“Post Keynesian economists can, with considerable justification, criticize the view in some Austrian circles that it is possible to emphasize both uncertainty and market coordination. However, it would also seem that the Post Keynesian emphasis on uncertainty raises problems for the argument that governments can resolve coordination problems. ... Keynes may well have correctly identified problems of market coordination when he wrote, and correctly identified policy instruments to resolve them. However, given uncertainty, the past is a fickle guide to the future and, given transmutation, the world is now a different place. In conclusion, Post Keynesians have a valid point when they argue that an emphasis on economic uncertainty raises problems for the assumption that market coordination can occur in the absence of governmental intervention. However, it can also be argued that the emphasis on uncertainty raises problems for the assumption that market coordination can occur through government intervention.” (Parsons 2003: 9).It is not, however, difficult to answer these charges.
When you introduce an intervention to influence the state of a nonergodic stochastic system, that process and outcome is not in the same ontological category or status as the future of that system, without intervention. The past data from which one draws inferences about what the intervention will do consist of examples of past such interventions, ideally of the same type. For example, there is no doubt that induction from past data will not be a reliable method to predict the future value of certain shares on the stock market or the future value of the whole market itself measured by some index, but predicting what happens when an entity with the power to influence certain shares or the whole system is a different matter. If the Treasury bought up the stock of a certain promising company, making the shares scarce when demand is high, announcing it will even support the value of the shares, we can make a empirical prediction about the outcome, which can be falsified. How? I have already addressed the question of the epistemological justification for such things and even Keynesian stimulus (and other government interventions) here:
“Risk and Uncertainty in Post Keynesian Economics,” December 8, 2010.The problem revolves around whether induction can be rationally justified. If one thinks that induction can be defended rationally, then inductive arguments using past empirical evidence can be used to provide justification for policy interventions. Induction can be reliable when used outside of nonergodic stochastic systems or events. If one thinks that induction has no rational justification, then Karl Popper’s falsificationism by hypothetico-deduction can be used to test predictive hypotheses about what will happened in the future under government intervention. In the absence of falsification, we have empirical support for such polices.
Fundamentally, if Austrians or neoclassicals think that they can evade their own such epistemological problems, they are deeply mistaken. How, for example, does the Austrian praxeologist justify his belief that that the axiom of disutility of labour will continue to be true in the future? Mises explicitly tells us that this axiom is “not of a categorial and aprioristic character”, but “experience teaches that there is disutility of labor” (Mises 1998: 65). In other words, it is a synthetic proposition and its truth is only known a posteriori. Praxeologists require either induction or Popper’s falsificationism by hypothetico-deduction using empirical evidence to justify their belief in its truth now and for the future.
The concept of radical uncertainty in the Post Keynesian or Knightian sense applies to non-ergodic, stochastic systems. But human life does not just consist only of non-ergodic systems. The economic system we know as capitalism, where most commodities are produced by decentralised investment decision-making by millions of agents and consumption by other agents with shifting subjective utilities, is not the only institution of modern life. We have government and quasi-government entities, private non-profit organisations, private voluntary organisations, and at the basic level families.
The free market itself has attempted to overcome uncertainty by certain institutions. Government interventions in economies are merely a much more powerful and more effective instrument for reducing uncertainty than what has emerged on the market.
Its many institutions that exist alongside and influence modern capitalism (such as law courts that enforce contracts, buffer stocks, and even central banks) have developed precisely to deal with uncertainty, as “outside” entities capable of reducing uncertainty by interventions designed to influence the state of the system. Law and order is a basic human institution without which commerce would be impossible. It has been enforced through the ages essentially by governments, not by private enterprise. When, for example, the trade of the Roman Republic was threatened by pirates in the east Mediterranean, it was the state that ended that threat and allowed commerce to resume with confidence. Indeed, some conventions or institutions that reduce uncertainty (for example, forward/future markets for commodities, and even money) are so deeply ingrained that we think of them now as a fundamental part of capitalism. A futures market was developed to reduce uncertainty for producers of commodities, often primary commodities. There is a great deal of evidence that standardised coinage in Western European civilisation was essentially the invention of the state. Indeed, the state had a great role in monetising economies.
Central banks developed in the 19th and 20th centuries precisely because business and financial interests wanted a system that would reduce the uncertainty caused by liquidity crises and financial panics, because they were frightened by the potentially disastrous consequences of unregulated financial markets and banking systems.
It is interesting that the Austrian Ludwig Lachmann’s view that institutions have an important part to play in free market systems is similar to the view I have had described above. It is important to note the logical consequences these ideas had for Lachmann as well:
“Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability.’” (Callahan 2004: 293).While I doubt whether Lachmann’s interventions would have been anything but minimal by Post Keynesian standards, nevertheless his intellectual journey is actually a lesson for his fellow Austrians: once they take fundamental uncertainty and subjective expectations seriously they would find themselves forced to much the same conclusions that he eventually drew.
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?, Emerald Group Publishing Limited, Bingley, UK. 165–180.
Callahan, G. 2004. Economics for Real People: An Introduction to the Austrian School (2nd edn), Ludwig von Mises Institute, Auburn, Ala.
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.
