The excellent new book by Mervyn King, former governor of the Bank of England, is inevitably noticed mainly for its views on banking regulation and the outlook for the eurozone. For me the most important message of The End of Alchemy is its emphasis on radical uncertainty — or, to quote Donald Rumsfeld, former US defence secretary: “The things we do not know we do not know.”
That emphasis reflects the parallel intellectual paths Lord King and I have taken since we were young dons 40 years ago. In a book published in 1976, economist Milton Friedman disparaged a tradition that “drew a sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities”.
Reality is proving unkind to economic forecasters. After the global oil price began dropping — it has fallen almost 70 per cent since late 2014 — the International Monetary Fund predicted a “shot in the arm” for the global economy.
The world would rebound from its post-crisis torpor in 2016, the theory ran, with advanced economies picking up the baton for growth from emerging markets. But none of this has proved accurate. Christine Lagarde, head of the IMF, warned this week that growth had been “too low for too long”.