Richard and Tim’s latest spat concerns the role of uncertainty, as distinct from risk. Richard says:
Keynes pointed [that] the number of circumstances where we can make the predictions neoliberal economists think possible are remarkably limited. He said the future is not probabilistic as they suggest in most cases: it is actually uncertain.
But Richard has a point, which is hidden by his silly conflation of neo-liberal and neo-classical economics: Hayek was a neoliberal economist but not a mainstream neoclassical one.
If we define neo-classical economics as stuff we learn at university (I’m using the Royal We) then it does, I suspect, emphasize probability over Knightian uncertainty. When I did my masters (25 years ago!) we learnt about expected utility theory, regret and even prospect theory. But uncertainty barely featured. Yes, the Ellsberg paradox got a mention. But like Allais’ paradox, it was something we looked squarely in the face and moved on from.
Cynics might say this is because orthodox economists were wedded to a scientistic faith that economics should be mathematical. Expected utility and its variants lend themselves to a maths that is suitable for university exams, but uncertainty doesn‘t. Yes, Larry Epstein, among others, has done important mathematical work on ambiguity, but this is hardly good exam material.
Herein, though, lies a nasty fact. Academic economics’ elevation of probability over uncertainty reinforced our human tendency to prefer risk to uncertainty. And - wishful thinking being so powerful - this preference gave rise to a belief that future outcomes really could be quantified and managed. But the banking crisis showed that this belief was an expensive mistake. Yes, Hayek could have told us this. But banks weren’t listening to Hayek.
Another thing: Although Hayek saw uncertainty as a reason to reject central planning, the man who first emphasized the distinction between risk and uncertainty - Frank Knight - saw uncertainty as a reason for the existence of hierarchical, centrally-planned organizations, namely firms:
When uncertainty is present and the task of deciding what to do and how to do it takes the ascendancy over that of execution, the internal organization of the productive groups is no longer a matter of indifference or a mechanical detail. Centralization of this deciding and controlling function is imperative.
And another thing. I really can't be arsed to define neoclassical and neoliberal properly. My blog, my (rough) definitions.