uncertainty risk and the financial crisis of 2008 the distinction between uncertainty and risk originally drawn by frank knight and john maynard keynes in the 1920s remains fundamentally important today in the presence of uncertainty market actors and economic policy makers substitute other methods of decision making for rational calculation specifically actors decisions are rooted in social conventions drawing from innovations in financial markets and deliberations among top american monetary authorities in the years before the 2008 crisis we show how economic actors and policy makers live in worlds of risk and uncertainty in that world social conventions deserve much greater attention than conventional ipe analyses accords them such conventions must be part of our toolkit as we seek to understand the preferences and strategies of economic and political actors

wage norms capital accumulation and unemployment a post keynesian view the paper presents a post keynesian view of unemployment it argues first that the effective labour demand need not be downward sloping with respect to real wages and aggregate demand need not be downward sloping with respect to inflation second that there is a broad case for unemployment hysteresis understood as endogeneity of the non accelerating inflation rate of unemployment nairu based on social norms in wage bargaining and on the supply side effects of capital accumulation and third that much as keynes argued capital investment rather than labour market institutions is the key variable to explain changes in aggregate unemployment performance across countries and over time overall the paper advocates a keynesian view of the nairu where effective demand determines unemployment in the short run and the deviation of actual unemployment from the nairu determines the change in inflation in the medium term the nairu is endogenous and follows actual unemployment copyright 2011 oxford university press

climate change uncertainty irreversibility and the precautionary principle this paper begins with a critique of the option value argument used by economists to explain and justify the precautionary principle the argument is shown to misrepresent both uncertainty and irreversibility an alternative justification of the precautionary principle is discussed under conditions of keynesian uncertainty and irreversibility interpreted in terms of incommensurability recent formal decision theories under keynesian uncertainty are reviewed and their limitations explored with particular reference to the insights that decision theory can bring to understanding the precautionary principle throughout the decision problems under consideration are those faced by climate change policy makers copyright oxford university press

contractual solutions to the hold up problem this paper considers a general version of the hold up problem where n agents first make relation specific investments and then must agree on some collective action it is shown that first best solutions exist under a variety of different assumptions about the nature of information asymmetries

analysis of uncertainty as opposed to risk an experimental approach the paper illustrates the scope for enhancing the conceptual apparatus used by agricultural economists to analyse decision making under conditions of uncertainty selected empirical results from experiments on student subjects from three universities are reported three issues are considered first the reasons for choice and the understanding of a choice problem are examined second attitudes towards different levels of uncertainty are measured third the possibility that apparently non normative psychological factors influence choice is explored the paper serves to illustrate and support a number of methodological points the major points are that a risk uncertainty distinction is useful contrary to the aging conventional wisdom of economic theory that laboratory experiments can potentially provide data of use to agricultural economists and that predictive models of choice under uncertainty may be more accurate if they take account of psychological variables which influence the decision making processes of human subjects

organic interdependence uncertainty and economic analysis this paper examines the effect of john maynard keynes s organic view of interdependence on his treatment of induction probability and expectations it argues that while organic interdependence is compatible with rational induction and prediction in some circumstances as it must be if there is to be a foundation for economic analysis it is not normally compatible with the existence of a rational foundation for expectation of future yield from capital assets this is not destructive of economic analysis however because keynes assumes most agents respond irrationally and conventionally rather than rationally and capriciously to fundamental uncertainty copyright 1989 by royal economic society

financialised internationalisation and structural hierarchies a mixed method study of exchange rate determination in emerging economies this paper conducts an extensive mixed method study of exchange rate determination in the brazilian foreign exchange market it combines semi structured interviews with foreign exchange market participants in brazil and london and advanced time series econometrics in line with post keynesian theory and critical realist ontology the interviews uncover the context specific expectations and underlying processes and structures that condition exchange rate dynamics in brazil and emerging economies more generally the results point to important structural changes in brazil s financial integration in the form of currency internationalisation and financialisation moreover they show that this internationalisation has been mediated through a structured and hierarchic international monetary system which fundamentally distinguishes exchange rate drivers in emerging economies from those in developed ones

ambiguity and uncertainty in ellsberg and shackle this paper argues that the similarities between ellsberg s and shackle s frameworks for discussing the limits of the probabilistic approach to decision theory are more important than usually admitted the paper discusses the grounds on which the ambiguity surrounding the decision maker in ellsberg s urn experiments can be deemed analogous to the uncertainty faced by shackle s entrepreneur taking crucial decisions the two authors insights are assessed and special attention is paid to the criteria for decision under uncertainty they put forward the paper establishes a link between ellsberg s and shackle s perspectives and the non additive probability approach of gilboa and schmeidler an approach that offers an alternative to standard probability calculus which can be of use to analyse both ambiguity and uncertainty the comparison between ellsberg and shackle draws on an interpretation of keynes s treatise on probability emphasising keynes s rejection of both well defined probability functions and maximisation as a guide to human conduct it is shown that keynes s viewpoint implies a reconsideration of the boundaries of probability theory that is in the same vein of ellsberg s and shackle s concern in the years of the consolidation of savage s new probabilistic mainstream copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

g e moore and j m keynes a missing chapter in the history of the expected utility model in his posthumous essay my early beliefs john maynard keynes outlined his mental history in the dozen years before the war and asserted their importance to his later life yet despite keynes s assertion of the importance of this part of his mental history to who he was and what he did in 1938 the year the essay was written and two years after he published the general theory there is virtually no treatment in the history of economic thought of this period of his life or of its impact on his economic theory the purpose of this essay is to treat an episode of that period of his life which has particular analytical importance and to suggest some ways in which it might contribute to a clearer understanding of his later work in economics the episode in keynes s early life which the essay examines is his role in g e moore s changing opinion about the importance of rules in ethics in his classic principia ethica 1903 moore had originally asserted that obeying certain rules is a necessary part of ethically correct behavior but in his ethics 1912 he makes exactly the opposite argument saying that individuals are always justified in judging a case for themselves and are under no obligation to follow general rules of conduct in the parlance of modern philosophy moore switched from a rule utilitarian argument to an act utilitarian argument the first four sections of the essay detail the role which keynes played in moore s change of heart the final section discusses how the episode affects our understanding of keynes s work in economics

is there redemption for conventions this article explores the concept of convention in the social sciences it presents the two major neo humean philosophical approaches to convention and challenges their intuitive appeal and research implications the weaknesses of these approaches are examined and a new direction is suggested for the study of convention the paper goes on to develop a framework for the analysis of conventions using the notion of the exemplar introduced by thomas kuhn an illustration of this alternative approach is provided using the example of the wage relation copyright 2005 oxford university press

theories of choice under ignorance and uncertainty abstract in this paper knight s distinction between risk and uncertainty and its significance for economic analysis are examined the paper consists of a survey of some recent developments on the theory of choice under uncertainty and some applications of these theories to problems for which bayesian decision theory has not proved entirely satisfactory two problems are examined in detail the first is that of finance and insurance and the second is that of risktaking behaviour with special emphasis on lotteries

keynes on atomism and organicism this paper examines john maynard keynes s early unpublished paper miscellanea ethica and concludes that keynes developed an atomist view of economic agents based on the assumption that the individual mind is an organic unity the paper argues this view was part of keynes s subjectivist critique of the realist tenets of g e moore s principia ethica and that keynes retained this view of the agent in the treatise on probability the biography of f y edgeworth the critique of j tinbergen and the general theory the paper concludes that the recent literature arguing that keynes adopted an organicist view of agents in the economy lacks foundation copyright 1989 by royal economic society

the uncertain foundations of the welfare state abstract the welfare state is often portrayed as provider of insurance against uncertainties in knight s 1921 sense of the term which would be refused or underinsured on private markets this image conflicts with the standard economic model of risk exchange founded on the subjective interpretation of probability which predicts that all individual uncertainties will be insured by private markets our aim in this paper is to explain why this prediction fails and building on contributions to decision theory that take seriously the idea of knightian uncertainty to show why social insurance may be justified

the source of optimality in action it is well known that the nature of the information set and the axioms of rational choice are critical in determining the type of ranking on which agents are held to act in economic theory this paper argues that the concept of the optimising agent is also sensitive to the conception of the relation between a ranking of options facing an agent and concrete action what is termed the realisation process three conceptions of the realisation process are examined which are seen to lead to three quite distinct views on the role of agency the enabling conditions under which the concept of the optimising agent may be legitimately applied and the resulting domain of application of optimisation

keynes s critiques of moore philosophical foundations of keynes s economics this paper analyzes three of john maynard keynes s unpublished apostles papers ethics in relation to conduct miscellanea ethica and egoism and the philosophical discussion in the first chapters of the treatise on probability it argues that keynes s philosophical development before and in the treatise can be understood as an effort to make sense of the concept of intuition specifically it is argued that keynes abandoned a two fold view of intuition in the early papers for a two tier epistimology of acquaintance and knowledge in the treatise only to return to the two fold view later in the general theory copyright 1991 by oxford university press

behind methodological individualism methodological individualism has become a more fashionable slogan for economistsin recent years in specific terms we are being urged to accept a doctrine within whichall explanations of social phenomena have to be couched in terms of statements aboutindividuals however the term has a wide and sometimes ambiguous usage and is beingemployed as a packaging for all kinds of methodological and theoretical prescriptions forexample it has been regarded as a commandment that thou shalt where possible placemacroeconomic statements on firm microeconomic foundations e g blaug 1980 or aninjunction against reckless aggregation particularly in regard to welfare criteria orsocial welfare functions e g kirzner 1980 littlechild 1978 or as an inspiration forrecent theoretical developments in economics with pro market policy conclusions e g furubotn and pejovich 1974 one of the further problems in discussing this topic is that often the term methodo logical individualism carries an ideological charge indeed by both advocates and itsopponents it is too frequently confused with individualism of a political variety however the connection between political and methodological individualism is merely assumed bythese supporters or critics or supported by cursory argument it is never demonstratedwith any rigour although there is a lack of uniformity in the use of the label it is argued here that the keyelement in the classic statements of methodological individualism is a refusal to examinethe institutional or other forces which are involved in the moulding of individual pref erences and purposes we are thus confronted with a remarkable optimism about thepossibility of explanation of social phenomena in terms of individuals but an extremereluctance to give even partial explanations of individual behaviour in social or evenpsychological terms this refusal is both dogmatic and as will be argued below unaccept able on analytical grounds this reduction of explanation and thereby causality solely to individuals has a furtherimplication the explanation of social phenomena proceeds even by a circuitous route

shared quality uncertainty and the introduction of indeterminate goods the purpose of this paper is to introduce a new category of goods indeterminate goods which will be compared with the classical framework of experience search and credence goods nelson 1970 darby and karni 1973 this concept sheds new light on the nature and status of quality uncertainty through the following hypothesis uncertainty about the product s quality can be shared by all agents of the market and this uncertainty can be non neutral and disrupt the market we identify three types of shared uncertainty about the product s characteristics and the corresponding problems that can arise shared uncertainty due to the emergence of a product hirschman 1974 shared uncertainty concerning the past of a product basing ourselves on the art market and finally shared uncertainty regarding the future impacts of a product through empirical data on product safety

investments and bargaining in a model with positive consumption externalities abstract this paper analyzes the investment decisions of the members of a committee when a subsequent bargaining process determines the distribution of a divisible good among them the shares allocated to investing agents generate positive consumption externalities we show that agents investments improve their bargaining position this induces rent seeking behavior that generates a negative external effect on other investing agents in this setting the effects of rent seeking counterbalance the effects of positive consumption externalities so that equilibria may be efficient or display either over or under investment

too much investment a problem of endogenous outside options this paper shows that when agents on both sides of the market are heterogeneous varying in their costs of investment ex ante investments by firms and workers or buyers and sellers more generally may be too high when followed by stochastic matching and bargaining over quasi rents the overinvestment is caused by the fact that low cost agents by investing more can increase the value of their outside option and thus shift rent away from high cost investors numerical simulations show that overinvestment can occur given parameter values calibrated to oecd labour markets

das maynard keynes problem one of the classic questions in the history of ideas first arose one hundred years ago in germany reading adam smith s two great works the theory of moral sentiments and the wealth of nations late 19th century german economists were struck by an apparent puzzle how could the theorist who made sympathy the mainspring of human action in the first book argue in the second that calculating self interest was the primary motive force thus arose das adam smith problem how could one reconcile the advocate of sympathy with the advocate of self interest the history of the attempts to answer this question is instructive in many ways it is instructive in part as a lesson in the fertility of the history of economic thought as a source of ideas a o hirschman is an outstanding example of an original and creative theorist who has come to fresh insights on the basis of his research on the question see hirschman 1977 1986 the history is also instructive in pointing out the indeterminate nature of the solution to the problem despite the stature of the scholars who have worked in the field and the high quality of their work one must ultimately accept that we shall never know the true answer to the question smith left few papers and the context of his thought is itself a puzzle for us careful reconstruction of the unfolding social cultural and philosophical worlds that smith inhabited would certainly be hallmarks of any acceptable answer to the question but authorities on each of these background areas themselves disagree about what was happening in the worlds in which smith lived reasonable persons must agree to disagree about the answer to the question

deficient foresight a troublesome theme in keynesian economics the fact that john maynard keynes had made a distinguished contribution to the theory of probability 1921 no doubt predisposed many of his readers to imbue with great significance his subsequent remarks on the related topic of uncertainty in economic decision making among those who have provided commentaries on his work there are those who have singled out this uncertainty theme not only for its special importance but also for its potential for analytical subversion the purpose of this paper is to scrutinize the ideas involved in this particular aspect of keynes work together with the lines of argument that have emerged from those commentators who have pursued it the result of this scrutiny will be to call into question the idea that there is anything peculiarly subversive in the analytical consequences of broaching problems of uncertainty in economic decision making i shall argue rather that as an analytical issue it is depending on how it is handled either innocuous or else quite indiscriminately destructive

a technical definition of uncertainty and the long run non neutrality of money ever since knight s 1921 seminal work some economists have drawn a distinction between uncertainty and risk in order to demonstrate that this difference has important implications for understanding the operations of an entrepreneurial economy lawson 1985 is the latest to discuss the need for the analysis of societal interaction 1 in an economic world where uncertainty as opposed to mathematical risk is a pervasive fact of life p 909 lawson correctly associates the concept of uncertainty with the situation where there is no basis whatever upon which to form any calculable probability uncertainty in this account arises when the probability relation is numerically indeterminate and non comparable to other probability relations 1985 p 914

the relative absolute nature of knowledge and economic analysis central to economic analysis are assumptions and hypotheses concerning the extent and nature of the knowledge held by individuals in this respect it is a noticeable feature of realist accounts that they tend to focus upon the pervasiveness of uncertainty as an undeniable fact of economic life nonrealist or instrumentalist accounts in contrast tend to assume that agents have perfect information correct foresight rational expectations and so on it is also apparent that this realist focus upon uncertainty tends to give rise to a concentration of attention upon those situations in which possibly numerically measurable probabilistic knowledge is thought to be available clearly such accounts are important nevertheless i wish to suggest that such a restricted choice of focus for the realist is not entirely satisfactory since in particular it tends to lead to a neglect of the widespread observation that feelings of certainty and claims to truth are also pervasive in human society i want to suggest moreover that if we are to account for the latter observation and economists concerned with realism of analysis surely need to then various arguments and conclusions have to be taken on board which in turn appear to bear consequentially upon the nature and conduct of economic analysis in general section i below discusses such possible limitations of existing realist accounts of agent knowledge in some detail the suggested route for responding to and resolving apparent problems which involves the argument that aspects of knowledge can have a relative as well as an absolute character is described in sections ii and iii and the various analytical consequences of the account there set out are discussed in section iv section v contains concluding comments and touches upon ways in which the proposed account might be appraised and rnade operational

beyond rational expectations a constructive interpretation of keynes s analysis of behaviour under uncertainty this paper suggests that behavior under uncertainty depends not only on rational expectations but also the agent s evaluation of the adequacy of the available evidence on which the expectations are based it is argued that behavioral functions need to be augmented by a credence variable this proposition is derived from keynes s argument in the general theory that investment depends on both the most probable forecast and the state of confidence reflecting the distinction between probability and weight in his a treatise on probability the research implications of the proposed model are indicated copyright 1994 by royal economic society

incomplete contracts specific investments and risk sharing an optimal contract design problem is considered contracts which are incomplete and simple are used to investigate the extent to which constrained revisions can mitigate inefficiencies resulting from contractual incompleteness an optimal contract is characterized in two cases first when a contract is being used to facilitate trade between two risk neutral parties who must make relationship specific investments it is possible to implement the first best by a simple contract second when a contract is being used to share risk it is generally not possible to implement the first best when one party is risk neutral however it is possible to implement the first best by assigning all the ex post decision rights to that party

some remarks on uncertainty and economic analysis in an important paper lawson i 985 a discusses the conditions under which it is possible to carry out a coherent economic analysis of a system which is subject to fundamental uncertainty as opposed to mathematical risk the issue is crucial for although the fact of uncertainty can hardly be denied it seems to have been extraordinarily difficult to take this into account in formal economic theory it remains in coddington s i982 phrase a troublesome theme since the subject of uncertainty was broached by keynes and by knight in the interwar period the response by economists has fallen into two main categories those whose major interest has been pushing on with the technical analysis have simply ignored it apparently on operational grounds for example a remarkably frank modern statement of the position is to be found in lucas i98i as quoted by lawson i985a p gog on the other hand those economists who have wished to emphasise uncertainty notably shackle and the post keynesians have been rightly or wrongly accused of analytical nihilism coddington i983 p 6i and have certainly not yet provided an alternative theoretical framework which would be persuasive to the majority of the profession against this background lawson seeks to establish the view as he puts it i 985 a p 9 i o that economic analysis can be constructive whilst admitting that we know less about the future than is typically assumed lawson begins his discussion with a re examination of j m keynes early work on probability theory in the treatise on probability i973 b and on the perceived links 1 985 a p 914 between the treatise and keynes later treatment of uncertainty in the context of economics i973a pp 147 64 1973 d pp 109 23 1 given keynes seminal contributions to the literature we would agree that this focus is appropriate but we wish to argue in the present note that the discussion can be usefully extended by consideration of certain issues raised by keynes which are not emphasised in lawson s treatment particularly important in this context is the position which keynes reached on the basic difference in subject matter between the natural sciences and the so called moral sciences and hence on the appropriateness of what he had described in the treatise i973b pp 276 8 as the atomic and organic assumptions as applied to each this is an issue which has attracted the

bargaining in legislatures over particularistic and collective goods we develop a bargaining model in which a legislature divides a budget among particularistic and collective goods by incorporating both private and public goods in a unified model we uncover nonmonotonic relationships between legislative preferences for collective spending and the amount of the budget actually allocated to collective goods put simply policy proposers can exploit coalition partners strong preferences for public goods to actually provide fewer public goods in equilibrium while directing more private goods to themselves these results explain why policy reforms to limit special interest spending often fail this unified model also sheds new light on when legislatures prefer open or closed amendment rules and when coalitions take different sizes and shapes