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.