Uncertainty and the Historical Model Approach

  • Paul Davidson

Abstract

Many years ago in the never-never land of Chicago where the busy P’s of economic theory often flourish, there dwelt a wise and famous Knight (Frank H.) who recognised the sterility of the use of ‘classical’ economics in providing guidance for social policy. Hence this Knight attempted to redirect the economics profession towards the study of relevant economic problems1 by forging meaningful and realistic concepts. Risk, this Knight maintained, is measurable and hence is distinctively different from uncertainty which is incapable of measurement. Hence the term uncertainty must be restricted to ‘non-quantitative’ views about the future and it is this ‘true’ uncertainty, and not risk, the Knight insisted, which forms the basis of economic decision-making.2

Keywords

Capital Good Spot Market Historical Model Forward Market Effective Demand 
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Notes

  1. 1.
    F. H. Knight, Risk, Uncertainty and Profits, 1937 ed., p. xxiv.Google Scholar
  2. 1.
    N. Lee, The Rival Queens (London: Gain & Bently, 1684) Act 1.Google Scholar
  3. 2.
    To use the mathematical laws of probability, the concept of probability must be defined as the limit the frequency of any particular event will approach as the number of observations increases. Shackle has always argued that probability cannot be used as a proxy for uncertainty. See G. L. S. Shackle, Expectations in Economics (Cambridge: Cambridge University Press, 1949).Google Scholar
  4. 3.
    G. L. S. Shackle, Uncertainty in Economics (Cambridge: Cambridge University Press, 1955) pp. 6, 7, 25. For example: Napoleon could not repeat the battle of Waterloo a hundred times in the hope that, in a certain proportion of cases, the Prussians would arrive too late. His decision to fight … was what I call a crucial experiment, using the word crucial in the sense of a parting of the ways. Had he won, repetition would for a long time have been unnecessary; when he lost, repetition was impossible. [Ibid., p. 25.]Google Scholar
  5. 1.
    G. L. Shackle, The Years of High Theory (Cambridge: Cambridge University Press, 1967) p. 290. Interestingly enough, the English Neo-keynesian school is currently utilising the Economics of Tranquillity in their Analysis of Golden Ages, while simultaneously attacking modern neoclassicists for utilising the ‘capital malleability assumption’, which in essence, is equivalent to assuming changes never exceed the physical decay of equipment, so that there is never redundant capacity. For example, see L. L. Pasinetti, ‘Switches of Technique and the “Rate of Return” in Capital Theory’, Economic Journal, 79 (September 1969). Of course, Joan Robinson has continually insisted that Golden Age economies are myths which have no relevance to the historical path of real world economies.Google Scholar
  6. 1.
    In The New Industrial State Galbraith suggests that the increasing span of time which separates the beginning of economic tasks from their completion, the increased requirements for specialised resource commitments, and the inflexibility of such commitments due to the growth of technology, induce the development of government institutions to remove some of the burdens of uncertainty from the entrepreneur. See J. K. Galbraith, The New Industrial State (Boston: Houghton Mifflin, 1967).Google Scholar
  7. 1.
    J. Robinson, Essays in the Theory of Economic Growth (London: Macmillan, 1963) p. 25.Google Scholar
  8. 1.
    P. A. Samuelson, ‘A Brief Survey of Post Keynesian Developments’, in Keynes’ General Theory Reports of Three Decades, ed. R. Lekachman (New York: St. Martin’s Press, 1964) pp. 341–2. Recently, Friedman has capitalised on the ‘Keynesian’s’ myopic analysis of Keynes’s own position and he has usurped Keynes’s own motto that ‘money enters into the economic scheme in an essential and peculiar manner’. [Keynes, General Theory, p. vii] i.e. money matters.Google Scholar

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© Paul Davidson 1978

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  • Paul Davidson

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