Irreducible Uncertainty

The Straits Times caught my attention again the week before with a particular article by Robert Skidelsky, which was a contribution to Project Syndicate. In Keynes versus the Classics: Round 2, Skidelsky highlighted the problem with today’s Keynesians being unwilling to work out the implications of irreducible uncertainty for economic theory. The article was essentially a response to the two economist, Krugman (his article) and Cochrane (his response here and here) who are engaging in an academic quarrel of sorts.

Krugman started out criticising the love for elegant economic theories of classical (implicitly speaking, Chicago school) economists. And Cochrane shot back, arguing that to attribute excessive fluctuations in the market to ‘irrationality’ is theoretical nihilism. And we all know that all that buying and selling has got motivations behind them even if these were results of false information, pure emotional preferences. I like Skidelsky’s analogy about the theater on fire (which might have been used previously by other economists as well):

It’s like what happens in a crowded theater if someone shouts “Fire!” Everyone rushes to get out. This is not “irrational” behavior. It is reasonable behavior in the face of uncertainty.

I’m not sure if Robert Skidelsky is a Post-Keynesian like Hyman Minsky but his extensive research into John M Keynes has brought him to write several volumes about this economist once touted as a saviour of capitalism. In any case, I believe Keynes simply sprinkled some important ideas that are pertinent to our study of the economy and there is definitely a need for further studies into the insights of Keynes about our modern capitalist economy and possible save it from itself once again.