Brief Summary
This discussion with Lord Mervyn King, former Governor of the Bank of England, explores various critical economic and political issues facing Western democracies. King critiques economic groupthink and over-reliance on models, particularly in the context of COVID-19 and climate change. He addresses the burden of national debt on future generations, the disillusionment of young people, and the challenges to democracy posed by political dishonesty and a lack of leadership. The conversation also covers the economics of defence, the turmoil in China, and the implications of a cashless society.
- Critiques economic groupthink and the over-reliance on models.
- Highlights the burden of national debt and its impact on future generations.
- Discusses the disillusionment of young people and the need for political honesty.
- Examines the economics of defence and the importance of national resilience.
- Addresses the challenges posed by climate change and the complexities of global trade.
Intro
The discussion begins by highlighting the need for radical changes in various policy areas, including health, social care, the tax system, defence, and infrastructure. It is argued that speeches and marginal changes are insufficient to address the issues and that significant reforms are necessary. The conversation also touches on the importance of education and training for young people, with a critique of the current university system for not adequately preparing students for the job market.
Introducing Lord Mervyn King
Lord Mervyn King is introduced as a distinguished economist and former Governor of the Bank of England. His background and notable publications, including "The End of Alchemy" and "Radical Uncertainty," are highlighted, setting the stage for a discussion on economics and its impact on society. King expresses his passion for good economics, emphasising its role in fostering better outcomes, opportunity, prosperity, and security for people.
Economics, the 'Dismal Science'
The origin of economics being labelled the "dismal science" is explained, tracing back to Thomas Carlyle's concerns about population growth outpacing economic output. However, it's argued that modern economics has evolved to focus on boosting productivity growth, offering a more optimistic perspective. The conversation transitions to a critique of the impact of university economics and its influence on institutions like central banks, leading to a discussion on economic groupthink.
Economic 'Groupthink'
Economic groupthink is identified as a problem that has grown over the last few decades, with economics becoming increasingly specialised and detached from the real world. It's argued that economics should be about helping people make better decisions, but it has instead become a self-referential academic discipline. The issue is not the use of mathematics, but the over-reliance on models as literal descriptions of how the world works, leading to inaccurate predictions and a lack of practical relevance.
The Economic Expertocracy
The discussion addresses the over-reliance on experts and their models by politicians, particularly in complex areas like COVID-19 and climate change. It's argued that governments often hide behind "the science" to avoid making difficult trade-offs and that this erodes public trust. The importance of acknowledging the limits of our knowledge and being honest about uncertainty is emphasised, drawing on the ideas of Friedrich Hayek. The COVID-19 pandemic is used as an example of when precise quantitative forecasts were made despite insufficient knowledge, leading to a loss of trust when these predictions proved wrong.
The Problem With Modern Monetary Theory
The conversation shifts to the dangers of modern monetary theory (MMT), which is criticised as being neither modern, monetary, nor a theory. The fundamental flaw of MMT is that printing money can lead to inflation, a concept dating back to David Hume. The discussion highlights the risks of excessive government debt and the burden it places on future generations. The quantitative easing measures taken during COVID-19 are questioned, as they were implemented despite the economy already being at full employment, leading to increased debt and asset price inflation.
The 'Lucky Generation'
The discussion explores the growing disillusionment with economic performance, particularly among younger generations. It's argued that the dream of each generation being better off than their parents has been shattered, with young people facing fewer opportunities and greater economic challenges. The rising cost of housing, student debt, and the decline of traditional industries are cited as factors contributing to this disillusionment. The speaker identifies his generation as the "lucky generation" because they grew up in a time when it was almost guaranteed that children would be better off than their parents, a trend that has now reversed.
Political Dishonesty
The conversation addresses the lack of honesty in political discourse, with leaders failing to level with people about the serious challenges facing society. It's argued that people are not fools and will respond positively to honesty and transparency, even if it means facing difficult choices. The discussion highlights the need for radical reforms in various policy areas and the importance of boosting investment, even if it requires reducing consumption. The unfunded liabilities and the low national saving rate in the UK are identified as elephants in the room that are rarely discussed.
'Young People Are Voting With Their Feet'
The discussion focuses on the disillusionment of young people and their tendency to "vote with their feet" by emigrating to other countries. The lack of opportunities, high student debt, and the handling of Brexit are cited as factors contributing to this trend. The importance of providing young people with hope for the future and addressing the shortcomings in education and training is emphasised. The conversation also touches on the challenges facing Western democracies, including declining trust in political systems and the rise of authoritarian regimes.
The Economics Of Defence
The conversation shifts to the economics of defence, with a focus on the need for increased defence spending in an unstable world. The discussion highlights the potential for corruption and waste in the defence industry, but also recognises its role in driving innovation and technological advancements. The importance of national resilience and the need to invest in defence capabilities are emphasised, drawing a comparison with Finland's approach to national defence. The discussion also touches on the need for leadership to persuade people of the necessity of defence spending, even if it means sacrificing personal consumption.
'Rational Behaviour' Is Not The Same As 'Optimising Behaviour'
The discussion explores the concept of radical uncertainty and the limitations of relying on models to predict the future. It's argued that rational behaviour is not the same as optimising behaviour and that good decision-making involves understanding the essence of a problem and mitigating potential risks. The importance of judgment and having the right people in the right positions to make decisions is emphasised, drawing on the example of President Kennedy's handling of the Cuban Missile Crisis. The conversation also touches on the challenges facing central bankers and the need for them to carefully evaluate situations without pretending there are scientific formulas.
The Problems Of Climate Change Models
The discussion addresses the problems with climate change models and the challenges of devising policies based on unreliable predictions. It's argued that the fact that we can't predict accurately what will happen is not an argument against taking policies to limit climate change. The conversation highlights the need for sensible measures to limit risks and mitigate damage, rather than getting bogged down in precise numbers. The discussion also critiques the inefficient approach of requiring every business and organisation to get to Net Zero, arguing for a carbon pricing mechanism instead.
China's Economic Turmoil
The conversation shifts to the economic situation in China and the potential for trade conflicts. It's argued that China needs to switch away from manufacturing exports and boost domestic consumption to rebalance its economy. The discussion highlights the need for geopolitical networks to recognise the problems and deal with them collectively. The potential for China to face a more hostile environment in the West unless it rebalances its economy is also discussed.
Will We Become Cashless?
The discussion concludes with a consideration of the implications of a cashless society. It's argued that it would be pointless to end cash completely and that central banks should continue to supply cash on demand. The conversation also touches on cryptocurrencies and central bank digital currencies, with the speaker expressing scepticism about their potential to replace existing currencies. The committee of the House of Lords concluded that Central Bank digital currencies was a solution in search of a problem.
