'Radical Uncertainty' Review: The Dismal Overreachers
Rarely is a book’s publication as well-timed as John Kay and Mervyn King’s “Radical Uncertainty: Decision-Making Beyond the Numbers.” We’re in the grip of a global pandemic that we don’t understand and must make immediate choices that balance the demands of our health against the needs of our economy.
The main advice to emerge from this book is: Don’t ask an economist. Economics has claimed for itself the right to address health policy and many other issues outside its usual orbits. “Radical Uncertainty” reminds us how inappropriate that is. Chemists, plumbers and doctors identify problems within their subject areas, then develop tools with which to solve them. Economists appear unbidden on any doorstep they please with a box of mostly useless tools in search of problems.
Messrs. Kay and King should know. They’ve spent their careers inside the academic and monetary-policy establishment. Mr. King ran the Bank of England for a decade, including during the 2008 panic. Their field, they note, is dominated by probabilistic methods. Politicians and their advisers assess risks with the aid of statistical tools derived from games of chance, in the hope that scientifically quantifying risk will allow them to make intelligent trade-offs about the future. “For more than half a century a single approach to rational choice under uncertainty has dominated economics,” the authors write. “Agents optimize, subject to defined constraints. They list possible courses of action, define the consequences of the various alternatives, and evaluate these consequences. Then they select the best available option.”
There’s a place for those tools, but economics habitually overreaches. Modern economists assume that whatever outcome their models predict must be axiomatically rational. When human beings fail to act according to these predictions, it is taken as a failure of the people, not the model. This insulting assumption, Messrs. Kay and King point out, is at the heart of microeconomics’ behavioral turn and the proliferation of “nudge” quackery in policy-making circles. The same tic enters macroeconomics as an appeal to exogenous shifts or shocks to explain economic crises the models didn’t see coming or about which economists simply have chosen not to fret.
Yet life is not a game of chance. “Radical Uncertainty” usefully, though tediously, catalogs all the reasons why a close study of blackjack or roulette doesn’t yield analytical tools of use for public-policy problems. Card games are “small worlds,” in a phrase from the mid-20th-century economist Jimmie Savage that the authors use throughout. The rules are well-defined, all possible outcomes known, the inputs fully quantifiable and the games run repeatedly.
None of that is true for a “large-world” event such as a pandemic or a financial crisis. Decisions must be made before basic facts, such as a disease’s rate of transmission or what proportion of the infected develop symptoms, are understood. Meanwhile politicians no longer seem to know what questions they want answered. Probability can tell you how likely you are to win a hand of blackjack because you know what “winning” means. But should we define winning against Covid-19 as the minimization of infection? Or merely slowing the flow of new cases into our hospitals—and if so, to what rate? Unlike with blackjack, we’re dealt only one hand. The terrible truth is that every time a politician makes a decision, families might lose a parent or child, or be cast into an economic tailspin from which they may never recover. Faced with such radical uncertainty, “real households, real businesses and real governments do not optimize; they cope.”
(snip)
If you’re radically uncertain about what to do, doing nothing is often the best option.
https://www.wsj.com/articles/radical-uncertainty-review-the-dismal-overreachers-11586717102 (subscription)
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I was thinking of another economist who advises the White House, who claims to understand medicine..