Julio Huato wrote:
Why does the "recognition of fundamental uncertainty" has not gotten much
traction in economic analysis while, say, "rational expectations" and
"informational imperfections" have? Is it that such "recognition" is
potentially subversive, while the hypothesis of "rational
expectations" or
"imperfect information" foster acceptance and adherence to the status
quo?
Is it that the powers that be are afraid that the notion of "fundamental
uncertainty" be used by the workers' movement to hit the system on the
head?
<snip>
The whole concept of fundamental uncertainty, which is central to
Keynes' analysis and to institutional analysis, is that there are
fundamental irregularities that in Knightian terms embody 'non-insurable
risk' -- that is there is no way to statistically anticipate or for the
market to provide for such risk. This means, of course, that no
insurance scheme or futures market can protect against such
fluctuations. Keynes argues that society protects itself from such
fundamental uncertainty by developing 'habitiual modes of behaviour'
(i.e. institutions) that protect society from such fundamental
uncertainty. This is the basic theoretical underpinning of
institutional economics as developed by Veblen, Commons, etc. and is
central to Keynes' analysis as, I would argue, to Marx, Schumpeter and
to many of the Austrians generally. The basis of these institutions is
not 'rational expectations' because, by the very definition of
fundamental uncertainty, there can not be rational (or even irrational)
expectations since these phenomena are 'fundamentally uncertain'. But
that does not mean that we can not construct institutions that can
protect us from such uncertainty, providing, of course, that these
institutions are protected from the market place. Just to give one,
simple, example. Almost every modern state provides for the declaration
of disaster and the provision of public relief in the case of a natural
disaster (Hurricane, earthquake, flood, terrorist attack or epidemic).
With global warming and the increasing unpredictability of such
weather, insurance companies are unable/unwilling to insure against such
happenings and the burden has shifted to the state as 'institutional
insurer of last resort'.
The problem with neoclassical economics is that it can not deal
with these kinds of issues. A current case is the flue vaccine shortage
in the United States due to 'fundamental uncertainty' in the market
supply of clean/safe vaccine. There is no such problem in Canada
because the state, as an institution, has provided for (an over) supply
of safe vaccine. This is not a market response, but an institutional
response predicated on the belief that the cost of market failure was
too great for Canadian society to accept. How would 'rational
expectations' respond? As we all know, they can not. And this is the
very Achilles heel of neoclassical economics.
Paul Phillips
Senior Scholar, Department of Economics,
University of Manitoba
