Degrees of Uncertainty

There is an interesting review here by Michael Emmett Brady of Gerald P. O’Driscoll and Mario J. Rizzo’s The Economics of Time and Ignorance (2nd edn; Routledge, Oxford, UK., 1996):

http://www.amazon.com/review/R25I26NGH79Y3I

Towards the end, Michael Emmett Brady states that

“Let us now turn to p. 9. The authors make the bizarre claim that Paul Davidson’s Shacklean, Post Keynesian views, that there is only certainty and uncertainty, is a continuation of those parts of the [General Theory] … that represent a true subjectivist position. Unfortunately, Shackle never got past chapter 3 of the [Treatise on Probability] … and rejected Keynes’s entire [Treatise on Probability] … approach in toto. Neither Shackle nor Davidson are followers of Keynes because Keynes totally rejected nihilism and the bizarre Shackle-Davidson claim that there are no degrees/gradations of uncertainty which Keynes spelt out clearly in his 1937 QJE article, titled ‘The General Theory of Employment’. Uncertainty is a range that can be specified in the same identical manner as Keynes’s weight of the evidence index, w. Complete and total uncertainty (ignorance) would have a w = 0. The differing gradations of uncertainty would be between 0 and 1 (0 < w < 1). Complete certainty would have a w = 1. The two authors never specify what their term ‘genuine’ uncertainty is. Their discussions of the beauty contest example (p. 156, GT), which is a continuation of a discussion started by Keynes in his introductory chapter 3 of the [Treatise on Probability] … in 1921 (1908) on the measurement of probabilities, does not fit the bill.”

I have just re-read Keynes’s paper “The General Theory of Employment” (Quarterly Journal of Economics 51 [1937]: 209–223). The crucial passage where Keynes talks about degrees of uncertainty is here:

“By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever” (Keynes 1937: 213–214).

It is indeed possible to see the concept of degrees of uncertainty, and Barkley Rosser describes Keynes’s views on the probability of future events in A Treatise on Probability (1921: 33), and how uncertainty comes in different forms:

“(i) ... there are no probabilities at all (fundamental uncertainty),
(ii) ... there may be some partial ordering of probable events but no cardinal numbers can be placed on them,
(iii) ... there may be numbers but they cannot be discovered for some reason, and
(iv) ... there may be numbers but they are difficult to discover” (Barkley Rosser 2001: 559).

There is also a literature about degrees of uncertainty, some of it by Post Keynesians (Runde 1990; Dow 1995; Crocco 2002; Dequech 1997).

At this point it is notable that Paul Davidson uses the concept of non-ergodicity to reject the view that there are degrees of uncertainty (Crocco 2002: 19). Nevertheless, there are Post Keynesians who recognise degrees of uncertainty, e.g., S. C. Dow (1994: 437). Moreover, here is Jesper Jespersen:

“Uncertainty is caused by lack of information. Therefore uncertainty might have different intensities or ‘stats of confidence’. You may feel(!) more or less uncertain, but except for rare cases all individual activities are characterized by (different degrees of) uncertainty, because one cannot know nor estimate the exact outcome. Hence, expectations are uncertain due to this inherent lack of information (and a constantly changing environment).”
Jesper Jespersen, “Post-Keynesian economics: uncertainty, effective demand & (un)sustainable development,” Paper, Dijon-conference, Dijon, 10-12 December 2009. p. 8.

It seems to me an exaggeration to say that the Post Keynesian school does not recognise degrees of uncertainty. Clearly not everyone follows Davidson.

BIBLIOGRAPHY

Barkley Rosser, J. 2001. “Alternative Keynesian and Post Keynesian Perspectives on Uncertainty and Expectations,” Journal of Post Keynesian Economics 23.4: 545–566.

Crocco, M. 2002. “The Concept of Degrees of Uncertainty in Keynes, Shackle, and Davidson,” Nova Economia 12.2: 11–28.

Dequech, D. 1997. “Uncertainty in a Strong Sense: Meaning and Sources,” Economic Issues 2.2: 21–43.

Dow, S. C. 1994. “Uncertainty,” in P. Arestis and M. Sawyer (eds.), The Elgar Companion to Radical Political Economy, Elgar, Aldershot. 434–438.

Dow, S. C. 1995. “Uncertainty about Uncertainty,” in S. C. Dow and J. Hillard (eds), Keynes, Knowledge and Uncertainty, Edward Elgar, Aldershot. 117–127.

Keynes, J. M. 1921. A Treatise on Probability (1st edn.), Macmillan, London.

Keynes, J. M. 1937. “The General Theory of Employment,” Quarterly Journal of Economics 51: 209–223.

Runde, J. 1990. “Keynesian uncertainty and the weight of arguments,” Economics and Philosophy 6.2: 275–292.