Keynesian Uncertainty

Note before I begin.. I am going to begin citing my sources, I have to start practicing citing my sources again


One of G.L.S Shackle’s favorite articles is “The General Theory of Employment” (Keynes 1937), in which it has shaped much of Shackle’s way of thinking (Shackle 1984: 391). Here is Keynes:

It is generally recognized that the Ricardian analysis was concerned with what we now call long-period equilibrium. Marshall’s contribution mainly consisted in grafting on to this the marginal principle and the principle of substitution, together with some discussion of the passage from one position of long-period equilibrium to another… Edgeworth and Professor Pigou and other later and contemporary writers have embroidered and improved this theory by considering how different peculiarities in the shapes of the supply functions of the factors of production would affect matters, what will happen in conditions of monopoly and imperfect competition, how far social and individual advantage coincide, what are the special problems of exchange in an open system and the like. But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out (Keynes 1937: 212, emphasis added).

Classical economics was performed by taking specific factors as given. Employment was given, prices were given, expectations were held neutral, and past events automatically determined future ones. All this, along with additional assumptions, is what made equilibrium analysis possible in the Ricardian framework. As Keynes put it these assumptions made possible for “pretty, polite techniques, made for a well paneled board room and a nicely regulated market” (1937: 215). While it is indeed a neat model that may be easy to illustrate, this system was liable to fail:

[Ricardian theory], being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface (Keynes 1937: 215, emphasis added).

We see the ontological uncertain Keynes pop out in this passage above. Certainty and security break down because new fears and hopes emerge. The classical model is one of illusion and when we remove the ‘illusion’ by introducing human action, expectations, and a role for time (making this a process), we see that modeling the market economy is no longer pretty or polite! Uncertainty was indeed the spine to Keynes’s overall theory [Shackle 1984: 391].

I should note that the “nihilist” comment made by Shackle (1984: 391) was probably a sentence implying this Keynes passage:

Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future (Keynes 1937: 215).

To Keynes, he already presumed that there would be economists at the time, probably ones that were loyal to the Ricardian framework, who thought of what Keynes said as too ”philosophical’, irrelevant to understanding the market economy. Maybe even rejecting Keynes’s philosophical claim on the ground that it quite clearly states that we know very little about the future (Keynes 1937: 215).

And even to this day, people still reject Keynes’s overall philosophical claims, or at least continue to follow those who made this mistake. For example Paul Samuelson automatically rejected this philosophical issue on the basis of the assumption of the ergodic axiom and did much work under this assumption, see for example, Samuelson’s “Optimality of Sluggish Predictors under Ergodic Probabilities” (1976) or “What Classical and Neoclassical Monetary Theory Really was” (1968). It is worth to note that his answer for using the ergodic assumption, thus rejecting Keynes’s philosophical emphasis, was on the grounds that if one rejected the ergodic principle, one rejected calling economics a science (1969: 12).

Samuelson does have a point, how can a subject be in the realm of the subject of science if we can not make precise quantitative predictions similar to how we do hard science?  There is no clear answer to this, but one argument that appeals to me is that there is a clear difference to what a hard science is and what a social science is. Different subjects often calls for different sets of tools and different questions to answer. Economics is in the category in trying to explain the ‘irrational’ subjective human.


Keynes, J.M. 1937. The General Theory of Employment. Quarterly Journal of Economics 51 (February): 209-23.

Samuelson, Paul A. 1968. What Classical and Neoclassical Monetary Theory Really was. The Canadian Journal of Economics 1 (February): 1-15.

—. 1969. Classical and Neoclassical Theory. In Monetary Theory, edited by R.W. Clower. London: Penguin Books

—. 1976. Optimality of Sluggish Predictors under Ergodic Probabilities. International Economic Review 17 (February): 1-17.

Shackle, G.L.S. 1984. Comment on the Papers by Randall Bausor and Malcolm Rutherford. Journal of Post Keynesian Economics 6 (Spring):     388-93.

In Defense of Shackle

In an article by John Allen Kregel and Eric Nasica entitled “Uncertainty and Rationality: Keynes and Modern Economics”, which is in the book Fundamental Uncertainty: Rationality and Plausible Reasoning edited by Silva Marzetti Dall’Aste Brandolini and Roberto Scazzieri, the authors state the following about Shackle’s ”nihilism”:

Despite these attempts to clarify the importance of uncertainty in the sense given the term by Keynes and Knight for empirical analysis, mainstream evaluation of the question remains that represented by Walliser (1985, p. 17), who writes that Keynes’s ideas on uncertainty have ‘remained at the preformal stage, they do not seem to have had any general “cultural” influence on economic thinking except as complications or useless subtleties’. Indeed, for most economists better-known Keynesian concepts such as ‘animal spirits’ are considered to be purely subjective and thus irrational and unscientific. As a result, in the contemporary literature Keynes’s analysis is either criticized or credited as an approach to macroeconomics that is incompatible with the traditional concept of individual behaviour based on the assumption of economic rationality.5 This situation is in part linked to the identification of Keynesian uncertainty with radical subjectivism, and the associated scientific and theoretical nihilism. This is clearly the interpretation of Keynes adopted by Lucas, who writes that ‘in cases of uncertainty, economic reasoning will be of no value’ (Lucas, 1981, p. 224). It must be admitted that some Post Keynesian authors have given support to such an interpretation. For example, Shackle has claimed to be a ‘nihilist’, and applied the same term to Keynes (see Shackle, 1984, p. 391).

Then the authors conclude:

 …this approach is incompatible with Keynesian uncertainty and non-ergodic processes, its force has been ignored because it appears to be based on radical subjectivism and theoretical nihilism.

This is not true at all. The passage that the authors refer to does mention the term ‘nihilistic’ but you have to look at the context of which the term is placed. Shackle is not saying that he is necessarily nihilistic or that Keynes is necessarily nihilistic. What he is pointing out is that the way he interprets Keynesian uncertainty, is one that some economists would look at as nihilistic because those economists are concerned with predictive simple models. It’s almost like me saying, “My studies on finance has led me to a state of thought that some mainstream economists would find stupid since I worry about private debt. Let them name me that, but at the end of the day, they are the ones that are closed minded for their theories ignore the importance of debt.” I did not call myself stupid, and I merely stating that some mainstream economists would find my thought as stupid. The same applies to the passage by Shackle, he isn’t saying he is nihilistic, he is merely stating that some critics will find his thoughts of uncertainty as nihilistic. Oh, by the way, here is the passage by Shackle:

Malcolm Rutherford’s comparison of the rational expectation hypothesis with Keynes’s dealings with uncertainty goes beyond this explicit purpose to a more general survey of the essence of the making of crucial decisions. His study leads him (as such study has led me) to a state of thought which the builders of precise predictive models will call nihilistic. Keynes was also nihilistic. In his Quarterly Journal epitome of his theory of employment he is contemptuous of the notion that business decisions, especially investment decisions, can be the work of adequately-informed reason. They are necessarily shaped (so far as they are not radical originations) by suggestions offered by visible current processes and circumstances, and by businessmen’s canvassing of each other’s opinions as a mean of spreading a wider net for knowledge and ideas. In the General Theory itself Keynes declares that all such decisions must spring ultimately from “animal spirits.” Uncertainty is the central nerve of Keynes’s theory of employment and output-as-a-whole, yet the presence of the idea of uncertainty in the book is particular . It may be said to haunt the whole work, for it appears in many places, yet no articulation is offered of any thought-process by which businessmen may seek to cope with it or exploit it.

James Buchanan on Jack Wiseman and George Shackle

I read some of Buchanan’s work and I am not much of a fan for it. But ironically , there are economists that I appreciate that like Buchannan’s work, specifically Karen Vaughn and Jack Wiseman. I guess if I want to read up on subjectivist economics, I rather read them than Buchanan. I do give Buchanan the credit for introducing me to Wiseman though and it was actually this interview where I first saw Wiseman’s name. In the interview Buchanan had with the Austrian Economics Newsletter, Buchanan comments on Wiseman and Shackle:

Well, I’m certainly much closer to Shackle than I am to the mainstream. I’ve been tempted to go completely along with Shackle and become a very radical subjectivist. But I recognize that if you go all the way down that road you end up with a nihilistic position. I’m somewhere between von Mises and Yeager on the one hand and Shackle on the other. The person who comes closest to my methodological position is Jack Wiseman.

This is a confusing statement because there is not much difference in how Shackle and Wiseman view uncertainty and how it is applied to economics. If anything, Buchanan should criticize Wiseman for his nihilistic view on economics like he did to Shackle. Wiseman did not think he was departing from Shackle when taking about uncertainty and ignorance of the future, and he even classified Shackle to be part of what Wiseman called the “new uncertainty” school of thought. Wiseman’s view on uncertainty is just as radical, just as critical of formalization as that of that “nihilistic” economist. Furthermore, I think he speaks for all economists that appreciate uncertainty (and thus would reject the nihilistic label put on ontological uncertainty ) when he states:

I hope that I have persuaded you that there is here something more than a straw man: those of us who are interested in the study of a truly uncertain world could do with some help.

More on Wiseman here: A Forgotten Austrian: Jack Wiseman

Uncertainty Part 3: A Response to Lord Keynes and Unlearningecon

Not too long ago, I questioned Lord Keynes (LK) on the issue of whether governments reduce uncertainty in his post on his reflections on Dave Prychitko’s article on the Financial Instability Hypothesis. Now, for the most part, I agree with LKs criticism on the article. While I liked the idea that Austrians were willing to look at FIH, it seems they were only looking at it in a restricted sense, since Prychitko appeals to the ABCT throughout the article. But Dave did hit on one point which I think is a spot on criticism, he states that the FIH talks about uncertainty (and expectations) but implies that government can reduce the uncertainty. This is exactly the same criticism I have in my two posts on uncertainty (here, and here), but instead of specifically talking about the FIH and uncertainty, I just broadly talk about ontological uncertainty and Paul Davidson’s work on it.

LK replies asking 1) if I know there are thing not subject to uncertainty, such as risk and 2) also stating that intervention implies new outcomes to systems than that of without intervention.

1) yes, I agree there are systems that are not subject to uncertainty, and may be subject to risk instead. But I do not see how this makes a difference to my overall criticism. Obviously, I do not see markets (and reality in general) as a thing of risk but as one of uncertainty.

2) I do not really disagree with LKs statement that systems without intervention have different outcomes than that with the intervention. Though I would say that both systems may have the some same outcomes too. But, again, this says nothing about reducing ontological uncertainty. Unless we know all the outcomes to where we can apply risk, we are still living in a world where “each step is a step into the void” and also this completely ignores the element of surprise. This is why Shackle states the quite radical position that uncertainty “goes beyond the reach of legislation or improvement of organization and technology.” Jack Wiseman in his article ‘Cost and Decisions’ essentially talks about the same thing. Current economic theories and models are only concerned about the outcomes they can imagine and thus revolve around analysis around these given outcomes. Thus, they ignore the surprise element in where outcomes that are not inherent in the model actually happen.

Unlearningecon replies to my second post on uncertainty by saying that while I disagree with a state vs market mentality , I still use it. But I do not see how I use it. I understand that the market is one that arises under spontaneous and political institutions, as Menger would say, but this is the same market which I say is ontological uncertain. In fact, I would claim that it is the post Keynesians that fall into the state vs market mentality. Instead of viewing markets as they currently exist in reality as ontological uncertain, they simply view a market with insufficient intervention or an unhampered market as an ontological uncertain one. As I stated in a comment reply to Unlearningecon:

[Post Keynesians], on one hand, talk perfectly about the dangers of using historical data to predict the future and thus reject a predictive state but fail to see how that applies to policy as well. They speak perfectly about the flaw to assume how increase knowledge means reducing uncertainty because data is changing and we don’t know the ‘amount’ of data to even make such a statement but fail to see how this applies to government policies into the market. It’s almost like the [post Keynesians] are implying that reality is not predetermined, thus we should be skeptical of data for historical data does not imply that we know anything about future states but once there is a sufficient amount of intervention in the market there can be such a predictive state and thus, it might be reliable to use historical data for a good source to determine future states.

To me, I don’t see how this follows. The problem of uncertainty is still with us. This seems close as an example of special pleading in which uncertainty is applied in markets and not on the state.

Also Unlearningecon sees me talking about governments and uncertainty as if I am talking about it superficially but I am not. I state:

I understand government just doesn’t wave a wand and says, ” we fixed uncertainty,” if only that was the case, but the question to ask is “how does government limit uncertainty. What tools and data do they use to interpret the results?” Well if we hold to the three things of the realities of uncertainty (ontological uncertainty, non ergodic, transmutable reality) should we still question the tools and data that we interpret? Why isn’t historical data looked with skepticism like what we did when talking about markets and reality? Why is it alright to now say that governments reduce uncertainty when data is still constantly changing, when the future remains to be written by the human actions we do in the present, and when each step is a step into the void? Shackle’s work on uncertainty, which much of Davidson’s work is based off of, was meant to describe reality as a whole, not simply just markets.

A couple concluding remarks. First, I am not condemning intervention, I am just questioning the idea that governments reduce uncertainty. For example, I do not agree with looking at uncertainty with appeal to complexity, this is to say, I do not agree with the statement, “the increase of knowledge reduces uncertainty.” I am not condemning increased knowledge, I am just questioning whether it reduced uncertainty. Second, I am not saying there isn’t economic regularities. What I am saying is that just because there are regularities does not mean that they aren’t subject to surprise (ontological uncertainty). We live in a world similar to that of a kaleidoscope, in which a ‘twist of hand’, a change of news or data, can shatter one picture and make it into another, to use Shackle’s analogy.

It’s also worth to note that there are mainstream economists that understand this uncertainty problem. Wiseman comments on Frank Hahn, a Hicks influenced economist:

These observations lead naturally to a consideration of the role of equlibrium. The concept has been central to the development of economists’ understanding of their universe. It’s appeal is easy to appreciate: it generates harmonious outcomes, and facilitates the manipulation of problems by mathematical techniques. But, in the present state of our technical (mathematical) competence, it also restricts our field of enquiry to problems with a known (ie predetermined, pre programmed) set of possible outcomes, and encourages the elevation of compatibility with consistency conditions over relevance to the real world in the specification of problems for study. This view does not go unrecognized, in quotes such as the one given earlier, and (at least in my own case) in discussion with colleagues. It leads most commonly to the view put forward in Hahn’s well argued defence [‘On the Notion of Equilibrium in Economics’]. This acknowledges that we have no theory of learning in its entrepreneurial sense of identifying and acting upon new opportunities: much less a formal analysis embodying the unexpected. In these circumstances, Hahn argues, formal general equilibrium models embodying only routine learning behavior are the best we can hope to do – and of course such models are rich in technical interest and potential diversity. This seems to me to value formal elegance more than relevance. It will do if we see ourselves as ‘schoolmen manqué’, debating the niceties of pinpoint dancing. If we want better to explain the world we actually live in, it leaves too many problems unexplored.

I differ from Wiseman’s conclusion in that while I understand his view that we might have to deal with forever having theories that are ignorant of the future, I like to view economics as an evolutionary subject, thus I still have optimism in that one day we will develop theory that has satisfactory treatment of ontological uncertainty.

A Forgotten Austrian: Jack Wiseman

Jack Wiseman is a great writer. He was often thought of by many as a radical right wing person and thus, many dismissed what he had to say. Though I would question his ‘radical right wing’ label because relative to other Austrians, especially the anarchists, he was not that radical.

Wiseman’s way of thinking is almost from a radical subjectivist perspective, and he talks more about policy than economic theory (as opposed to Lachmann or Shackle who preferred to talk about theory). He might of also been thought of radical because of his distaste for neoclassical economics and he extends his criticism towards neoclassical economics to policy making. What he states insightful passages and why he isn’t recognized by other economist, especially Austrians, is unknown to me. On a side note, some Austrians that do know who he is would just call him a fellow traveller, but I do think that is highly debatable.


(the article I quote from Wiseman’s on uncertainty is one called Costs and Decisions though there are plenty of articles by Wiseman to chose from. This is simply my favorite on uncertainty )

My favorite contribution has to be what he writes in concerns about uncertainty. He seems to come very close to my overall interpretation of what uncertainty implies, though not quite. He also notes that his idea of uncertainty comes in part from Shackle, even though for most of his career he was always participating in Austrian circles.

Uncertainty is here because people do not know the future. But this idea of uncertainty is applied to everything, thus we can have the same analysis when looking at markets and policies.

At the time, the equilibrium theorists during his time (search theorists, temporary equilibrium theorists, the ‘new’ new welfare economics theorists based on information theory) were theorists who went beyond the ‘Walrasian god’ of conditions of general equilibrium, but nevertheless were still ignorant of the unknown future. The future may not be predetermined in the same sense as earlier theories, but it is still known. These theories incorporate probabilities and risk attitudes, or equilibrium is a condition were individual ‘theories’ and policies with emerging outcomes are conformed.

Decision makers are ‘clockwork Bayesians’ programmed to respond to changes in conditions but in preordained ways and within a defined system. This of course ignores or puts aside the fact that decision makers may experience surprise or experience new opportunities not anticipated as possibilities in the model, they can ‘learn’ but only in a restricted sense. In other words, this is a nice stable system choosing to assume away reality because of instability. He went on to consider this vision of uncertainty as the “new uncertainty school”, which he would of course categorize Shackle as one of his members and presumably, Lachmann.

But of course it was his view of uncertainty which was the main bait for critics. If I was to summarize the main argument against Wiseman, it would be, “Well, can you do better?” Wiseman’s answer is along the lines of, “Well to say this is to imply that you reject the evolutionary aspect of economics. There is no argument of principle against such an evolution.” The italicized part are his words, quite wonderfully said. What of arguments that reject this notion of uncertainty and fail to apply its implications but yet argue “current theory is the best we got”?

One of my favorite passages by Wiseman is when he draws two points about uncertainty and economics:

I shall content myself with two [inferences] by way of illustration, one positive, one negative. The positive one is that ‘higgledy-piggledy growth’ is a natural consequence. The past (recorded) performance of decision makers does not provide a simple guide to their likely future performance, and… ‘learning’ can never provide a more sophisticated fully trustworthy ‘investment rule’. The negative proposition is perhaps more disturbing: what becomes of positive economics once it is recognized that the basic econometric data (recorded prices etc) is, and always going to be, the outcome of mistaken predictions?

It’s note mentioning that even by friend and early mentor at LSE, Lord Robbins,
states that he shouldn’t overestimate the influence of uncertainty upon the thinking of future compatriots.

One thing that I do find fault in Wiseman’s talks on uncertainty is changing of institutions may indeed reduce or eliminate uncertainty. Though he does only say this once and quite vaguely, I still am at awe of the fact that he says this and yet also questions the state of positive economics.

At least though, he acknowledges the idea that we may never find a formal analysis embodying the unexpected. We need to get out of the “this is the best we can do” mentality for this only seems to appeal to elegance not relevance.

I always keep in back of my mind that we may never satisfy a clear theory of Economics with uncertainty but I do not let that dominate my overall thoughts. Economics is an evolutionary science, and this leaves room for optimism, this is to say, a feeling that we may find a satisfying theory of economics and uncertainty.

Group Behavior and Action

Another major contribution has to do with his research on group behavior. While still having a view of methodological individualism, he acknowledge that groups may act too. But because groups are composed of individuals, and thus with different ends and means, groups are often not just perusing one goal and quite often, groups are constantly fighting in trying to ‘change the rules of the game’ for their favor. By this in mind, we should imply that treating firms with a tendency of an extension of the lone entrepreneur is faulty. The mainstream treatment of firms is dealing with things one thing at a time with assumed profit constraints and no quarreling. This also may question some government policies like subsidies. To Wiseman, having a vast amount of subsidies in various countries led him to believe that there is more to subsidy policies than just economic reasons. Of course when talking about things abstract to the mainstream, like various ends and different means for individuals, we can now see that there can be some policies simply to ‘favor’ a particular thing and allow the changing of the rules for individuals. See his article Some Reflections on the Economics of Group Behavior for more info.

I will conclude by quoting a passage of Wiseman’s in which he concluded one of his articles on uncertainty:

I hope that I have persuaded you that there is here something more than a straw man: those of us who are interested in the study of a truly uncertain world could do with some help.

Uncertainty…Round 2

Lets start this post with a Lachmann passage on Keynes and subjectivism:

We have emphasized the importance of expectations for the subjectivist view of action. It is well known that in the General Theory, Keynes’s main aim was to establish the possibility of unemployment equilibrium and that everything else he had to say was made to serve this purpose. The introduction of expectations was thus to him a means to an end. He brought them into his argument when it suited him and left them out when it did not. (emphasis mine)


Keynes_Follower states the following

I may have a possible response to this uncertainty problem. The market itself is uncertain, we both agree, but government does reduce uncertainty because it has intervening factors that we know and that said, it does not apply to the uncertain problem like that of the markets at least.

To refresh, click here on my post on uncertainty.

But to answer: In a world of ontological uncertainty, non ergodicity, and transmutability, how can we have Post Keynesians say for certain that government reduces uncertainty? Just because the market is instable, unpredictable, and uncertain does not follow that government policies in trying to reduce the consequences to these thing suit any better. And it does not follow that these same policies overcome uncertainty. Again to state that ‘Government reduces uncertainty’ is like saying ‘increase of knowledge reduces uncertainty’.

This problem is even more of a problem if one rejects the ‘state vs market’ mentality, which many Post Keynesians agree to reject this mentality. This is to say, one cannot say the uncertainty problem solely applies on markets and also reject the ‘state vs market’ mentality. But even setting aside this ‘state vs market’ mentality, policies still influence the market process, and thus it still follows that the market still deals with the exact same problem than without the policies, it still deals with ontological uncertainty, non ergodicity, and transmutability.

It seems like the followers of Keynes have fallen into that same problem as Keynes but in a somewhat different context. Post Keynesian literature and research on uncertainty, while really great stuff, is only a means to an end. They use it when it suits them and leave it out when it doesn’t… Or so it currently seems.

And on a side note, this is not a critique specifically towards Post Keynesians, though I am ‘picking’ on the Post Keynesians (if you will) because of the great literature on uncertainty they have on markets. This critique really applies to all economic theories. If we want to have more realistic explanations about the economy and economics then we must be willing to take uncertainty to the next level and apply it to everything that is involved in the market process. Again, my conclusion that I drew up from my original post on uncertainty was as follows:

By applying all that has been said to economic theories and policies are key if we wish for economics, as a subject, to progress. Davidson is really spot on, on what he has to say about uncertainty and he does a very good job at explaining uncertainty in depth. Nevertheless, this puts in question all theory that asks for both positive and negative regulation.

Uncertainty and How it Works in Economics

I question a’ mainstream Austrian thinking’ Austrian in Lord Keynes’ blog:

The commentor states:

Of course as An Austrian I hold the view that if you removed the huge tax burden on individuals and businesses (much of which is used to support a moribund bureaucracy and its bribed supporters) there would by a much bigger pool of resources available to the private sector , and that would lead to the required infrastructure investment taking place spontaneously.

In which I reply:

How do you know this? This completely ignores market instability and uncertainty, both of which are Austrian principles in themselves.

He responds:

I believe it based on theory and also think this is (to some degree) backed up by what actually happened following denationalization and deregulation in some key infrastructure industries in the 1980s and 1990s where those industries (on the whole) became more efficient and more innovative.

In which I respond:

Even if I were to take your premise as true, can’t the keynesians do the same thing: 1) claim its based on theory 2) point to some event in history where the theory may be consistent with reality (even if at some degree too)?

Thus, I come back to my initial concern, where is the uncertainty aspect in this? So far, all I know is that your theory (whatever it is) is one that ignores uncertainty.


What I have said is very important because it is clear that, at least internet Austrians, Austrians fail to apply uncertainty in their thinking. I have replied to this comment by granting what he said about deregulation in the 80s and 90s as true and asked whether keynesians can claim along the same lines, 1) believe theory 2) show historical events that seem consistent with the theory. This is hard to reply to, if one says yes, then looking at theory and events that are consistent with the theory is not sufficient to prove your case that your theory is right. Also, it is quite clear that the theories ignore the uncertainty aspect too because they view the theory has being consistent, even in a world of changing data. If one says no, then there is still trouble here because keynesians do look at their theories and look at historical events to see if the theory is consistent. And therefore, there needs to be more research on the events in question and the theories in see which theories, if any, are consistent.  They also see the same uncertainty problem here, in which the theories in question seem to only look at a world in which there is a given amount of data and thus ignore the change in data and the ‘amount’ of data at a specific time. And on a side note, I am not really questioning whether deregulation is right or whether regulation is right, I am only concerned here with how one thinks of this as right. I have said before, I am not highly concerned right now on what to think in economics, but on how to think. This concern on how to think about economics is really why the Austrian school got started in the first place. People have to keep in mind that the Austrian school was not started as a defense for free markets, it was started because they sought to challenge the current mainstream on methodological issues. Socialists and liberals did not consider Carl Menger’s lectures as mind blowing because of his liberal views, but his lectures were mind blowing because the way he thought about economics was unheard of at the time and people found it interesting, people of all political spheres.  That said, let me get back to the topic of uncertainty.

The best person in my mind to convince me wholly of uncertainty is probably Paul Davidson, a post keynesian, but regardless, what he has  to say about uncertainty should be adopted by the mainstream Austrians (see Davidson’s book John Maynard Keynes and his article Reality and Economic Theory for more info). To Davidson, there are three elements of uncertainty to question neoclassical reasoning on markets: 1) ontological uncertainty 2) transmutabilty and 3) a non- ergodic world. These are not laymen terms, so lets discuss each term to where we can get a better understanding of them.

1) Ontological uncertainty

This concept in itself, Austrians fail to understand. The Austrian explanation of uncertainty is that of complexity. This is to say, the world is complex and our knowledge is limited, thus uncertainty. And in a theoretical perspective, the increase of our knowledge and thus an increase to the knowledge of specific complexities in this world, we reduce the uncertain element. Simply put increase in knowledge = less uncertainty (if we were to stay consistent with how the Austrians view how uncertainty arises).

Radical subjectivists automatically reject this notion on how uncertainty arises for the radical subjectivist see the world as Kaleidic, that is to say, we look at the world as ontological uncertainty. This is the whole point of Lachmann’s infamous quote, “The future is unknowable, but not unimaginable.” In a world where data is constantly changing, in a world where capital X could be useful today and entirely useless tomorrow how can one know the future? Just because we gain more knowledge of this complex world does not follow that we reduce uncertainty.The future is uncertain because of constant change via human action and expectations! This is the basic concept of ontological uncertainty. We can credit the radical subjectivist for ontological uncertainty, specifically Lachmann and George Shackle. It is clear that Paul Davidson got this notion of uncertainty directly from reading George Shackle. This is also the most important of the three to grasp, for it seems that the other two are understood once ontological uncertainty is understood.

2) Transmutable Reality

Transmutability deals with the creative part of reality. We live in a world of uncertainty but also a world where actors progress through creativity. This is the second part of the Lachmann quote (The future is unknowable but not unimaginable). Not only this but this implies the expectations of actors. Keynes’ view of the transmutable reality is what made Lachmann conclude that Keynes was more subjective than the Austrians! But it is in fact this that we should be skeptical of  using historical data to come up with probabilities of what is going to happen in the future. Davidson states the following:

…[E]ven if agents have the capacity to obtain and statistically process information regarding past and current outcomes, this existing market information does not, and cannot, provide reliable data for forecasting the future. Hicks correctly concludes that stochastic methods involving ergodic systems are inapplicable in this situation. Or as Keynes (1973b, p. 114) wrote, “About these [future] matters there is no scientific basis to form any calculable probability whatever. We simply do not know.”

This is perfectly consistent to the radical subjectivist perspective in that, as Shackle states, the future remains to be written and is determined about the actions we take today and the expectations we have for the future. This is to say, ‘About these future matters… [w]e simply do not know’.

3) Nonergodic Reality

Ergodicity is another word for something being predetermined, therefore non ergodicity means that something is not predetermined, and thus, we see a world that is not predetermined. This is a unique concept in economics As Davidson states:

… [M]ost economist today, following Samuelson and Lucas, accept as a universal truth the existence of a predetermined reality that can be fully described by unchanging objective conditional probability functions.’ Reality is, therefore, immutable; the future path of the economy and the future conditional consequences of all possible choices are predetermined(i .e., programmed by natural laws). This does not preclude an economy that is moving or changing over time. It does mean that all future movements and changes are already predetermined by the fundamental real parameters of the system and cannot be changed by human action.

The bold is very important here because in accepting a predetermined reality, one admits that this objective reality cannot be changed by human action.What utter nonsense it is to say that human action has nothing to do in the overall effect of economics. Or at least it is utter nonsense from an Austrian perspective, as Davidson shows, from a Post Keynesian perspective as well.


By applying all that has been said to economic theories and policies are key if we wish for economics, as a subject, to progress. Davidson is really spot on, on what he has to say about uncertainty and he does a very good job at explaining uncertainty in depth. Nevertheless, this puts in question all theory that asks for both positive and negative regulation. I do believe that Davidson does make a mistake for implying the following, “There is uncertainty in the markets. Markets are unstable. Therefore government intervention because government intervention reduces uncertainty.” Granted, this is a very simplified version of  what Davidson concludes but I think this is fair to say nonetheless. How can the Post Keynesians talk perfectly about uncertainty in the markets, but ‘know’ the basic things to do to combat the uncertainty? The common Post Keynesian answer is that there is a limit to where uncertainty is applied. But then what things are not uncertain in a world of transmutability, non ergodicity, and ontological uncertainty? Or this is to say, at least my interpretation of the previous question: What things are not uncertain in a world of uncertainty? As far as I can tell, the only thing that we do know is that we will always live in a world of uncertainty, so long as there is human action.

-Isaac Marmolejo