Abstract
Uncertainty is a central topic in Keynes’ “General Theory of Employment, Interests and Money” (1936), but also his dissertation “A Treaties on Probability” (1921) empathises the importance of uncertainty in social systems. Here he argued that social life is aleatory and yet not random. This implies that social systems (of which the economy is part) cannot in general yield certainty because they are open and organic (Chick 2003; Chick and Dow 2005). This means that structures and interrelations evolve in such a way that the past is a very limited guide to the future (Lawson 1988; Dow 2002, 2003). Therefore, Keynes doubts that rational probability calculations are particularly helpful in the social realm. Keynes’ early rather philosophical thoughts on uncertainty strongly influenced his economics and became central to his legacy. Some, among them Skidelsky (2010: 83), have claimed that: “Uncertainty pervades Keynes’ picture of economic life. It explains why people hold savings in liquid forms, why investment is volatile, and why the rate of interest doesn’t adjust savings and investment. It also explains why economic progress throughout history has been so slow and fitful. All the actors in his (Keynes’) drama are motivated to a greater or less extent by uncertainty about the future, and regard the possession of money, or liquidity, as an important way of coping with it. Uncertainty breaks the tight link between supply and demand assumed by Say’s Law.”
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Notes
- 1.
Say (1880: 138) had argued that demand necessarily equals supply: “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.” And continues: “As each of us can only purchase the productions of others with his own productions—as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”
- 2.
By the time, Keynes was working on his first drafts of his “A Treaties on Probability”, the topic of uncertainty also preoccupied Frank Knight and Friedrich A. von Hayek (Hutchison 2009).
- 3.
There seems to be an inconsistency between Keynes’ theory of probability in “A Treaties on Probability” and his later economic writings. Some have argued, among them Bateman (1987, 1996), Davis (1994, 2003) and Gillies (2003), that Keynes changed his theory of probability later on in his life. In his “Treaties on Probability,” he initially stated with a logical account, but later, he would adopt Ramsey’s subjective account of probability. In what follows, I will initially focus on the logical concept of probability, which Keynes developed in his 1921 book.
- 4.
Fundamental uncertainty is identical to ontological uncertainty. Keynes and Knight thus identified similar stages of knowledge.
- 5.
E. g.: Keynes (1921: 1). “Part of our knowledge we obtain direct; and part by argument.”
- 6.
Naturally, the second critique fails as soon as one introduces Subjective Bayesianism (or subjective probability theory). It assumes that individuals in circumstances of uncertainty have well-defined subjective probabilities. Thus, the numerical basis for rational choice theory is no longer missing. Decisions in the face of uncertainty become like choices involving risk. Decisions are based on a subjective rather than on an objective concept of probability. Consequently, modelling rational choice involving uncertainty did become unproblematic. Though the modelling issue seems to be solved today in the aftermath of expected utility theory (Savage 1954), the question remains whether people behave rationally.
- 7.
E. g.: Dow (2010: 3): “By ‘probability’ Keynes meant logical probability, ‘the various degrees of rational belief about a proposition which different amounts of knowledge authorize us to entertain’. Quantified probability based on frequency distributions was a special case; the general case was uncertainty, where even non-quantifiable (ordinal) probability may not be identifiable.”
- 8.
In a letter to Harrod, Keynes (1938) argued: “It seems to me that economics is a branch of logic, a way of thinking; and that you do not repel sufficiently firmly attempts a la Schultz to turn it into a pseudo-natural-science. One can make some quite worthwhile progress merely by using your axioms and maxims. But one cannot get very far except by devising new and improved models. This requires, as you say, “a vigilant observation of the actual working of our system”. Progress in economics consists almost entirely in a progressive improvement in the choice of models. The grave fault of the later classical school, exemplified by Pigou, has been to overwork a too simple or out of date model, and in not seeing that progress lay in improving the model; whilst Marshall often confused his models, for the devising of which [b] he had great genius, by wanting to be realistic and by being unnecessarily ashamed of lean and abstract outlines. […] Economics is a science of thinking in terms of models joined to the art of choosing models, which are relevant to the contemporary world. It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time. The object of a model is to segregate the semi-permanent or relatively constant factors from those which are transitory or fluctuating so as to develop a logical way of thinking about the latter, and of understanding the time sequences to which they give rise in particular cases. Good economists are scarce because the gift for using “vigilant observation” to choose good models, although it does not require a highly specialised intellectual technique, appears to be a very rare one. In the second place, as against Robbins, economics is essentially a moral science and not a natural science. That is to say, it employs introspection and judgments of value”. Harrod (1938) discusses Keynes concerns regarding the possibility of general laws in economics. For a complete reprint of the letter please, see http://economia.unipv.it/harrod/edition/editionstuff/rfh.346.htm (2014-07-03).
- 9.
See also Minsky (2008: Chaps. VIII & IX).
- 10.
Priddat and Koehn (2014), suggest that Keynes as a dandy himself, imagines a well educated statesman as the ideal decision maker.
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Köhn, J. (2017). Uncertainty and Economic Instability. In: Uncertainty in Economics. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-55351-1_7
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