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December 06, 2011



Hayek was not aware of the importance of uncertainty - he used it in a completely different way to Keynes:



The other peculiarity with this sort of debate is why Hayek is being invoked at all.

Hayek's economics has absolutely nothing to do with modern macroeconomics. His understanding of the economy bears no relation to any of those that currently prevail or have any leverage over policy.

He is some respects not a million miles from Keynes on uncertainty, but that is why Keynes' original thesis had to be emptied of all content by Hicks and the neoclassical synthesis. Uncertainty was removed from the story in order to tame Keynes into the IS/LM framework. In the process they completely lost the point. And they lost the aspects of Keynes that brought him closer to Hayek.

Uncertainty deeply threatening to contemporary economics at an ontological, epistemological and methodological level, which is why it persists with risk. If you embrace the importance of uncertainty and the idea that the future is currently underdetermined - there are genuine choices today that will shape which future comes to pass - then the whole edifice of formalism falls to pieces.


Software simulation is a good way to model the mechanical possibilities I would say. This sort of technology was unavailable cheaply enough, until recently. I would be surprised if there are not economic simulations running in a lab somewhere that are reasonably representative of the current economic situation. Then I would like to see what happens to a representative model when the minimum wage is abolished. I suspect more economic activity will take place, and wages will go back to being a sliding scale, instead of the massive employer leg-up that it has become (by creating a surplus pool and reducing bid prices). Hell we can imagine what would happen if there was a minimum price for pork : an animal welfare catastrophe.

Will Davies

One problem with uncertainty, as opposed to risk, is that it produces a very uncomfortable form of politics. It doesn't mesh with our public, bureaucratic and media desire for accountability. To acknowledge uncertainty, a politician, regulator or expert has to stand up and say "I know that this policy may produce a bad outcome, but I cannot tell you how likely that is". That person would be treated as incompetent. Uncertainty leaves political judgement looking very naked: how one responds to it depends on values and instinct, which are harder to defend publicly than statistics (partly because even laypersons understand them, whereas few of us understand statistics).

This all contributes to the power of a category that neither Knight nor Hayek discussed, namely ignorance. Bankers, Murdochs and politicians now prefer to say "I had firm knowledge of these risks, but knew nothing whatsoever of x", as this seems a safer strategy than saying "I recognised that x was possible, but did not know how probable".

Luis Enrique

I don't know anything about this topic .. In most settings, in the presence of uncertainty, is it reasonable to say people make a guess that amounts to supposing a probability distribution? If so, how would economics modelling need to change from just supposing people face probability distributions? I suppose guesses might be more unstable in light of new info,

Ray Sawhill

Frank Knight is 'way underappreciated. I almost never see his name come up, whether in the econ press or on econblogs. Any idea why?

Uggs on Sale

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.

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