Michael Emmett Brady on Hayek’s Concept of Uncertainty

Some commentators have alerted me to the work of Michael Emmett Brady. I gather (correct me if I am wrong) that his undergraduate and postgraduate work has been in mathematics, and he has done work on Keynes’s theories of probability and other economic issues. That would appear to be a promising combination, as Post Keynesians like Steve Keen have complained in the past that economists are often poor mathematicians. While there are many papers of his to review, I will start with one I have already read here:

Michael Emmett Brady, “Comparing J.M. Keynes’s and F. Von Hayek’s Differing Definitions of Uncertainty as it Relates to Knowledge,” January 30, 2011.

This examines and compares Keynes’s concept of uncertainty with that of Hayek.

Michael Emmett Brady argues that Hayek’s concept of uncertainty and the role of knowledge are quite distinct from that of fundamental uncertainty as defined by Frank Knight and Keynes:

“Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.” (p. 14)

“Keynes, Knight and Schumpeter deny Hayek’s claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital important information is missing. Pieces from the puzzle are missing and will not turn up in the future” (p. 14).

“Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist. In conclusion, nowhere in any of Hayek’s three articles on Knowledge in Economics in 1937, 1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there.” (p. 15).

Brady charges that the “Austrian use of the term ... uncertainty actually means dispersed knowledge” (p. 16), which bears further investigation.

One of Brady’s major conclusions is confirmed by other scholars who have also noted that the Austrian view of knowledge as fragmented and dispersed through market prices ignores the fact that a great deal of needed knowledge for investment decisions today does not yet exist (Hoogduin 1987: 61), and that the “market process” of Austrian theory is not capable of solving the knowledge problem, given that so much information about future relevant states has yet to be created when decisions are made in the present (Hoogduin 1987: 63). The inability of a decentralised market process to co-ordinate with reliable consistency what dispersed knowledge that does exist, when so much relevant knowledge does not exist with respect to a future that has yet to be created, is a fundamental insight of Post Keynesian economics (Dunn 2008: 140). The Hayekian view of the market as a co-ordinating mechanism in a type of evolutionary process that is capable of dealing with uncertainty and dispersed knowledge is therefore subject to serious criticism. Subjective expectations throw a spanner into the works of this view of the market, as does the non-existence at present of relevant information created in the future.

Brady also discusses G. L. S. Shackle’s break with Hayek over the issue of uncertainty, and points out Shackle saw that “Hayek’s discussion of uncertainty excluded by definition the existence of knowledge that would be unavailable to the entrepreneur.” (p. 8).


BIBLIOGRAPHY

Brady, Michael Emmett. “Comparing J.M. Keynes’s and F. Von Hayek’s Differing Definitions of Uncertainty as it Relates to Knowledge,” January 30, 2011.

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

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.

Hayek, F. A. von. 1945. “The Use of Knowledge in Society,” American Economic Review 35.4: 519–530.

Hoogduin, L. 1987. “On the Difference between the Keynesian, Knightian and the ‘Classical’ Analysis of Uncertainty and the Development of a More General Monetary Theory,” De Economist 135.1: 52–65.

Schinckus, C. 2009. “Economic Uncertainty and Econophysics,” Physica A 388.20: 4415–4423.

A Note on Mises and the Concept of Uncertainty

A rather good question is posed here about Mises and the concept of uncertainty in the Knightian sense.

The earliest work by Ludwig von Mises on uncertainty that I can think of is in the English edition of Human Action (1949) in Chapter VI, long after Keynes had published “The General Theory of Employment,” Quarterly Journal of Economics 51 (1937): 209–223.

Both Keynes and Frank Knight came to their views on uncertainty largely independently without any influence from Mises, as far as I am aware.

Frank H. Knight’s Risk, Uncertainty and Profit (Houghton Mifflin, Boston) was published in 1921. I see no evidence Knight was influenced by Mises. Curiously, in the introduction to the scholar’s edition of Human Action, we have this account of Mises’s inspiration for the chapter on uncertainty:

“Several commentators have noted the similarity of Mises’s distinction between class probability and case probability and that between risk and uncertainty introduced by Knight in Risk, Uncertainty and Profit in 1921.

Yet, it does not appear that Mises was influenced by Knight in this regard. Mises had been long familiar with Knight’s work, and had already made reference to Risk, Uncertainty and Profit in Nationalökonomie in conjunction with his discussion of profit and uncertainty.

Rather, it appears more likely that Mises’s Chapter VI was stimulated and influenced by his younger brother, Richard von Mises (1883–1953). A professor of aerodynamics and applied mathematics at Harvard University, Richard von Mises’s most outstanding theoretical achievement was his contribution, from 1919 onward, to the frequency theory of probability. In principle, Ludwig accepted Richard’s frequency interpretation of probability, but Ludwig provided a new definition of randomness, and thus significantly improved on Richard’s theory. (Mises 1998: xvi).

But the idea that Mises was not influenced by Knight in regard to his chapter on uncertainty rings hollow to me. If Mises had been “long familiar with Knight’s work” and actually cited it in Nationalökonomie (first published in Geneva in 1940), then the view that there was some influence from Knight on Mises’s thinking on uncertainty seems plausible.


BIBLIOGRAPHY

Knight, F. H. 1921. Risk, Uncertainty and Profit, Houghton Mifflin, Boston.

Mises, L. 1940. Nationalökonomie, Theorie des Handelns und Wirtschaftens, Éditions Union, Geneva.

Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition, Mises Institute, Auburn, Ala.

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

Davidson on the Austrian Concept of Uncertainty

Paul Davidson summarizes the concept of uncertainty held by some leading Austrian economists:

“Modern-day Austrian economists such as O’Driscoll and Rizzo believe in an economic world where there is an immutable external reality similar to the way nineteenth-century physicists viewed the working of the physical world. In their emphasis on uncertainty, however, Austrians often differ from mainstream Old and New Classical theorists. Many Austrians believe that the external reality may be predetermined by Mother Nature but this reality is too complicated for any single human being ever to process the information being sent out by market signals. The free market is the Austrians’ deus ex machine that provides the (in principle calculable) relevant probabilities and prediction to coordinate the plans and outcomes via a Darwinian process in a would of epistemological uncertainty and a programmed external reality” (Davidson 2002: 63).

The Austrians adhere to the concept of epistemological uncertainty, whereas Post Keynesian economics stresses the notion of ontological uncertainty (Barkley Rosser 2010: 171). This is an important difference and I will have more to say about it in the future.

BIBLIOGRAPHY

Barkley Rosser, J. 2010. “How Complex are the Austrians?,” in R. Koppl, S. Horwitz, and P. Desrochers (eds), What is so Austrian about Austrian Economics? (Advances in Austrian Economics, Volume 14), Emerald Group Publishing Limited, Bingley, UK. 165–179

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