Home > Uncategorized > Knight and Keynes have very different concepts of uncertainty

Knight and Keynes have very different concepts of uncertainty

from Paul Davidson

Knight and Keynes have very different concepts of uncertainty. Knight believes that uncertainty is epistemological problem where humans do not have the mental ability to see the future even if it actually knowable currently. Keynes argued the future can not be derived from analyzing the past and current relationships.

On page 210 of his book Knight writes that the future “universe may not be knowable ,,,[but] objective phenomenon… is certainly knowable to a degree so far beyond our actual powers….[and therefore] any limitation of knowledge due to a lack of real consistency [i.e., what I would call this lack a nonergodic system] in the cosmos may be ignored.”

In other words, Knight’s view of uncertainty is a failure of human capability –and not a lack of consistent probabilistic relationships over time.

Keynes, on the other hand in his paper on Mr. Tinbergen’s methodology stress his belief that past probabilities of relationships will not be unchanging in the future– and so there is no evidence available today that can be reliably used to predict the future.

  1. Rhonda Kovac
    April 25, 2019 at 10:58 pm

    The reliability of a prediction of future events is not a property of the phenomena in a system. It varies as a function of what the person calculating that predictive figure knows and doesn’t know. A person with different knowledge of a system will arrive at a different probability figure for prediction of the same future events in the same system.

    For example, someone pre-Watson-Crick would conclude a huge uncertainty in the prediction of cell reproduction chemistry. Whereas someone with knowledge of DNA sstructure and replication process would have high predictive certainty for the same phenomena.

    Beyond knowledge, social systems, unlike natural ones, allow deliberate interventions that change causal rules; in turn altering predictive certainty. Better structured systems give better certainty for the affected outcomes, sometimes dramatically so.

    This is why it is foolish to allow ourselves to succomb to pessimism about our ability to have predictive certainty in economics just because economies present to us now as ‘uncertain’. Such phrases as “people aren’t capable of understanding social systems with certainty” (Knight), or “one can’t use past probabilities to predict the future” (Keynes) are essentially worthless. They miss the point. These conclusions are not measures, nor indicators, nor roadmaps of our potential capacities to understand economies and mold them to our needs, which is our real hope and grounding.

  2. April 26, 2019 at 6:09 pm

    As I see it, FWIW, the ontology of investments is of the essence in nailing down the nature of economic uncertainty. And neither Knight nor Keynes can get us from their position to provide a coherent answer to the question at hand… Investments are made in the _belief_ that returns in excess of outlays are in the offing. The determinant of those uncertain investments are its returns over time, as capital without returns is worthless by any rationale. Therefore anteriorly, capital investments are indeterminate in value; and, as to be resolved expenditures, they’re systemic debts. Hence all capital is _debt_. This of course is the very opposite of capital goods’ determinant being the investments made at the time they are made. Keynesian uncertainty is yet determinate by definition. A clear contradiction, no?

    As for the other side of the argument… The capital expenditures, potentially loaned into existence, become disbursed personal income. These incomes as a rule are spent at the retail level on products embedded with a full set of claims, both cost and profit sourced, already. The additional incomes could be seen as “phony” money to the extent they’re lent, because no additional final output is available yet. And retailers, sensing quicker turn-overs, may well decide to raise prices. The “risks” of uncertain investments thus are borne by existing claim holders to final output; both in the possibility of having their current paychecks now diluted in rendement, and in having a future payoff in then enhanced final output that may not be coming about at all, due to “risk taking” by investors at that time. The pox on investors and their so-called indispensable investments. The 1-2% empirical av. real yearly growth in the developed world (more than plenty for a finite planet anyway) during the last couple of generations or so, has been due to a learning-by-doing, as “financed” by direct spenders. The about an order of magnitude greater indirect spending has been virtually all wasted, let alone investment borrowing.

    And to top it off, this proffered explanation indicates that income too is a to be resolved debt at the time of its disbursement. So we can’t just earn some income to pay off debt. I’d like to see a Keynesian interpretation of it all.

  3. Craig
    April 27, 2019 at 8:46 am

    Radical uncertainty is obviously true, but so what? If you’re an entrepreneur and you’ve done your due diligence etc. you act. The thing to do in economics or any problematic situation in any other body of knowledge is not get obsessed with problems, but search for a relevant and new solution. Orthodoxy is a trap and obsessive iconoclasm is probably an even more devilish trap.

    The actual operation of all new paradigms are basically very simple, but visualizing the new paradigm is almost impossible without first finding the new concept that defines it. After that is recognized the rest of policy formation is a straightforward rational process. Of course you have to wade through and endure all manner of being ignored, doubt, misunderstanding, non-comprehension, orthodox invalidation, heterodox timidity and mankind’s penchant for reforms and palliatives instead of the freedom of actual solutions. You have to live and advocate bravely and with as little ego reaction to the aforementioned mental shortcomings as possible.

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