PKT message, Re: Uncertainty

Hi from far off South Africa,

One of the issues that set PK aside from mainstream economics is the acceptance by PK of ontological uncertainty. The main question is why mainstream economists find it so hard to accept the existence of ontological uncertainty. If you ask anyone on the street, they will tell you that the future is unpredictable, so why do most economists find it so hard to accept?

I think that the main reason is the mainstream quest for predictability. If you want to predict, the behaviour needs to be stable. In mainstream economics the behaviour of agents depends on the different trade-offs agents make to maximise their utility (1. Between work and leisure, 2. Between different products and 3. Between consumption now and consumption in the future). Thus, stable and predictable behaviour requires that preferences as expressed in these different trade-offs be stable. (This also allows mainstream economics to formulate their long-run growth theories). When behaviour is stable there is a structure in the economy. All that is left to agents is to discover that structure. As long as they have not discovered it, there is uncertainty, but of the epistomological type.

Keynes rejected the notion that preferences are fixed. In chapter 16 of the GT he argues that the decision to save today does not imply the decision to consume tomorrow. In other words, saving does not result from a trade-off between consumption now and later. Accumulated saving merely is the potentiality to consume. Thus, the individual when he saves has not necessarily decided what, when and if he is going to consume. This leaves him room to change his preferences.

The potentiality that preferences may change means that the relative demand for goods may change in the future. If producers cannot predict the relative demand for goods, then they cannot predict the demand for the goods they plan to sell in future either. This makes the future for investors uncertain. This uncertainty is ontological because the facts on the future on which investment is based is not known, not because the agents does not have knowledge about these facts (then it would be epistomological), but because these facts do not exist at this point in time: i.e. there is nothing to know.

Note that uncertainty here depends on the possibility (and not probability) that preferences may change. This in turn depends on the choices of individuals. To be choice in the true sense of the word requires individuals to be really able to exercise that choice (see Shackle). Thus, ontological uncertainty is embedded in the existence of free will.

Philippe Burger