“A New Attempt to Explain Market Inefficiency,” Economist, February 24th, 2011.This follows some good work by the New Keynesians G. A. Akerlof and R. J. Shiller in Animal Spirits: How Human Psychology drives the Economy, and Why it Matters for Global Capitalism (Princeton University Press, 2009) that clearly approaches the Post Keynesian concept of subjective expectations.
All this is good news: the mainstream is catching up with Post Keynesians!
Addendum: The Concept of Uncertainty in Other Schools
Uncertainty in the sense of not being able to assign objective probabilities to economic outcomes and events in the future is an idea fundamental to Post Keynesian economics.
Daniel Kuehn in a post called “More on Keynesian Uncertainty” (March 1, 2011) makes some comments on my post, and wonders why I connect “Keynesian uncertainty to Post-Keynesians specifically.”
It is perfectly true that the concept is held by other economists. The neoclassical Chicago school economist Frank Knight drew the distinction between risk and uncertainty. But have the neoclassicals ever adopted his ideas? They have not. The New Classicals and monetarists adopt the ergodic axiom and rational expectations, which are not compatible with the Keynesian/Knightian concept of uncertainty which is not measureable.
Radical uncertainty – uncertainty in the Knightian sense – was also stressed by Keynes and made a fundamental part of his macroeconomic theory in the The General Theory of Employment, Interest, and Money (1936).
G. L. S. Shackle (1903–1992) also adopted the idea from Keynes, and Shackle was generally classified as a hybrid Austrian/Post Keynesian (or someone who drew “Keynesian conclusions from Austrian premises”).
The Austrian radical subjectivists in the tradition of Ludwig Lachmann also use the idea of uncertainty in economic systems, and correctly draw from this the conclusion that expectations are subjective. But it is quite clear that Lachmann was influenced to a considerable extent by Keynes and Shackle in this, as well as Mises, and that Lachmann criticised Mises for failing to extend subjectivism to the realm of expectations (Gloria-Palermo 1999: 128).
Lachmann and the Austrian radical subjectivists supported the subjectivist nature of value, expectations, and knowledge, and Lachmann denied that free market systems tend to equilibrium or have coordinating processes, which follows logically from understanding the role of money, time and uncertainty in economic processes.
But then Lachmann’s position is rejected by other Austrians like Kirzner as “nihilism,” so there are clear limits to the extent to which Austrian economics really takes these ideas seriously.
BIBLIOGRAPHY
Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.
