Radical Uncertainty with Sir John Kay

John Kay joined us today to discuss the difference between risk and uncertainty, what this means for finance and how societies can collectively deal with the unknown by ensuring systems build in resilience.

As John explained to series host Kaisie Rayner FRSA, risk can be estimated, while uncertainty is truly unknowable, a distinction forged in the wake of the Great Depression.

Over the last half century, finance and economics have gradually merged these two concepts. The economist Milton Friedman explicitly stated, in his quest to model society as a collection of perfectly informed utility maximiser.

This reflects a general bias towards quantifying phenomena among policymakers, a fear of the unknown and the unknowable. Models should be treated not as quantitative answers to these intractable problem, but rather tools to be used to organise thinking.

Sir John Kay argued that this is reflected in the paradox of the perfect map; if a map were to represent reality perfectly, it would be a 1:1 copy of it, and therefore no map at all.

What a map or model should do is simplify information in a way that retains what is useful while cutting out other information. London's Tube map is a great way of navigating the city by train, but much less helpful on foot.

By treating models as gospel, rather than helpful simplifications, we risk ignoring that which has been left out. Resilience and robustness - which are key to dealing with uncertainty - will be viewed as inefficiency.

An example of this is the global financial crisis, where sophisticated risk modelling and the unrelenting pursuit of profit sidelined experienced professional judgement. Another is that of privatisation of public services, where resilience and robustness can be cut to make profit, with the state ready to step in if the unexpected does happen.

Purchase Radical Uncertainty: https://lnkd.in/epTk7ujb or https://lnkd.in/gHD4h5P3
Find out more about our Radical Old Idea series https://lnkd.in/eKYu2uny
Watch the full webinar on our YouTube page.


Adam Smith, climate, COP and natural capital | David Pitt-Watson | The Radical Old Idea

Watch our Radical Old Idea interview on Adam Smith with David Pitt-Watson, responsible investing pioneer and Cambridge Judge Business School. As COP27 came to a close, our researcher Sam Wheldon-Bayes spoke to David about Smith, the climate crisis, COP and natural capital.

In the interview, filmed at Adam Smith's Panmure House, where the Enlightenment scholar once lived, David discusses what Smith would have thought about climate, COP and natural capital, applying these lessons to some of the big questions facing modern policymakers. The discussion draws on the Wealth of Nations in the 21st Century essay series, which he contributed to.

As David argues, some of Smith's modern devotees dramatically misunderstand his beliefs. In the face of a collective challenge such as climate change, it is unlikely Smith would have proposed a free-market, low-regulation approach, but rather advocated effective regulation.

Click here to watch now.


"Channel your inner 3-year-old" | The Radical Old Idea with Dr Katherine Trebeck, on the Economics of Arrival

Why is it necessary to "channel your inner 3-year-old" to reshape the economy?

At our Radical Old Idea event, Dr. Katherine Trebeck explained the basics of her recent book the Economics of Arrival to Kaisie Rayner. For Dr Trebeck, economics should be focused not on growing indefinitely, but instead on point of "arrival": a destination that, once reached, allows us to "make ourselves at home". To get here we must channel that inner 3-year-old, to constantly ask "why?".

Why do we need more growth?

Why do we need to work 40-hour-weeks?

Why can someone work a full-time job and still be in poverty?

This focuses the mind on the point of arrival. The lack of an endpoint leaves our economies directionless, focusing too much "helping people and planet cope", remedying social aches and pains without treating their root causes.

As she explained, growth up to a point is good, providing us with the means to live a decent life. In particular, growing the incomes of the poorest in society delivers results. However, beyond a certain point, it ceases to increase happiness (in development economics, this is often known as the 'Easterlin paradox'). Just like eating ice-cream, the first few mouthfuls are incredible, but after a while, each extra spoon provides less joy than the previous one.

Building on the food metaphor, she pointed out that growth should be a means to an end. Growth for growth's sake is akin to walking into a restaurant and shouting "more!". It's far more important to know what it is that you want more of, such as looking after citizens, providing food, health services, and a decent material standard of living.

Some examples of economies that have arrived, or have the potential to arrive, include Japan and Costa Rica. Japan has a high standard of living, and relatively low inequality without extensive redistrubution. However, without a clear endpoint, the country suffers from high worker stress, when in fact it could "take its foot off the pedal" and lead a better life by slowing down.

Another exaple is that of Costa Rica, which is a middle income country that has thrived in terms of health, social and nature outcomes, because it has focused on outcomes rather than economic growth for its own sake.

The event concluded with a lively audience discussion which looked at how to practically ditch GDP, whether the focus on predistribution over redistribution was viable, the role of elites and more.

Find the Economics of Arrival at https://policy.bristoluniversitypress.co.uk/the-economics-of-arrival

 


GEFI spoke at the Edinburgh Futures Conversations to discuss the future economy

GEFI spoke at the Edinburgh Futures Conversations to discuss the future economy. GEFI founder & managing director Omar Shaikh appared alongside former UK Prime Minister Gordon Brown, and Chinelo Anohu, Head of the AfDB’s Africa Investment Forum.

Omar emphasised that the SDGs must be at the heart of the future economy. They go beyond technological advances (no doubt important) to fundamentally reshape the way we conduct ourselves, placing purpose at the centre of the economy. Profit and purpose, the triple bottom line, conscious consumerism are all terms increasingly prevalent in financial markets. Paul Polman’s work at Unilever was a great ambassador for such.

Purpose, he argued, gets us to the ontological question – the question of being, of what the economy is and what it is for. If it is to provide the essentials and comforts of life, then that immediately leads to the question of what is the good life, and how much is enough? This chimes with Adam Smith’s challenge of reconciling between his two great mentors Hutchison and Hume – balancing innate goodness with self interest.

At GEFI’s flagship annual Ethical Finance Summit, Prof John Kay illustrated in his presentation how social purpose had been slowly stripped out of the narrative within annual reports of multinational Plcs since the 1960s towards a nearly exclusive focus on return on equity and financial performance – in effect shareholder primacy.

We now stand at a point in time where the pendulum appears to be swinging the other way: financial markets and the economy are placing purpose alongside profit. This incorporation of ethical values was historically a maligned practice, seen as the domain of ‘tree-huggers’, but that has changed via the demands of staff, shareholders, regulators and customers.

For example, we now see a total of:

  • $35.3 trillion USD in sustainable investment
  • Over $100 trillion USD managed by members of the Principles for Responsible Investment
  • $1trn+ USD in impact investing

Omar concluded by reflecting on the many more areas where the future economy can improve upon the past, especially with fintech readdressing the fundamental intermediation role of traditional financial institutions. Challenges remain, be that around nature and biodiversity or around social issues, from poverty, to inclusive growth, to addictive products such as tobacco and gambling.

Gordon Brown followed, highlighting the importance of recognising global interdependence, suggesting that “global problems require global solutions”, from the financial crisis to the COVID-19 pandemic. The pandemic has completely exposed the limits of individualism. There must be a break from the 40-year-old Washington consensus, building a new relationship between state, market and society. In particular, there needs to be a reevaluation of the need for fiscal policy.

He focused on the global failure to distribute vaccines equitably around the world, emphasising that this is not simply an unjust policy, but a self-defeating one, asking what this means for the fight against climate change. We can clearly identify both the problem and the solution, but the ‘us versus them’ ideology of political nationalism prevents us from reaching a mutually beneficial solution. Brown suggested that, in the words of Adam Smith who had been mentioned earlier by Omar Shaikh, there needs to be a “circle of sympathy”.


“Hope” is the thing with feathers | The Radical Old Idea with Prof. Tim Jackson

In our latest Radical Old Idea, Royal London’s Kaisie Rayner was joined by Professor Tim Jackson to discuss his latest book, ‘Post-Growth: Life after Capitalism’. In a discussion that ranged from Adam Smith to the teachings of Buddhism, to maintaining hope in the face of despair. Professor Jackson called for a complete rethink on how we define prosperity. Watch the full session now on EFx.

While Professor Jackson’s previous book, ‘Prosperity without Growth’, was close to a policy manual for governments, ‘Post Growth: Life After Capitalism’ is a philosophical examination on the failings of our current economic model. Although written during the Covid pandemic and certainly partly influenced by the fallout of the last 18 months, it is more a culmination of years of reflection from one of the world’s leading ecological economists.  

The session started with Adam Smith, the so-called ‘father of capitalism’. Professor Jackson described how the legacy of Adam Smith has been “used and abused” by free-market capitalism. Proponents of lassez-faire capitalism seized on the ‘invisible hand of the market’, as evidence that Smith would be an advocate of today’s economy.

Professor Jackson disagrees, arguing that Smith would have been appalled by the modern markets, and their domination by monopoly power. Smith believed markets relied upon trust and community, and that the state had a fundamental role in countering unrestrained self-interest. The power wielded by conglomerates over governments today was something Smith warned against, not something he would have lauded.

In his book, Professor Jackson also mentions another great thinker who has had one of their ideas take on a life of its own, psychologist Abraham Maslow. Maslow’s 'hierarchy of needs' has been used as evidence that a linear relationship exists between fundamental human needs such as food or shelter, and social or psychological needs.

Without the former, humans do not engage with the latter. Maslow later upturned this hierarchy – something which has been lost in history. Social and psychological needs are not ‘nice to haves’ but fundamental to human wellbeing. Our physical needs can be secondary to our social needs – a lesson reinforced by our experiences over the last 18 months.   

Professor Jackson also spoke of how Buddhism and capitalism start in the same place – the recognition of suffering. The message of capitalism is to escape from this suffering, to struggle to ensure we escape poverty and ensure that we are not the worst off in society, turning life into a competitive endeavour. The recent trend of billionaires to conquer space is perhaps a manifestation of our existential anxiety to get as far away from suffering as possible.

By contrast, Buddhism teaches to face suffering head on and with compassion, not to escape it. We can learn from Buddhism in many ways, finding joy in being human and not from the material consumption essential for a society dependent on growth. If we can change our definition of prosperity to mean health and balance rather than having more, we will see a powerful transformation at every level.  

To finish, Kaisie asked Professor Jackson if he still has hope for humanity. To answer, he drew on the poetry of Emily Dickinson: 

“Hope” is the thing with feathers

That perches in the soul

And sings the tune without the words

And never stops - at all 

 Something in the human soul means that hope will not abandon us. Hope must however turn to action, and action is the antidote to despair.


The case against a growing economy

Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist

When Boulding spoke those words in the 1970s, the environmental movement was but a shadow of what it is now. In the decades since, climate change has moved from fringe concern to being at the centre – rhetorically at least – of how we think about our economies. As the problem of climate change takes centre stage, so the question of growth has followed, with countries including Scotland, New Zealand and Bhutan have made moves towards going beyond GDP in their national accounts.

They are still very much in the minority; since the industrial revolution, finance and economics have taken a constantly growing economy to be both a fact of life and an ideal state of being, something to take for granted and to strive for. But there have been voices of dissent. Before he was tragically killed, Bobby Kennedy had raised concerns about the idea of limitless growth. As Prof. Tim Jackson notes in his excellent new book Post Growth: Life After Capitalism, the younger Kennedy had, in a 1968 speech, raised concerns about the accuracy of GDP measuring social wellbeing, and the impact that pursuing it would have on the planet and its people.

Prof. Jackson, Director of the Centre for the Understanding of Sustainable Prosperity (CUSP) will be appearing in an interview with Kaisie Rayner, Climate Change Lead at Royal London on 14 July at 14:00 BST as part of our Radical Old Idea series. In the spirit of that series, inspired by the Scottish Enlightenment, the ideas discussed go back even further: John Stuart Mill professed a sympathy towards a steady state economy in 1848’s Principles of Political Economy, at the start of the industrial revolution.

Despite the constant presence of economic growth since the industrial revolution, it has changed over time. The 5% rates of growth typical in Western countries during the “golden age of capitalism” immediately following World War II had given way to rates of just 1-2%, even before the Global Financial Crisis.

Why is this? Labour productivity has been in decline. While it grows, social tensions between classes can easily be resolved. As the pie grows, we can all content ourselves with a growing slice. When it stops growing, getting a bigger slice for yourself becomes a zero-sum game. In fact, it is arguable that the astonishing growth rates of the post-war period were in fact only possible due to an increasing exploitation of the natural environment.

Since the 1980s, the social contract that characterised post-war capitalism has been broken, as the embrace of neoliberalism by Thatcher and Reagan removed any restrictions on uninhibited profit. Smith would have disagreed, railed against “those who live by profit” – a Radical Old Idea indeed – and advocated state regulation to guard against their capture of the economy. It had lead to a finance system that, as Lord Turner stated in the wake of the financial crisis, includes a lot of “socially useless” activity, focused on pursuing and capturing rents, not allocating capital to where it is most needed.

Can we continue to grow? 1972’s Limits to Growth pushed this question towards the mainstream. Fundamentally, as Jackson argues, people do not like being told their lives are limited. The idea of limits is anathema to most economists. Green growth is the preferred solution. But is it possible? There is, after all, “no growth on a dead planet”, as Jackson states.

So far, we have not decoupled economic output from material input to a great enough degree. Relative decoupling has been achieved: the carbon intensity of economic activity has fallen by a third since the 60s, but this is not enough. To reduce our impact on the planet, we have to decouple faster than we grow, and that is not happening. The solution, according to Jackson, is a reimagining of what prosperity means, moving beyond simple expansion of material wealth.

Indeed, there have been serious questions raised about whether expanding material wealth truly does entail “true” prosperity. The Easterlin Paradox was the remarkable finding by economist Richard Easterlin that, beyond a certain amount, raising average national income does almost nothing for happiness. Once you cross a threshold of roughly $20,000 per person (which suggests that growth is still important for the poorest countries), and extreme poverty and basic needs are taken care of, an ever-increasing average fails to deliver any meaningful progress.

The work of Pickett and Wilkinson in The Spirit Level perhaps goes some way to explaining this – the pair find that equality, rather than material increases, is a more reliable driver of contentment in industrialised economies. Another explanation lies in the idea of “the hedonic treadmill”, introduced by Philip Brickman and Donald T. Campbell, which suggests that humans quickly adjust to new luxuries, moving them from novelties to things they cannot live without, and losing any increase in happiness in the process.

The challenge for humanity – for finance, and for economics – is to find something other than growth to pursue, and to deal with the social consequences of limiting growth. To return to talk of pensions after discussing the future of the economy might seem mundane, but it is important.

To hear Prof. Tim Jackson in conversation with Royal London Climate Change Lead Kaisie Rayner on Wednesday 14th July, exploring these ideas in the context of the pension industry, click here to sign up. We are looking forward to a provocative debate. Tim's latest book Post Growth can be purchased at https://politybooks.com/bookdetail/?isbn=9781509542512.