Embrace radical uncertainty

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Embrace radical uncertainty

Between 1920 and 1950, a debate took place which defined the future of economics in the second half of the 20th century. On one side were John Maynard Keynes and Frank Knight; on the other, Frank Ramsey and Jimmie Savage.

Knight and Keynes believed in the ubiquity of “radical uncertainty”. Not only did we not know what was going to happen, we had a very limited ability to even describe the things that might happen. They distinguished risk, which could be described with the aid of probabilities, from real uncertainty—which could not. In Knight’s world, such uncertainties gave rise to the profit opportunities which were the dynamic of a capitalist economy. Keynes saw these uncertainties as at the root of the inevitable instability in such economies.

Their opponents insisted instead that all uncertainties could be described probabilistically. And their opponents won, not least because their probabilistic world was convenient: it could be described axiomatically and mathematically.

It is difficult to exaggerate the practical consequence of the outcome of that technical argument. To acknowledge the role of radical uncertainty is to knock away the foundations of finance theory and much modern macroeconomics. But the reigning consensus is beset with glaring weaknesses. Keynes and Knight were right, and their opponents wrong. And recognition of that is a necessary preliminary to the rebuilding of a more relevant economic theory.

John Kay and Mervyn King are writing a book on “radical uncertainty” to be published in 2019. Find out what another 12 leading economists think are the greatest challenges facing the discipline here.

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1 COMMENT

  1. Tienes razón el tema de la identidad es confuso y complejo. Cuando hablamos de identidad es un tema que los medicos mentales no son capaces de describir de una manera objetiva y no digamos los politicos con sus adversarios. Que programa mental es el sano y normal en una sociedad donde la mente se ha convertido en una mercancía. El yo es un conjunto de cualidades y defectos provisionales que no sabemos como hacemos una síntesis para poder decir soy yo. La hybris personal es la desmesura y por tanto uno se puede convertir en el ombligo del mundo sobre todo en política. Personalmente la identidad la dejaría para los números, figuras geométricas y discursos irracionales literarios pero no para vivir con los otros sin convertir la convivencia en un infierno. No somos machos ni hembras alfas ni omegas. Somos. Pos data Una anécdota de Keynes que siempre tengo presente. Un inversor le pregunta que puede hacer para invertir su dinero. Keynes le dice usted necesita un psiquiatra yo soy economista.

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