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A typology of uncertainties

from J.-C. Spender

There is some heavy stuff in this section – but we cannot get beyond today’s literature on managing as rational decision-making and connect with managers’ practice without engaging uncertainty. All attempts to define uncertainty must fail – by definition, for to define is to take as certain, axiomatic. Those who see uncertainty in terms of probability stand on the certainty of population statistics. Knight saw such modified certainty as ‘risk’. Yes, risk management is important, just as is distinguishing knowing definitively from knowing statistically. But the difference here is methodological and neither mode grasps Knightian uncertainty. Probability is logical/nomothetic, computable. In contrast Knight’s notion was implicitly idiographic, the sense of an absence of certainty arising from an ideographic experience of not-knowing. Something failed, what was expected did not occur – why not? Was the causal sequence (nomothetic) adopted wrong, or did the fault lie with the situation’s ideographic characterization – its initial conditions etc.? Such questions must still be expressed in language, thus standing on what is known. Like us all, Knight struggled with Aristotle’s nomothetic/idiographic distinction, the failure to relate knowing and experiencing, the inevitable separation between the totality and immediacy of living versus explaining it with abstract concepts. 

Knight studied science, religion, and philosophy before switching to economics. He knew the limits to human knowing have been explored for millennia in philosophy, religion, theater, and every other form of the arts, e.g. figure/ground reversal, Velázquez’s Las Meninas, or the confusions of Midsummer Night’s Dream. One striking medieval metaphor is that ‘it is not given to Man to enter God’s Mind’, to arrive at the Archimedean Fulcrum from where everything is certain and things are what they seem to be. Coase was one of the few who carried Knight’s intuition about uncertainty in economics further. But neither Knight nor Coase wrote much about managing. We must dig deeper. The nomothetic/idiographic distinction points to a state of not-knowing that awaits integrating the parts into a reasoned practice that resolves the distinction. This is the ‘micro foundation’ or ‘micro-institutionalization process’ of value creation. Something similar happens in the natural sciences, leading to the tectonic shifts in thinking Thomas Kuhn called ‘paradigm shifts’. Einstein achieved one by bringing physicists’ notion of mass together with their seemingly unrelated notion of energy – changing both and paving the way for nuclear energy. Until synthesis happens experience keeps reminding us that we know multiple things in multiple ways, none for certain. Our knowledge suffers all manner of imperfections, contradictions, and fragmentation. Crucially, these defects are not in the things we seek to know. These may well be ‘real’ – coherent, logically constructed, existing, simply ‘there’ as ‘realists’ believe. Rather the defects in our knowledge are aspects of how we know. We cannot know anything for certain or objectively. Knowing is subjective, an aspect of us, even when we claim to know facts. Knowledge is a human artifact, an aspect of consciousness. We are the source of all the uncertainties we can be aware of. The effective manager/entrepreneur’s special talent is to dig into these for those that can be engaged with imaginative practice to their benefit – mini-Einsteins of the economy.

The most familiar mode of not-knowing is being ‘ignorant’ of what can be known, a mark of our scientific era. In prior times the most pressing forms of not-knowing were often religious, such as fearing God’s vengeance, unknowable. Ignorance has been brought to the top of our list of uncertainties by our society’s turn towards science as the ‘one true mode of knowing’. Note science sets out presuming everything worth knowing is knowable, independent of our knowing and researching, that there is an unshakeable Truth. The Scientific Method guides us to overcome our ignorance of this Truth. Science-talk has become privileged in our era. The Internet and media show big money can be made informing people about things they believe knowable. Yet we also see ‘fake news’ and hope the less-privileged media talk reports the Truth rather than Falsity.

Dealing with others’ ignorance is not the only or even the most important entrepreneurial opportunity in our polity. In practice, our knowing and not-knowing is vastly more complicated than the notion of objective Truth or its absence allows. Aristotle reminds us ignorance and incommensurability are completely different types of not-knowing. Again, our enthusiasm for science tempts us to collapse the difference, to treat incommensurability as type of ignorance, presuming we can arrive at the Truth by integrating known facts. But, as suggested earlier, this is ironic – it eventually evacuates the idea of human knowing, rendering knowledge irrelevant, rather than moving us towards Truth.

Karl Popper’s falsification is a curious interpretation of the nomothetic/idiographic distinction that presumes the possibility of a scientific (logical) connection between a theory and an experimental finding. Alfred Ayer’s slap-down showed falsification and verification were not asymmetric, one black swan does not disprove the claim ‘all swans are white’. It merely throws the claim into question. Our sense of knowing is ‘irritated’. When the experimental finding is presented as an application of the theory under test, it is tautological; the result cannot but confirm the theory. Popper’s argument was appealing, but all informative experimentation must be knowledge-independent of the theory being tested, in which case the relation between the theory under test (the hypothesis) and the experimental result is problematic, incommensurable, not conclusive. Rather it is a complex kind of not-knowing that calls forth the experimenter’s judgment about ‘what really happened’.

The distinction between incommensurability and ignorance is no philosophical word game. Resolving uncertainty by integrating such fragments into shapeable practice is the entrepreneur’s route to value creation. Enterprising managers must understand/sense uncertainty enough to engage it. They can never control it completely; the outcome cannot be fully predicted. Key is the observation that experienced managers engage ignorance and incommensurability with very different practices. Ignorance of the presumed knowable leads on to ‘research’. Incommensurability calls for discussion, negotiation, reconciliation. Capable managers’ ability to characterize the situation’s uncertainty and thereby choose an appropriate practice seems natural and obvious. Managers are effective when they can ‘read’ the situation, ‘recognize’ uncertainties, and ‘diagnose’ them into categories of practice. Recognition is an act of imagination. Note the difficulty of ‘teaching’ computers to recognize, for they have no imagination and can only ‘match’ the data they ‘know’ in memory with what they know through ’seeing’, even when aided by algorithms that speed the memory search. Academics who admit only one type of uncertainty, ignorance, blind themselves to managers’ diagnostic and entrepreneurial skills.

Again, ignorance presumes the prior existence of what is knowable, a coherent and logically constructed ‘objective reality’ that exists already and is unaffected by our research practice. It is as if humankind is characterized as a Single Supreme Scientist, probing Nature with unambiguous yes/no questions. Such science admits no incommensurabilities, everything is presumed equally real and explainable. But the Scientific Method is not our only method of dealing with not-knowing. Analyzing managing changes completely when we admit incommensurability, the fragmented nature of our imperfect knowing, as distinct from ignorance of the perfectly known. We address incommensurability by debating alternative ‘knowns’. Note how people and their subjectivity are drawn in. The ‘negotiation’ process is not ‘objective’ because it hinges on the participants’ particulars, their specific not-knowing. There is no general model – implying there can be no scientific model of managing or ‘the firm’ if negotiation is its fundamental process. Yes, some propose rigorous theories of negotiation but must set out by defining (axiomatizing) the participants and their choosing behaviors, claiming to know people, to have a true theory of the individual. Poets know better. The human individual is not knowable to us; we do not know ourselves, let alone anyone else. Our imagination indicates what we do not know. Consequently, real interaction is more complex, we ask advice, we reflect, allowing some dialectical interplay between alternatives. The practice of dealing with incommensurability, the going back and forth between possibilities, is very different from dealing with ignorance and the scientific back and forth between hypothesis and evidence. Yet both processes are dynamic, implying the analysis of value creation must stand on dynamic models/ideas.

Managers must diagnose before instructing action, just as physicians must determine the patient’s condition before prescribing professionally. Is this an A-situation or a B-situation? Managers’ (and physicians’) diagnostic skills vary widely. Even with the best science, gathering data and reducing ignorance seldom leads to definitive doubt-free conclusions. Some uncertainty remains to be ‘diagnosed’. Good diagnosticians are highly regarded for good reason; their choices often push the boundaries of professional practice – famously in the case of puerperal fever. We might debate ‘internally’, but differences in characterization may arise ‘externally’, such as agent C and agent D disagreeing over value. Here a third mode of uncertainty appears as ‘indeterminacy’, the difficulty of knowing how D will respond to C’s move. Note time and expectation enter the analysis. In circumstances of indeterminacy the manager’s choice of mindful practice is often ‘negotiation’. Rather than researching (scientifically) a presumed reality, managers proceed by bringing contrasting but different ideas, knowns, and doubts together. Entrepreneurship and value creation is more often driven by synthesizing practice than by scientific research. This essay concludes by proposing ‘the firm’ as a managed complex of human interaction that grasps targeted idiographic uncertainties evident in the socio-economy. The resulting practice may lead to economic value creation.

To conclude this section, the three types of uncertainty noted – ignorance, incommensurability, indeterminacy – must be complemented by a fourth – ‘irrelevance’. All human knowledge is held in language. Negotiation requires sharing language. Likewise, the entrepreneur must create a language that enables hir to consummate the complex or bundle of contracts that bring the business into economic existence, no longer just an idea beyond the real world, rather made ready-to-hand to be ‘set in motion’ as Schumpeter suggested. Managers need a language specific to the firm that enables them to issue directions and evaluate the consequences of the motions they generate. There is no nomothetic (universal or formal) language. Even when this language is idiographic and identified/constructed, it may not relate adequately to the ideas and actions necessary for the firm to succeed, and so be irrelevant. One downside of using consultants is that their language, embodied in their ‘strategic tools’, may prove irrelevant to the resources and practices necessary for their client’s success. Likewise business meetings, often considered a superfluous part of corporate life, are often crucial loci for adapting, updating, and promulgating new business language. Again, negotiation is often the most effective route to improvement, calling for managers to engage in skilled listening and persuasion. But sometimes new language does not lead to improvement.

The next section moves towards the practice of engaging uncertainty. The section above claims some grasp of specific uncertainties is necessary to understanding a firm and managing it. Science and its methods are focused on engaging ignorance of the general, one mode of value creation. But managers need also to be adept with incommensurability, indeterminacy, and irrelevance, and consequently with shaping, motivating, and empowering the practices of others. Even in our technology-penetrated era, science seldom drives business success. Schumpeter insisted it was the business application of science that shifts the economy from creative destruction to economic growth, not science’s progress alone.

J.-C. Spender, “Managing the engines of value-creation”
real-world economics review, issue no. 83, 20 March 2018, pp. 99-115, http://www.paecon.net/PAEReview/issue83/Spender83.pdf

  1. April 16, 2018 at 5:54 am

    What is relevant for managers is not necessarily relevant for economists. Keynes and Knight emphasized uncertainty. It lies in the lacuna which is not covered by deterministic reasoning or by provability calculations and judgment. As J.-C. Spender argues, uncertainty is one of the most important elements that managers must take in consideration. However, what is important for managers (and even for management science) is not necessarily important for economists (and economics). As our capacity of reasoning is limited, in economics building or reconstruction, we should choose a research strategy which may permit us to arrive fast at a better understanding on how an economy works or functions.

    Now, the central question for economics is how and why the large network of human economic actions works, or in other words, why this complex network of interactions does not lead to chaos. Adam Smith hinted a parable of invisible hand. Frank Hahn (1981, reprinted in 1984) cited Arrow-Debreu’s General Equilibrium model as “near the end of that road” in answering our central question. However, we should contend that Hahn was wrong. Arrow-Debreu’s General Equilibrium model does not explain what is really happening in the market economy. In a very specific aspect, it may indicate a mechanism how a market (for example a security exchange) works. Even on this point, we can only say that (1) the model explains a very small exchange market among the whole economy and, (2) even in this small exchange market, the vital condition (for Walras and Arrow-Debreu models) of simultaneous equilibrium is violated. This means that Arrow-Debreu model is only a very rough disfigured explanation.

    What is more important in Arrow-Debreu model is that it contains an internal logic that restricts its validity to a small economy. The Arrow-Debreu model relies on the assumption that economic agents know all prices and can calculate their optimal actions. The model becomes more and more irrelevant when the economy becomes bigger. It cannot explain an economy as big as one that comprises millions of people and hundreds or commodities. An economy with a population of one hundred is a fantasy far from the modern economic world. We should reconstruct a theory that can explain the working of the modern economies which is not restricted to a small fictitious economy.

    For this central question, the question of uncertainty is not important, or in other words we can neglect it, because the modern large scale economy works not by responding to uncertain situations, but by a series of routine actions which have been proved to be effective by long experience. Whether an entrepreneur succeeds or not is closely related how he or she judged the uncertain world. But, to reply the central question, economics has no necessity to explain which result comes out for an entrepreneurial decision making. Whether he or her succeeds or not is one of many accidents which the economy (and economics) must admit as inevitable noises.

    References:
    Hahn, F. (1981) General Equilibrium Theory. In Bell and Kristol (eds.) The Crisis of Economic Theory, Basic Books.
    Hahn, F. (1984) Equilibrium and macroeconomics. Basil Blackwell.

    • robert locke
      April 18, 2018 at 7:40 am

      Yorshinori, your comment is a perfect example of the failure of economics to recognize the dysfunctionalism that it creates in our attempt to understand our world. Please stop mapping economics onto the methodologies of natural science, the subjects are different. Spender is telling you that the real world entrepreneurs face every day deals with unknowns that only imagination and rhetoric can overcome, you are telling us that economics has nothing much to do with that world, which in my view makes it dysfunctional. Start with the real world and then use the “science” that seems appropriate to solving the problems you find in it, not with a nomethetic science that, as Spender is saying, is of little use to enterpreneurs engaged ideographically in the real world.

      • Prof James Beckman, Germany
        April 18, 2018 at 11:46 am

        Robert, I think we are saying the same thing: when I teach logic or economics, I am nomothetic, but when I teach engineers in a master’s program which introduces them to global business I certainly must be ideographic. This is true whether putting a Wifi comm system into the Amazon River area or analyzing supply chain issues in global manufacturing sites. “Let the problem be your guide”, I say somewhat simplistically.

      • April 18, 2018 at 5:44 pm

        Robert Locke
        can you present any theory that explains how an economy as big as a nation works? You may explain how people face difficulties by the existence of uncertainty. In spite of all those difficulties, the economy works at least sufficiently satisfactorily almost always. Why?

  2. Prof James Beckman, Germany
    April 16, 2018 at 6:40 am

    Excellent remarks, J.-C. I knew Knight thought philosophically, but didn’t know more. As I both teach & consult in Germany–engineers normally in both roles–I must address the matter of probability. I know the VW folks (& others) did so over their diesel fix. Here, of course, there was little chance of being caught, but those darn engineers in West Virginia & California came to the rescue of adult-asthmatics like myself & millions more. So practical issues, with broadly measurable alternative results, set the stage for professionals like me.

  3. Frank Salter
    April 16, 2018 at 12:57 pm

    The two paragraphs:

    “The most familiar mode of not-knowing is being ‘ignorant’ of what can be known, a mark of our scientific era. … Note science sets out presuming everything worth knowing is knowable, independent of our knowing and researching, that there is an unshakeable Truth. The Scientific Method guides us to overcome our ignorance of this Truth.

    Dealing with others’ ignorance is … the notion of objective Truth or its absence allows. Aristotle reminds us ignorance and incommensurability are completely different types of not-knowing. Again, our enthusiasm for science tempts us to collapse the difference, to treat incommensurability as type of ignorance, presuming we can arrive at the Truth by integrating known facts. But, as suggested earlier, this is ironic – it eventually evacuates the idea of human knowing, rendering knowledge irrelevant, rather than moving us towards Truth.”
    ——————————————————

    Science deals with understanding reality not with truth. Scientific laws are theories which have not been falsified. It is not science which imputes truth. It is others’ failure to grasp this simple point which leads to confusion.
    The scientific method sets out to show whether hypotheses correspond to empirical facts. If they do and the scientific community accepts these hypotheses, they are considered valid theories NOT statements of truth. Theories simply provide acceptable descriptions of reality. There are many examples of overlapping and differing descriptions of some aspects of reality. This is a comfortable position when truth is not imputed. It would be intolerable if truth was being claimed.

    Unfortunately, economists do not accept this rigorous level of scholarship. If they did enormous quantities of economic theorising, the dross, would be eliminated. Economic analysis reminds one of Lewis Carroll’s:
    Humpty Dumpty scornfully — “When I use a word, it means just what I choose it to mean—neither more nor less.”
    The Bellman — “What I tell you three times is true.”

  4. lobdillj
    April 16, 2018 at 4:59 pm

    I am not an economist; I am an applied scientist. That said, it was easy for me to see that the theory of comparative advantage is, in general, flawed. The assumptions necessary for the theory to be valid are an incomplete set in reality. OTOH, a statement that the market for toilet paper has an inflexible demand curve seems to be valid, though there has never yet been empirical proof of it.

    • April 17, 2018 at 1:10 am

      Dear lobdillj,

      I do not under stand why you cite here the comparative advantage theory. The last year was bicentennial of the publication of (the first edition) of Ricardo’s Principle of Political Economy and Taxation. Many books were published on this occasion. We can observe two big changes with regards to comparative advantage theory.

      (1) You know that Ricardo was commonly understood as the person who found the comparative advantage theory. But this interpretation was not exact, because Ricardo explained the gains from trade by the so-called “18-th century rule” and he made no argument commonly understood as comparative advantage. This new interpretation is now called Sraffa-Ruffin interpretation.
      See chapters by Ruffin, Maneschi, Tabuchi, and Faccarello in Senga et al. (eds.) Ricardo and International Trade, Routledge.

      (2) A new theory of international values was discovered and the former theory of comparative advantage was replaced by a more direct cost-comparative theory. It became clear that comparative advantage theory was a crude primitive theory which was valid only in a very special situation.
      See my paper in Shiozawa et al. (eds.) A New Construction of Ricardian Theory of International Values, Springer. You can also read a draft version in the ResearchGate
      https://www.researchgate.net/publication/304717720_The_New_Theory_of_International_Values_An_Overview

      • lobdillj
        April 17, 2018 at 4:09 am

        Dear Dr. Shiozawa,
        I am not able to discuss these matters at your level. I have studied only material written for the popular market (e. g. Krugman’s books).
        As I understand it, comparative advantage theory basically says that trade is mutually beneficial between two countries with differing labor rates if each country imports only those goods in which the imports cost less in terms of the importing country’s labor cost than what would be required to produce them at home. Adoption of this policy results in specialization in production of a limited range of goods, and importing the rest, because the country is better off than it would be if it decided to produce all goods rather than engage in trade.
        Krugman used this theory in the book “Pop Internationalism” to promote international trade. And he tooted the comparative advantage horn for many years as I recall.
        This ignored the fact that specialization creates dependence. When a country does this it becomes dependent on the exporting country’s future willingness to export. This is an important consideration in the real world.
        Scholars seem more interested in citing the record of who published what when than in trying to explain economics for us ignoramuses who have to cast votes based on whatever tidbits we can glean from the oracles.
        I may be wrong about some of this, but it’s not because I haven’t tried to figure things out.

      • Prof James Beckman, Germany
        April 17, 2018 at 8:52 am

        Hi, Lobdillj, let me jump in as an economist who consults on global trade from my vantage in MIddle Europe, but also lectures frequently in China. Global finance sets exchange rates, reflecting both trade transactions & personal income (think devivatives). Cheap labor nations producing for sale to expensive labor nations, or cheap production of extractive products due to location (think petroleum or shellfish) do often not prevail. It is this ideographic reality which prevails, but lets give credit to the early thinkers who have led the way with their nomothetic logical structures, I suggest.

      • lobdillj
        April 17, 2018 at 12:50 pm

        Hi Prof Beckman. Thanks for your reply. You are describing trade as I see it. It is not a healthy, mutually beneficial reality, is it? It is predatorial. The big dogs win. The little dogs are trapped in servitude. This is what happens when the false promise of the invisible hand is invoked by predators to justify their plundering. If the little dogs were wise to the game and understood it they might possibly avoid the death grip and have a chance of prosperity for their people. Unregulated capitalism is a cancer. Those who appear to be winners will ultimately be destroyed as well as the apparent losers. Unchecked greed is NOT good. It is inevitably a disaster for everybody.

      • Prof James Beckman, Germany
        April 17, 2018 at 4:23 pm

        Hi, Lobdillj,

        I agree that the current globalization model does not show much compassion. Look at the response of Hillary Clinton to those “awful” people who couldn’t adjust to the loss of their jobs to outsourcing. It was identical in the UK, where even the Socialists didn’t do much to retrain & to help product firms compete, accepting I suppose the movement towards services of all kinds. The Chinese have been very adept because of the size of their domestic market, their ability to satisfy international economic demand & to show practical compassion by moving rural people to urban areas where they had better education, superior health care & a chance to earn a survivable living. Since I teach several months a year in China, I can marvel at the toughness & clever adaptability of these survivors.

    • April 17, 2018 at 5:54 pm

      @lobdillj
      There is one thing you should know about economics. There are many schools and strands in economics which explain the same phenomenon very differently. Simply stated, they are contradictory with each other. If you know this, then you can search another explanation than that you find erroneous. You should not be bewildered by the name like Paul Krugman. He has got a Nobel prize by his theory of international trade but he is still one of neoclassical economists and inherits almost all flaws of neoclassical economics.

      If you are an applied scientist, it is easy for you to read my paper than many other economists who are trained in the mainstream tradition. The core of the new theory of international values is that the wage rate (measured in some international currency) of a country is determined simultaneously with wage rates.of other countries and the pattern of specializations in such a way that all countries have some competitive industries. On this point, all is dependent of all others. If once wage rates are determined, there is no difference between domestic competition and international competition.

      This is really state-of-the-art knowledge but it is explainable in a simple words. It is true that you had no chance to know the new research result. Given the situation, what you have thought is quite precious. But I hope that you understand in general there are some economists who are thinking more seriously than the popularizers of textbook economics. If you want to find such an economist, in most cases, you can find one.

      Economics is not a simply retarded science. In some sense, it is highly developed but it is difficult to know the relations between many different theories even for specialized economists. But this is not very different from the state-of-the-art physics like super string theory or theory of everything. The difference is only a matter of degree.

      • lobdillj
        April 17, 2018 at 7:37 pm

        @ Yoshinori Shiozawa, Thanks for your thoughts. I am mostly interested in Modern Monetary Theory and how it could serve the people and end brutal inequality. The problem is that the oligarchs will have none of it. Money talks, as they say.

  5. Norman L. Roth
    April 16, 2018 at 9:16 pm

    Pssst ?

    Any of you guys ever read Peter Drucker’s CONCEPT of the CORPORATION ? Doesn’t sound like it, Try it .

    NORMAN L. ROTH

  6. Prof James Beckman, Germany
    April 17, 2018 at 8:08 am

    Hi, Norman, since I have been a mgmt consultant as well as econ prof for 40+ years, yes, I have read, known & learned from Drucker. We are now in an era of TEAM planning & executiion in an very uncertain, highly interactive global world. so Drucker’s famous dictum applies, I think: “The best way to predict the future is to create it”.

  7. April 21, 2018 at 4:36 am

    Dear Norman L. Roth and James Beckman

    Of course, Peter Drucker is one of my favorite management science writers together with Henry Mintzberg. In relation to uncertainty and ignorance, Brian Loasby’s following book is most recommended. I wonder if Lars Syll have read this important book when one discusses uncertainty and ignorance.

    Brian J. Loasby (1976) Choice, Complexity and Ignorance: An Enquiry into Economic Theory and the Practice of Decision-Making, Cambridge: Cambridge University Press. .

    • Prof James Beckman, Germany
      April 21, 2018 at 7:12 pm

      Thanks, Yoshinori, for the reminder on Loasby.

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