Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday 21 June 2013

Mervyn King

Mervyn King is about to retire as Governor of the Bank of England, and there have already been assessments (e.g. here). I will not attempt to do the same, but instead just add an anecdote, an observation and a small comment.

First the anecdote. Mervyn first taught in Cambridge, which in the early 1970s was a department with a large contingent of Marxist or Neo-Ricardian (i.e. anti-mainstream) staff. Mervyn gave tutorials in a third year option in economic theory, and one group he had consisted of just two students: one who would go on to achieve great things in academia and public service, and the other of more modest talents. The latter, having previously done little economics (his first year was spent reading maths), had become perhaps too impressed by the radicals, who had explained how mainstream economics was fundamentally flawed, ideologically tainted and doomed. Mervyn did not try to immediately disabuse him of these views, but instead said something like ‘OK, but have a read of these papers, such as this by Arrow on health, and see if you still think neoclassical economics has nothing to offer.’ It was a good strategy, and I’m grateful for it.

The anecdote has a point, which is that I think it is impossible to understand Mervyn King without also understanding how many academics work. We like clear principles and sound thinking derived from them. Arguments based on perceived knowledge from practical experience may be brushed aside if they cannot be reconciled with those principles, particularly if they may also just reflect limited vision or vested interests. This approach can be called arrogance. Take this paragraph from Neil Irwin’s assessment:

“King encouraged the bank to engage the city less on its own terms — understanding how things were working or not working, and where the bodies were buried — and more as what an academic economist might want the banking sector to be. I’m told that when there was a question of studying how gilts were to be issued, for example, King instructed his staff to consult some of the leading academic students of auction theory, not the people who actually traded UK government bonds all day.”

Now I know nothing about this particular issue, but I have to note here that these were some of the same academic students of auction theory who helped the UK government raise £22.5 billion from the sale of the 3G spectrum - that is a few hundred pounds for each person in the country. To not consult them and follow conventional practice could have been very expensive.

One set of circumstances where this academic approach will founder is when the principles on which your view is based are wrong, and events decide to teach you a lesson. The financial crisis is the obvious example: I remember being told at the Bank at the very onset of the crisis that it might take the markets a few weeks to adjust relative prices to better reflect risk. But good academics also adapt their view when the facts change (as Keynes famously noted), and King’s subsequent criticisms of too large to fail banks have been very strong and public.

Which brings me to UK austerity in 2010. Before he became Governor, King made the following remark which I have always remembered: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.” In public King encouraged the new coalition government in their austerity programme (see here, for example: HT PK). This in turn may have reflected an over optimistic view about how effective unconventional monetary policy could be in dealing with the consequences. For some that is enough to damn him, despite the clear success of the Bank in targeting inflation in the decade before the crisis. Of course we do not know exactly what was said in private advice, and in these circumstances believing politicians’ accounts can be very misleading. (For example, read Andrew Adonis on the negotiations that led to the current UK coalition government.) More important, from my own point of view, is that we do not know whether King’s view changed as evidence against austerity mounted. Many good economists made the wrong call in 2010, and have since had the courage to follow Keynes’s advice. What we do know is that in recent months King has voted for more monetary stimulus, and has been outvoted by his MPC colleagues. 

But I said I was not going to attempt an assessment. What I have liked is having an academic - a very good academic - running our central bank. In that, of course, I’m biased.


  1. Mervyn King, reported in the Guardian 2 May 2012:

    "In the five years before the onset of the crisis, across the industrialised world growth was steady and both unemployment and inflation were low and stable. Whether in this country, the United States or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom."

    The year that King took office, 2003, was the year that Robert Shiller started warning of US housing bubble. In May 2005 Shiller's Irrational Exuberance (2nd edition) explained that the US home price bubble starting there in 1997 began in London in 1996.

    I see two methodologies pre-crisis, and King was and is wrong. And now the UK has had two housing bubbles, 1983-88 and 1996-2007.

  2. Prof Simon,

    I’d be interested to see you do an article on why M.King (presumably with the connivance of Osborne) implemented QE. My guess is that their reasons were little better than “the Americans are doing it, and we’ve got to make it look as though we’re doing something, let’s do it.” But perhaps I’m too cynical.

  3. Nice article.

    My view always is that organisations need different kind of leadership depending on which challenges that particular leadership is likely going to face. Just some examples: if your management info is a complete mess and the company suffers as a consequence of that you need a guy who can set that straight and not a marketeer. If your competition has better products (for the money) you need a guy/gal that is a marketeer and a good one (or a product designer) and not a beancounter.
    Churchill was possibly the greatest war time leader of all time, but likely would have been rubbish in this crisis. EU's Barosso should focuss on not let public support further erode, he doesnot (so crap for the job).

    Seen from that angle I sincerely doubt if an academic has the ideal profile. What would an ideal profile be:
    -Can start immediately. No pure manager type who will have to get used to the subject matter and the organisation. But in house or from a similar organisation. Reason you are still in the middle of a crisis. Not have the luxury to let somebody grow into the job. Academics do not tick this box. At least pure academics, some people do different things in life.
    -Markets are now moving all over the place. And not unlikely they will keep doing so for the foreseeable future. So you need somebody who has a feeling for that and a good feeling. Look at guys like Krugman (or yourself) you simply simplify this part of the outside world way too much. Also the new Japanese guy (BoJ) he simply missed the markets reaction.
    And even Ben, the exit strategy is hardly well managed. His assessment of the situation was simply wrong, missed the risk that everything could be reversed via in-pricing and in a very short period of time).
    Difficult job with a market that was overconfident but simply not well done.
    -Political climate. Next CEO needs to be aware of the political climate decisions have to be made in. And political in the widest sense. As now eg the electorate has become an important political factor. Again academics are pretty poor in this.

    I doubt btw that policies in this crisis will change considerably (may be the rethoric around it but that hardly works). Only as a General Custer and then we are probably f'ed anyway.

  4. I used to think that admirable quote was from Keynes, but then the facts changed ...

  5. Isn't the sale of spectrum just a tax? It will surely be passed on to the consumer, no?


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