Radical uncertainty: Why the Scots could ignore business and follow the crowd

 
Paul Ormerod
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The extent of North Sea oil reserves is one of the major uncertainties facing Scottish voters

AFTER months of Trappist silence, a plethora of large companies has pronounced on the adverse consequences for Scotland of a Yes vote tomorrow. The sectors span the economy – from oil to banks, from supermarkets to phone companies. But what will the effect of these interventions be?

From the perspective of a rational economic person, they must make people more likely to reject independence. Jobs will be relocated out of Scotland and the prices of goods and services will rise. The public finances of the Scottish government will be weaker than is claimed, with less oil being available than some project. Serious doubts have been raised about the financial stability of Scotland as a whole, as problems with its currency arrangements are aired.

Yet there is a distinct impatience among those who operate in this rational world with how voters seem to make up their minds. Certainly, at times, this can seem bizarre. On a recent visit to Scotland, I was told in all seriousness by one woman why she was voting Yes. On a recent holiday, she had noticed on her passport the Royal Coat of Arms, in which the Scottish Unicorn appears chained to the Lion of England.

There is obviously a wider issue as to how important economic factors are in how people are casting their votes. But in terms of the companies’ announcements, their impact depends upon credibility. If they are perceived mainly as scare stories, their effect may be the complete opposite of what is intended, pushing people more firmly into the Yes camp. It is the question of credibility which makes the impact difficult to assess.

Many of the issues thrown up by the referendum campaign are difficult and complicated, where even experts may legitimately disagree. The level of uncertainty around their impact is inherently high, not least because the consequences of an action like voting for independence stretch far into the future. Economists are starting to appreciate that their standard model of so-called rational behaviour may not be very helpful in describing how people actually make decisions in such circumstances. Discussion of this issue was prominent at both the Institute for New Economic Thinking conference in Toronto in April, and at the recent World Economic Forum gathering in Kuala Lumpur, each graced by the presence of Nobel Laureates. The fashionable new phrase is “radical uncertainty”.

So how might this apply to Scotland? An effective strategy for making decisions when outcomes are very uncertain is simply to copy what other people do. There are many nuances to this, but it is often a good rule of thumb to use. Keynes wrote about “the psychology of a society of individuals, each of whom is endeavouring to copy the others”. The American economist Armen Alchian took the concept further in the Journal of Political Economy in 1950. Interest in his brilliant paper, Uncertainty, Evolution and Economic Theory, is reviving rapidly. The tools and the maths to formalise the concept did not exist in the days of Keynes and Alchian. But the question of how people decide under uncertainty is now a red hot topic in economics.

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