More Uncertainty

Actually, now I think more about it, how can we ever have ‘more’ uncertainty? The massiveness of our lack of knowledge about the future surely reduces that word ‘more’ to trivial irrelevance.

As the wise G.L.S. Shackle taught us: anything beyond about ten years into the future is so opaque as not to exist at all other than in our imaginations. Which is why all business has to accommodate itself within the narrow future. Anything other than the short term is not worth the risk. Or, rather, we ought to leave such risks to the body politic which has the greatest ability to absorb the loss caused by error.

The basic state of nature is that it hides from us what its unfolding will produce. We simply cannot know. People who state otherwise are fooling themselves and are blind to reality. They have substituted some form of faith for acceptance of our real condition.

I think it was Frank Knight who cut to the chase of the problem: we need to predict the future in order to conduct our lives within some recognizable pattern. To predict the future we depend, explicitly or not, on its similarity to the past. But the very fact we need to predict the future suggests that we are aware that it will be different from the past. So we are caught in a paradox. If the past and the future are the same we need no prediction. We simply need memory. We need not concern ourselves at all with change. Yet we observe change. And the very existence of change invalidates, at least in part, our reliance on the past as knowledge about the future.

Much of modern economics exists in an alternative world where none of this interferes with the perfect, clockwork like, working of allocative logic. To economists in that tradition an economy is a mechanism for allocating resources and the entire problem is fully specified: there are no uncertainties whatever. Around the edges of their theories it might appear that they have acknowledged their deviation from reality, but at the central core of their work there still persists a leap of faith that dooms them to be forever disconnected from an actual economy.

And Robert Lucas is hopelessly wrong when he argues that economic reasoning has no value whenever uncertainty prevails. Perhaps his doesn’t, but proper economic reasoning, that is to say economic reasoning that bends itself to the centrality of uncertainty, is of great value because it helps us explicate and inform policy to mitigate uncertainty.

Plus it allows us to perceive an economy as more than a simple, mechanical, allocative machine. It is also a discovery device. It is a source of novelty. Uncertainty engenders responses such as innovation, risk taking, and exploration. Those things are a source of enrichment and the accumulation of knowledge.

It is also critical to remember that the growth in knowledge is itself uncertain. We cannot prove either the truth or falsity of what we claim to know with any certainty. We are doomed to live in perpetual, and to some disconcerting, doubt. But it is precisely this doubt that propels us to uncover new knowledge.

It is also this doubt that ought ensure we excise due care in the construction of social policy. Since we can never know for sure what the impact of a policy is we need to proceed cautiously, acting boldly only where we see the damage of uncertainty being potentially greatest.

The failure of the great libertarian economic agenda of the last thirty years is due exactly to its lack of admittance of uncertainty. Those who advocated great programs of deregulation, fiscal shift, and trade liberalization made claims of certainty with respect to the outcomes of those programs. They defied reality. They ignored the limits of their own knowledge and foisted the consequences of those limits onto the rest of us. Many of them had a scarcely hidden political agenda to upend the safety and progress of the post-war middle class. Others, though, believed, with an unbecoming fervor, in the cause of ‘free-market’ economics. They, because they admit of no uncertainty, saw no need to provide continuing protection against the vicissitudes of life. For them it was a matter of creating sufficient incentives and allowing people to make their own plans about how to deal with what they regard as the simple calculations of life. Not only did they deny the existence of potentially damaging unknowns, they even denied the existence of limits on our ability to understand, and to handle, what we do know.

The tragic consequences of their cynicism and hubris are what we see around us in the dysfunction of the economy, growing inequality, environmental degradation, and the disconnection of our economic leadership from the realities faced by everyday people.

The great irony of this is that the false system upon which they based their policy advice, the system that failed to acknowledge limits and the uncertainties we face was based on a series of conjectures they call, collectively, ‘rational expectations’. It is a system which, in its defiance of reality, also defies reason. Thus it is the very epitome of irrationality.

So, perhaps, we can admit of one certainty: they were arrogant fools. And, perhaps another: we must ignore them henceforth.