Risk and Uncertainty in Post Keynesian Economics

The distinction between risk and uncertainty is fundamental in Post Keynesian economics, as it was in the economic thinking of John Maynard Keynes. While risk can be quantified, uncertainty simply cannot be quantified.

The notion of future uncertainty is partly related to David Hume’s difficult philosophical problem of induction. According to Hume, we have no basis for believing that induction is rational. Human beings use induction out of habit, but there is no rational justification for this belief in induction. Although a full discussion of the problem of induction is not what I want to do here, a few comments can be made.

In brief, induction is the use of a finite number of specific observations to make a general conclusion. The most common form is the use of past observations of events to infer a general conclusion about how nature will behave in the future (e.g., gravity will continue to operate tomorrow or 10 minutes from now). But we can just as easily appeal to observed events in the recent past or present to make a general conclusion about the past (e.g., miracles do not happen in the past). The conclusion of an inductive argument is only probable and never certain.

The trouble is that observation of a finite number of events in the past does not seem to justify the belief that events will continue to happen in this way in the future. One solution to the problem is to assume the uniformity of nature. But even here the assumption that nature is uniform requires an inductive argument, so the reasoning is circular (and note that the radical sense of uncertainty that emerges in the absence of a justification for induction and the uniformity of nature is rather different from Keynesian uncertainty, which relates to future events for which no measurable probability can be given, as we will see below). Various philosophers have tried to solve the problem of induction (Will 1953; Edwards 1965; Strawson 1952; BonJour 1998; Salmon 1974), but many believe there is no satisfactory justification. Hume concluded that we use induction out of habit but with no legitimate basis, and modern evolutionary psychologists might argue that our ability to instinctively reason inductively is an innate property of the brain (like language or moral sentiments), which we have acquired by evolution, even though there is no rational justification for it.

Probably the best solution to the problem of induction (for both the natural and social sciences) is the use of Karl Popper’s critical rationalism (even though Popper’s critical rationalism seems to be widely criticised in modern analytic philosophy [Musgrave 2004: 16–17], and another complaint is that, while many working scientists claim to be Popperians in method, in practice they behave like good Bayesian inductivists [Evans 2007: 33]).

Popper adopts the hypothetico-deductive method, with falsification (not verification) of hypotheses by empirical evidence the key. In hypothetico-deduction, we use the method of forming a hypothesis, deducing predictions or conclusions from it, then empirically testing the predictions or conclusions, and thereby attempting to falsify the hypothesis. Popper comes to an astonishing conclusion:

“I go further than Hume: I hold that inductive procedures simply do not exist (not even low-level ones) and that the story of their existence is a myth” (Popper 1983: 118; see also Musgrave 2004: 18).

Induction is also unnecessary: we simply do not need it. In the natural sciences and other scientific inquiry, what really happens is that we use deduction, especially by means of the modus tollens and the elimination of erroneous hypotheses by empirical evidence, in a process of trial and error (more on this below).

John Maynard Keynes’ Treatise on Probability (1921) was an attempt to answer Hume on the problem of induction. Keynes took the view that induction was justified by a relation of probability which was objective (although later he conceded that probability was not an objective relation). But Keynes also came to argue that there must be a distinction between risk and uncertainty.

Risk is something where a measurable probability can be given to outcomes, e.g., the probability of rolling a 3 when throwing a dice is 1 in 6 (Glickman 2003: 366). In contrast, we face fundamental uncertainty about many other events, and no measurable probabilities can be assigned (e.g., what the interest rate will be in 10 years time). This distinction between risk and uncertainty was also made by Frank Knight.

Keynes’s conception of uncertainty applies to what is technically called a nonergodic stochastic system (Davidson 2002: 187). Our economies are such complex systems, as are many other economic phenomena (e.g., stock markets and financial markets).

We face fundamental ontological or metaphysical uncertainty about many events in the future, a state of affairs which – when applied to economics – can be called “Keynesian uncertainty” (or uncertainty in the sense of Frank Knight, Keynes, George L. S. Shackle and Ludwig Lachmann).

Since there is fundamental uncertainty about many economic variables in the future (particularly in the long-term future), investment decisions cannot be based on a firm calculation of probabilities of future earnings. Since subjective preferences can change in the future, not all investment decisions today will be profitable in the future. The process involved in decision-making about investment and the action of investment itself is not rational calculation.

There is a time difference between production of commodities and the successful sale of those commodities at a profit, and so even the production of commodities has a speculative element, in which decisions to invest in production involve habits of minds, instincts, and conventions.

Thus the investment decisions of a firm are based on expectations of future earnings, which are not necessarily rational at all. When investment decisions are made, they are done under conditions of subjective expectations by business, and the expectations depend on what Keynes called “animal spirits” (for the original concept, see Gerrard 1994). Keynes discussed the factors influencing long-run expectations in Chapter 12 of the General Theory. Because of uncertainty about the future, expectations in investment decisions is not a matter of mathematical calculation. Decisions to invest are taken

“as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities” (Keynes 2008 [1936]: 144).

The term “animal spirits” was borrowed by Keynes from Descartes (Gerrard 1994: 15), and whether or not modern psychology provides support for Keynes’ idea that we have a “spontaneous urge to action rather than inaction” is really irrelevant. The fundamental point here is that, because of uncertainty about the future and changing subjective preferences of consumers and other exogenous factors driving supply and demand, there can be no genuine rationality in expectations. Expectations are subjective, and the investment decision is essentially non-rational.

There has been a resurgence of interest in subjective expectations since the great recession of 2008/2009, and most notably the New Keynesians George A. Akerlof and Robert J. Shiller have published a book studying this subject (Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, 2009).

Neoclassical economics in its various forms (e.g., general equilibrium analysis, the efficient market hypothesis, and New Classical economics) assumes the ergodic axiom, the belief that the future can be known or events in the future given objective probabilities. But recognition of the ontological uncertainty of events in the future and changing subjective preferences means that events cannot be quantified in terms of probabilities. This destroys the basis of rational expectations and other neoclassical theories.

In the face of the shock of the financial crisis in 2008, the severe global recession in 2008–2009, and debt deflation, business expectations across the world plummeted. The destruction of optimistic expectations is undoubtedly an important factor that will mire many economies around the world in periods of stagnation with low growth and high unemployment in years to come. The Keynesian resurgence and stimulus packages in many countries in 2008–2009 prevented a depression, but much more stimulus is needed in the major economies to restore better growth and to bring unemployment down (there are of course other problems too, such as poorly regulated financial markets and loss of manufacturing in countries like the US that will have to be fixed). Government spending and fiscal stimulus can help to overcome the poor business expectations in many countries.

To return to an earlier point above, how can we justify government intervention in the face of uncertainty? If one accepts that induction can be justified (perhaps along the lines of Will 1953 or Strawson 1952), then obviously one could use an inductive argument for government intervention.

But, if we argue that induction has severe philosophical problems and cannot be justified, how in fact do we justify the hypothesis that government stimulus packages should be used and will work? My answer is that we do not need inductive arguments. We can use Karl Popper’s hypothetico-deductive method to test Keynesian hypotheses about stimulus. Our Keynesian models of stimulus will make predictions about what will happen to an economy, and, if they are not falsified by the empirical evidence, they will have passed the test of falsification, just as they have many times in the past. Popper argued that the hypothetico-deductive method was fundamental to both the natural sciences and social sciences, and he makes a good case for this (Popper 1976: 130–143; Milonakis and Fine 2009: 262–263). In short, induction is unnecessary, and economic methodology can be hypothetico-deductive with falsification of hypotheses by empirical evidence, as M. Blaug (1992) has also argued.

The issue of how Popper’s critical rationalism should be properly applied to economics is not my purpose, and the issue is a difficult one.

Of course, there are numerous economists who do not think that a strict Popperian methodology of economics is workable (Caldwell 1985: 126), and on this subject one can consult as a starting point the critical essays in N. De Marchi (ed.). The Popperian Legacy in Economics: Papers Presented at a Symposium in Amsterdam, December 1985 (Cambridge and New York, 1988), with a response by L. A. Boland (1990–1992).

Lawrence A. Boland contends that economists promoting a Popperian methodology for economics have not fully understood Popper’s critical rationalism, and have been misled by Imre Lakatos’s alleged distortion of Popper’s thought by overemphasizing the role of falsificationism (Boland 2006: 222–223). Boland (2006: 223–224) believes that an Imre Lakatos-inspired and pseudo-Popperian method has been adopted by some proponents of a Popperian methodology for economics.

Although this question requires a post in its own right, there is no doubt that Popper argued for the unity of method and the importance of hypothetico-deduction in the The Poverty of Historicism:

“I … propose a doctrine of the unity of method; that is to say, the view that all theoretical or generalizing sciences make use of the same method, whether they are natural sciences or social sciences …. I do not intend to assert that there are no differences whatever between the methods of the theoretical sciences of nature and of society …. But I agree with Comte and Mill—and with many others, such as C. Menger—that the methods in the two fields are fundamentally the same (though what I understand by them may not be what they had in mind). The methods always amount to deductive causal explanation, prediction, and testing, as sketched in the foregoing section. This has sometimes been called the hypothetico-deductive method, or more often the method of hypothesis, for it does not achieve absolute certainty for any of the scientific statements which it tests; rather, these statements always retain the character of tentative hypotheses, even though their character of tentativeness may cease to be obvious after they have passed a great number of severe tests” (Popper 1976: 130–131).

I will note in conclusion that a Critical Realist methodology is often proposed for Post Keynesianism (King 2002: 197–200; Jespersen 2009), and that this position might be compatible with the core elements of a Popperian methodology too (King 2002: 253–254; Jespersen 2009: 57–62), and that in his later work Popper appears to have moved closer to Critical Realism (Lawson 1999: 8–9).

APPENDIX 1: THE PARADOX OF INDUCTION?

I noted above that an intuitive ability to reason inductively is probably an innate trait of the human mind, given to us by evolution by natural selection. Animals, for example, appear to use rudimentary induction in probability calculations when they forage for food (Real 1991).

Even though there is no rational justification for it, why then has induction been so successful and obviously selected for as a survival trait? Even if Popper and Hume are right, we are faced with the paradox that we appear use induction very frequently and that it is a successful form of reasoning, by and large (the fact that induction is of limited use in non-ergodic stochastic systems and that we can err in our inductive arguments does not change this fact [for a list of common fallacies in defective inductive reasoning, see Copi and Cohen 2005: 140–145]).

That inductive reasoning has been highly successful and useful in increasing our chances of survival (and was thus selected by evolution) does not necessarily mean that is it rationally justified, of course.

For example, the belief in life after death might very well help some human beings overcome the trauma and stress of losing a loved one or even contemplating their own death (perhaps it might even make them healthier and better able to survive?), but it is still an irrational, unjustified idea.

But the success of induction is presumably explained by the uniformity of nature which has persisted since the first living things with rudimentary inductive reasoning evolved (for example, if the law of gravity had stopped working 1 million years ago, then all land animals would simply have floated off the planet into space and been killed, and there would be no human beings today; the fact that we are here strongly suggests that basic natural laws have remained uniform).

Human beings have also evolved to use induction. I am aware that this is somewhat similar to Willard Van Orman Quine’s (1908–2000) naturalized epistemology and his explanation of why induction is successful. Quine argues that, while Darwinian evolution does not justify induction, it must explain why it is so effective (Derksen 2000: 27–28; Quine 1975; as an aside, Quine also argues that there is no synthetic/analytic distinction. Thus analytic propositions are just firmly-held synthetic propositions, and there are no real a priori propositions. Quine agrees with Popper that the essence of science is the falsificationist hypothetico-deductive method). And, if the uniformity of nature continues to hold in the future, then presumably inductive reasoning will continue to be successful in those areas where it works well.


BIBLIOGRAPHY

Akerlof, G. A. and R. J. Shiller, 2009. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton University Press, Princeton.

Barkley Rosser, J. 2001. “Uncertainty and Expectations,” in R. P. F. Holt and S. Pressman (eds), 2001. A New Guide to Post Keynesian Economics, Routledge, London and New York. 52–64.

Blaug, M. 1992. The Methodology of Economics, or, How Economists Explain, Cambridge University Press, Cambridge and New York, NY.

Boland, L. A. 2003. “Dealing with Popper in Economic Methodology,” Philosophy of the Social Sciences 33: 477–498.

Boland, L. A. 2006. “Seven Decades of Economic Methodology: A Popperian Perspective,” in I. Jarvie, K. Milford, and D. Miller (eds), 2006. Karl Popper: A Centenary Assessment. Volume III. Science, Ashgate Publishing Ltd., Aldershot, Hants, England. 219–227.

BonJour, L. 1998. In Defense of Pure Reason, Cambridge University Press, Cambridge.

Caldwell, B. J. 1985. Beyond Positivism: Economic Methodology in the Twentieth Century, G. Allen and Unwin, London and Boston.

Copi, I. M. and C. Cohen. 2005. Introduction to Logic (12th edn), Pearson/Prentice Hall, Upper Saddle River, N.J.

Davidson, P. 2002, Financial Markets, Money, and the Real World, Edward Elgar, Cheltenham, UK.

Davidson, P. 2004. “Uncertainty and Monetary Policy,” in P. Mooslechner, H. Schuberth, M. Schürz (eds), Economic Policy under Uncertainty: The Role of Truth and Accountability in Policy Advice, Edward Elgar, Cheltenham, UK and Northampton, MA.

De Marchi, N. (ed.). 1988. The Popperian Legacy in Economics: Papers Presented at a Symposium in Amsterdam, December 1985, Cambridge University Press, Cambridge and New York.

Derksen, T. 2000. “Naturalistic Epistemology, Murder and Suicide? But what about the Promises!,” in L. Decock and L. Horsten (eds), Quine: Naturalized Epistemology Perceptual Knowledge and Ontology, Rodopi, Amsterdam, 2000. 15–34.

Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London.

Edwards, P. 1965. “Bertrand Russell’s Doubts about Induction,” in A. Flew (ed.), Logic and Language, First and Second Series, Doubleday, Garden City, N.Y. 59–85.

Evans, J. St. B. T. 2007. Hypothetical Thinking: Dual Processes in Reasoning and Judgement, Taylor & Francis, Hoboken.

Gerrard, B. 1994. “Animal Spirits,” in P. Arestis and M. Sawyer (eds), The Elgar Companion to Radical Political Economy, Elgar, Aldershot. 15–19.

Glickman, M. 2003. “Uncertainty,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, E. Elgar Pub., Cheltenham, UK and Northhampton, MA. 366–370.

Jespersen, J. 2009. Macroeconomic Methodology: A Post-Keynesian Perspective, Edward Elgar Publishing Limited, Cheltenham.

Lawson, T. 1999. “Developments in Economics as Realist Social Theory,” in S. Fleetwood (ed.), Critical Realism in Economics: Development and Debate, Routledge, London and New York. 3–20.

Keynes, J. M. 2008 [1936]. The General Theory of Employment, Interest, and Money, Atlantic Publishers, New Delhi.

King, J. E. 2002. A History of Post Keynesian Economics since 1936, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA.

Milonakis, D. and B. Fine, 2009 From Political Economy to Economics: Method, the Social and the Historical in the Evolution of Economic Theory, Routledge, New York.

Musgrave, A. E. 2004. “How Popper (might have) Solved the Problem of Induction,” in P. Catton and G. Macdonald (eds), Karl Popper: Critical Appraisals, Routledge, Abingdon, Oxon, England. 16–27.

Parsons, S. D. 2003. “Austrian School of Economics,” in J. E. King (ed.), The Elgar Companion to Post Keynesian Economics, E. Elgar Pub., Cheltenham, UK and Northhampton, MA. 5–10.

Popper, K. 1976. The Poverty of Historicism (1st edn 1957; 2nd corrected edn 1961), Routledge and Kegan Paul, London.

Popper, K. R. 1983. Realism and the Aim of Science, Rowman and Littlefield, Totowa, N.J.

Quine, W. van O. 1975. “The Nature of Natural Knowledge,” in S. Guttenplan (ed.), Mind and Language, Clarendon Press, Oxford. 67–81.

Real, L. A. 1991. “Animal choice behavior and the evolution of cognitive architecture,” Science 253: 980–986.

Runde, J. 1999. “On Popper, Probabilities and Propensities,” in S. Fleetwood (ed.), Critical Realism in Economics: Development and Debate, Routledge, London and New York. 63–82.

Salmon, W. 1974. ‘The Pragmatic Justification of Induction’, in R. Swinburne (ed.), The Justification of Induction, Oxford University Press, Oxford. 85–97.

Skousen, M. 2005. Vienna & Chicago, Friends or Foes?: A Tale of Two Schools of Free-Market Economics, Capital Press/Regnery Pub., Washington, DC.

Strawson, P. F. 1952. Introduction to Logical Theory, Methuen & Co. Ltd, London.

Will, F. L. 1953. “Will the Future Be Like the Past?,” in A. Flew (ed.), Logic and Language: Second Series, Blackwell, Oxford. 32–50.

The Different Types of Austrian Economics

Although I advocate Post Keynesian economics, I have always been rather intrigued by Austrian economics. In the 1930s, when John Maynard Keynes was establishing the beginnings of the Keynesian revolution, his great intellectual opponent was the Austrian economist Friedrich August von Hayek.

The Austrian school arise in the 1870s as part of the marginalist revolution in economic thought. The founder was Carl Menger, who wrote an influential book called the Principles of Economics in 1871.

In a previous post (see “Friedrich von Wieser and Eugen von Philippovich von Philippsberg: Austrian Economists and Fabian Socialists”), I noted that the early Austrian school was in fact split into two factions: (1) a Classical liberal wing and (2) a wing that was not opposed to government intervention per se, and that even included members sympathetic to Fabian socialism. Hayek explains the history of the Austrian school in this interview:

LEIJONHUFVUD: In economics, let me come back to a question we have touched upon before. In the twenties in Vienna, was there such a thing as an Austrian school in economics? Did you and your contemporaries perceive an identification with a school?

HAYEK: Yes, yes. Although at the same time [we were] very much aware of the division between not only Meyer and Mises but already [Friedrich von] Wieser and Mises. You see, we were very much aware that there were two traditions—the [Eugen von] Böhm-Bawerk tradition and the Wieser tradition—and Mises was representing the Böhm-Bawerk tradition, and Meyer was representing the Wieser tradition.

LEIJONHUFVUD: And where did the line between the two go? Was there a political or politically ideological line involved?

HAYEK: Very little. Böhm-Bawerk had already been an outright liberal, and Mises even more, while Wieser was slightly tainted with Fabian socialist sympathies. In fact, it was his great pride to have given the scientific foundation for progressive taxation. But otherwise there wasn’t really—I mean, Wieser, of course, would have claimed to be liberal, but he was using it much more in a later sense, not a classical liberal (Nobel Prize-Winning Economist: Friedrich A. von Hayek, pp. 49–50).

The split in the Austrian school in the 1920s was between (1) the classical liberal wing of Eugen von Böhm-Bawerk/Mises (which evolved into modern American libertarianism), and (2) the wing of von Wieser, some of whom were leaning towards Fabian socialism.

However, with the migration of Austrian economics to America and the emergence of Mises as a leading figure, the Classical liberal wing won out, and modern Austrian economics developed from the Classical liberal wing under Mises’ influence.

For much of the 1940s, 1950s and 1960s, Mises, Hayek and Rothbard were the major Austrian thinkers. However, there were a number of other less well known third-generation Austrian economists in this era, including Oskar Morgenstern (1902–1976), Gottfried von Haberler (1900–1995), Fritz Machlup (1902–1983), Paul N. Rosenstein-Rodan (1902–1985), and Friedrich A. Lutz (1901–1975). Not all of them were reflexively hostile to government. Paul N. Rosenstein-Rodan, for instance, was famous for his work on how the state can initiate industrialization in poor nations through planned investment (Rosenstein-Rodan 1943).

In the US, the Austrian tradition was strongly influenced by Mises and Rothbard. Then Austrian economics experienced a resurgence in America from the 1970s onwards:

“American Austrianism revolves around an axis that passes through Auburn University, George Mason University, and New York University. It gets its spin from a 1974 conference held at South Royalton, Vermont, a week-long affair that featured lectures by Murray Rothbard, Israel Kirzner, and Ludwig Lachmann” (Garrison 2001: 259).

A proceedings of that conference was later published as The Foundations of Modern Austrian Economics (ed. E. G. Dolan; Mission, Kansas, 1976). For a fascinating discussion of the history of this Austrian resurgence, see Mario Rizzo’s post “What Is Austrian Economics?” (November 23, 2009) at the ThinkMarkets blog and the comments on it.

Modern Austrians come in a number of forms, and there are clear differences between them. In my view, a useful division of modern Austrians would be as follows:

(1) The Anarcho-capitalists
E.g., Murray Rothbard, Hans-Hermann Hoppe and Jörg Guido Hülsmann;

(2) The minimal state/classical liberal Austrians in the tradition of Mises
This variety supports praxeology and utilitarianism;

(3) Hayek’s economics, with a minimal state;

(4) Moderate subjectivist Austrians
E.g., Israel Kirzner and Roger Garrison;

(5) Radical subjectivists like Ludwig M. Lachmann (1906-1990), and Austrians influenced by him.

(see Böhm 1989: 60–61; Hutchison 1994: 222).

One should note that the differences between these types of Austrians are not trivial.

From the 1970s, a new generation of Austrians challenged the older, pure aprioristic methodology of Mises, and advocated a greater role for empirical testing, and Hayek had already moved away from Mises’ methodology with his paper “Economics and Knowledge” (1937).

Personally, I have little time for Austrians of types (1) and (2). The anarcho-capitalists (1) have a radical view that the state must be completely abolished and all of its functions privatized. In the form developed by Rothbard, the case for anarcho-capitalism is based on an untenable and deeply flawed moral argument using natural rights and Aristotelian, neo-Thomist natural law theory (Rothbard 1998). Though my purpose here is not to offer a detailed critique of anarcho-capitalism, one of the most convincing arguments against it is that private protection firms would in fact have an incentive to victimise potential customers to increase market share. Violence of the type that already happens between private mafia groups might occur. A natural monopoly would probably develop as the most powerful firm drove its competitors out of business (or a cartel might become dominant), and one would be left with a de facto state, the very thing anarcho-capitalism sought to abolish! (see Holcombe 2004: 330–331). Moreover, the power relations in an anarcho-capitalist society would appear to be rather like feudalism, with no sense of the common good (Freeman 2001: 147–149). If history is any guide, a movement towards anarcho-capitalism might well result in the kind of incessant violence and warfare between private warlords/protection agencies, as in medieval feudalism. Above all, do we really want to privatise the ownership, use and production of nuclear weapons or biological and chemical weapons? Quite frankly, an anarcho-capitalism system would be one of utter insanity.

The classical liberal Austrians (2) in the tradition of Mises support a minimal state with limited functions, like justice and defence. But Mises’ praxeology is heavily aprioristic, involves an absurd and radical rejection of empirical evidence, and falls apart once one sees the vast number of unsupported subsidiary hypotheses, both present and assumed, that underlie his deductive arguments. Moreover, by admitting the possibility of rational government intervention on utilitarian grounds, Mises’ ideology has a severe logical contradiction (see “Was Mises a Socialist?: Why Mises Refutes Himself on Government Intervention”).

Austrians of type (5) are more interesting. The Austrian radical subjectivists have a “kaleidic” view of economics influenced by the views of the peculiar Austrian–Keynesian hybrid George L. S. Shackle (Lachmann 1976) and stress the subjectivist nature of value, expectations, and knowledge. Lachmann, for example, even denied that free market systems tend to equilibrium or have coordinating processes (Kirzner 2000: 46–47). Lachmann’s radical subjectivism is rejected by Austrians of type (4), who condemned his position as “nihilism” (Kirzner 2000: 47). This rejection is not unreasonable from the perspective of those who support extreme laissez faire economics, because, if there is no neoclassical tendency to full employment equilibrium or Hayek’s plan coordination in a free market system, the alleged economic or moral superiority of such a system collapses. It is thus not surprising that the Lachmann-inspired wing of Austrians aroused some hostility from the moderates who defended the free market as an equilibrating or coordinating mechanism (Dunn 2008: 136).

I am not certain whether Gerald P. O’Driscoll and Mario J. Rizzo are moderate subjectivist Austrians of type (4). Their interesting book The Economics of Time and Ignorance (Oxford, UK, 1985) appears to use Lachmann’s views on the role of time and fundamental uncertainty, but also tries to overcome the charge of “nihilism” by postulating the idea of pattern coordination in place of equilibrium (Gloria-Palermo 1999: 138).

O’Driscoll and Rizzo have made some favourable comments about Post Keynesian economics:

“[i]t is evident that there is much more common ground between post-Keynesian subjectivism and Austrian subjectivism …. the possibilities for mutually advantageous interchange seem significant” (O’Driscoll and Rizzo 1985: 9).

There are indeed some limited similarities in economic analysis between Austrians of type (4) and (5) and the Post Keynesian economists (Böhm 1989: 61).

Paul Davidson, one of leading American Post Keynesians, criticised The Economics of Time and Ignorance in his classic articles “The Economics of Ignorance or Ignorance of Economics?,” Critical Review (1989) 3.3/4: 467–487, and “Austrians and Post Keynesians on Economic Reality: Rejoinder to Critics,” Critical Review 7.2/3 (1993): 423–444. Clearly, there are also very significant differences between Austrians and Post Keynesians.

Austrians of type (4) include Israel Kirzner, who argues that plan/pattern coordination (the Austrian substitute for neoclassical equilibrium) in a free market economy can be achieved by entrepreneurial discovery and creation (Parsons 2003: 7). Type (4) Austrians also include Roger Garrison and others who even engage in “Austrian macroeconomics,” which seems peculiar, given that other Austrians reject the whole concept of macro-theory in economics.

From the perspective of Post Keynesianism, Austrians of type (4) and especially (5) are the most interesting. Ludwig Lachmann, like Keynes, stressed that expectations are subjective, and Lachmann even produced work that has a positive view of aspects of Keynes’ thought. Lachmann’s paper “John Maynard Keynes: A View from an Austrian Window” (South African Journal of Economics 51 (1983): 253–260) argues that

“In the field of methodology Keynes and the Austrians agree that economics is a social science to which methods that have proved successful in the natural sciences should not be applied without careful inspection, …. But Keynes’s mind also moves in another direction. ‘I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth’ … Keynes sees in social facts manifestations of the human mind. While to Hayek it is the complexity of these facts, their multitude and diversity, that defies the attribution of numerical values to social concepts, to Keynes it is their mental character … that does so. Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than is his Austrian opponent (Lachmann 1983: 256).

These similarities have been noted by other scholars too (Caldwell 1989; Parsons 2003: 6).

Though the practical policy recommendations and political outlook of Post Keynesians and Austrians will remain deeply in conflict, there might be something that Post Keynesians can learn from studying the theories of Austrians of type (4) and (5) above.

WALTER BLOCK’S CLASSIFICATION OF AUSTRIAN SUBJECTIVISM

In an article published in 1988, Walter Block proposes a useful division of different types of Austrian subjectivism:

1. The nonsubjectivists
2. The moderate subjectivists (i.e., Yeager)
3. The Austrian subjectivists (i.e., Rothbard, Kirzner, Buchanan)
4. The ultra- or extreme subjectivists (i.e., Jack Wiseman, G.L.S. Shackle, Ludwig Lachmann, and “hermeneuticians” associated with the market process group located at George Mason University) (Block 1988: 201).

Categories (2) and (3) here include my category of “Moderate subjectivist Austrians.”

BIBLIOGRAPHY

Böhm, S. 1989. “Subjectivism and Post-Keynesianism: Towards a Better Understanding,” in J. Pheby (ed.), New Directions in Post-Keynesian Economics, Edward Elgar, Aldershot, Hants, England. 59–93.

Block, W. 1988. “On Yeager’s ‘Why subjectivism?,’” Review of Austrian Economics 2: 199–208.

Caldwell, B. J. 1989. “Post-Keynesian Methodology: An Assessment,” Review of Political Economy 1465-3982, Volume 1, Issue 1, 1989, Pages 43 – 64

Dolan, E. G. (ed.). 1976. The Foundations of Modern Austrian Economics, Sheed & Ward, Mission, Kansas.

Dunn, S. P. 2008. The “Uncertain” Foundations of Post Keynesian Economics: Essays in Exploration, Routledge, London and New York.

Freeman, S. R. 2001. “Illiberal Libertarians: Why Libertarianism Is Not a Liberal View,” Philosophy & Public Affairs 30.2: 105–151.

Garrison, R. W. 2001. Review of Subjectivism in Economic Analysis: Essays in Memory of Ludwig M. Lachmann (Routledge, London, 1998), Review of Political Economy 13.2: 258–262.

Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.

Holcombe, R. G. 2004. “Government: Unnecessary but Inevitable,” Independent Review 8.3: 325–342.

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