“My great thinker is G. L. S. Shackle: an economist slightly forgotten but whose contributions are highly relevant to some of the contemporary problems we face.”
John Kay FBA
G.L.S. Shackle FBA spent his career advocating the importance of understanding uncertainty in economics, but his ideas fell out of fashion towards the end of the 20th century. In this episode, economist John Kay FBA and the former head of the Bank of England, Lord Mervyn KingFBA, explain why they’ve come around to Shackle’s way of thinking.
The economist George Lennox Sharman Shackle was born in 1903 and started his career as a bank clerk, before completing an external degree at London University and a PhD at the London School of Economics. When the Second World War broke out, he was recruited to a think tank known as S-Branch, set up by the physics professor and aeronautics expert Frederick Lindemann. Shackle worked there throughout the war, then spent another five years in the Cabinet Office. After a brief period at the University of Leeds, he became Professor of Economics at the University of Liverpool in 1951 and remained there until his retirement, in 1969.
Professor John Kay FBA notes that Shackle is far from a household name today, but has chosen him thanks to his extensive, often isolated work on radical uncertainty. Radical uncertainty in economics acknowledges the possibility of unforeseen events that fall outside known ‘risks’. Risk can be calculated on the basis of probability; radical uncertainty cannot.
“The prospect of a European war is uncertain, or the price of copper and the rate of interest 20 years hence, or the obsolescence of a new invention... About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”
John Maynard Keynes, The General Theory of Employment, 1937
This distinction was put forth in the 1920s by two celebrated economists, Frank Knight at the University of Chicago and John Maynard Keynes FBA at the University of Cambridge, but disputed by two equally prestigious academics, Frank Ramsey and Bruno de Finetti. Ramsey and Finetti argued that personal probabilities could be used to dispose of radical uncertainty – allowing everything to be treated as a risk. Their argument entered the economics mainstream and in the post-war era, radical uncertainty virtually disappeared from the conversation.
“If we 20 years ago had taken the kinds of position Shackle took, we would have been regarded as heretics, too.”
John Kay FBA
Kay and King recall how, following the Second World War, American economists came to dominate the field. In the 1940s, John von Neumann and Oskar Morgenstern from Princeton University created what people now call Game Theory. Two young economists at the University of Chicago, Milton Friedman and Leonard Savage, then translated Game Theory into situations of uncertainty, linking it to personal probabilities and expected utility. Their work created a framework that has dominated both modern macroeconomics and finance theory since their time.
Meanwhile, Shackle quietly kept the Keynesian flame alive, emphasising the importance of radical uncertainty and the limitations of probabilistic reasoning in an era when these ideas had become deeply unfashionable. Shackle understood how important radical uncertainty had been to Keynes’s thinking, as set out in The General Theory of Employment, and insisted that uncertainty could never be captured by probabilities. However, as a naturally quiet and unsociable man, he never successfully pushed his theories to compete with the dominant economic worldview.
The 2008 crisis exposed the limitations of mainstream models that assumed that all uncertainty could be turned into risk using probabilities. John Kay and Mervyn King, the then-governor of the Bank of England during the 2008 financial crisis, have arrived at the same conclusion: that neglect of radical uncertainty is a fundamental problem for modern economics, leading them to reconsider the importance of Shackle’s work. In the new book that John Kay and Mervyn King are writing together, they hope that people will recognise the significant role of radical uncertainty. They argue that the modeling that dominates so much of economics is not a description of the world, but a tool that produces useful narratives, which can be used to understand part of the issues that we face in the real world.
Professor John Kay FBA is a fellow of St John’s College, Oxford. Lord Mervyn King of Lothbury FBA is the School Professor of Economics and Political Science at the London School of Economics and Political Science and served as the Governor of the Bank of England from 2003 to 2013. Their co-authored book Radical Uncertainty will be published in March 2020 by Little, Brown.