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Problems of Uncertainty. Leon Walras Walras wanted to show evidence that free markets provide the optimal allocation of prices and factors by mathematical.

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Presentation on theme: "Problems of Uncertainty. Leon Walras Walras wanted to show evidence that free markets provide the optimal allocation of prices and factors by mathematical."— Presentation transcript:

1 Problems of Uncertainty

2 Leon Walras Walras wanted to show evidence that free markets provide the optimal allocation of prices and factors by mathematical methods. Beside non-realistic assumptions the model can be rejected by „Goedeler's incompleteness theorem“. Uncertainty has no meaning in the Neoclassical Model

3 Chapter 12: The State of Long-Term Expectations Long term expectations are decisive for investments. Long term expectations are determined by psychological factors. The role of knowledge has an influence to the “state of confidence” The “state of confidence“ rules these factors. The “state of confidence“ is also influenced by conventions.

4 Conventions “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.“ (Keynes)

5 Conclusions of Chapter 12 Uncertainty plays a major role for investments. A lack of confidence leads to lower investments, less effective demand and higher unemployment rates. The “state of confidence” has a higher impact on investments than monetary policy.

6 Chapter 18: The General Theory of Employment Re-stated Given factors Dependent variables Independent variables

7 Given factors Skill and quantity of available labor. Existing quality and quantity of available equipment. Existing technique Degree of competition Tastes and habits of the consumer Factors that determine the distribution of national income...

8 Given factors These factors are not constant but Keynes considers that these factors are not changing over a period.

9 Independent variables The propensity to consume. The schedule of the marginal efficiency of capital. The rate of interest.

10 Dependent variables Volume of employment. The national income.

11 Implications The given factors influence the independent variables but do not completely determine them. The schedule of the marginal efficiency of capital is determined by the given factors, partly of the prospective yield of capital-assets of different kinds, whilst the rate of interest depends partly on the state of liquidity preference and partly by the quantity of money measured in wage-units. (GT p. 157)

12 Independent variables Independent variables are consisting of three parts: 1. The psychological propensity to consume. 2. The psychological attitude to liquidity. 3. The psychological expectation of future yield from capital assets.

13 Keynes's conclusion “...the physical conditions of supply in the capital goods industry, the state of confidence concerning the prospective yield, the psychological attitude to liquidity and the quantity of money … determine between them the rate of new investment.“ (GT p. 157)

14 Conclusion of chapter 18 New investments are highly influenced by psychological factors in an uncertain world, namely determined by the “state of confidence“.

15 Keynes's criticism on Tinbergen - Tinbergen uses multiple linear correlations without explanations for an economic model. -The economic environment is not homogenous over a period of time. -A set of empirical statistical data of the past has no meaning for statistical outcomes for the future (non-ergodicity).

16 The relation between the „Treatise on Probability“ (TP) and the „The General Theory“ (GT) - The TP was submitted in 1907/08 and published in 1921. - The GT was published in 1936. -There is a strong belief in the PK school there would be a deep link between the GT and the TP.

17 Objective and subjective probability - One fraction of the PK school (Continuists) assumes that Keynes developed an objective theory in the TP and let in unchanged until the publication of the GT. - The other fraction (Discontinuists) assumes that Keynes first developed an objective theory of probability and later changed to a subjective theory due to the objections by Ramsey.

18 Uncertainty - Both fractions assume that the definitions of risk and uncertainty are similar by Keynes and Knight. - According to Keynes and Knight risk is defined as a quantifiable risk and uncertainty as a non- quantifiable risk. - So, according to Ramsey, non-quantifiable risks can be quantified by betting quotes.

19 Uncertainty - Both fractions do not consider the decisive question that there is a difference between Knight's and Keynes's definition of uncertainty. - According to Knight uncertainty can be quantified by computational methods. - According to Keynes uncertainty can never be reduced to a quantifiable risk.

20 Missing the point of Keynes - The whole discussion in the PK School is a shadow boxing based on the hypothetical assumption that there would be a connection between the TP an the GT. - The discussion misses the point that Keynes outlined uncertainty as a non-quantifiable risk which cannot be quantified by any methods. - The discussion misses also the point that any statistical data from a time series of the past has no meaning for future events.

21 Conclusion - The whole discussion is symptomatic for the current PK School. - Theoretical discussions which have no meaning for Keynes at all and no meaning for the economic world of today. - The GT was an answer to the Great Depression. - The task of the PK School should be to adjust the GT to the economic world of today.


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