J.M. Keynes Versus F.H. Knight: Risk, Probability, and Uncertainty PDF
Preview J.M. Keynes Versus F.H. Knight: Risk, Probability, and Uncertainty
Evolutionary Economics and Social Complexity Science 18 Yasuhiro Sakai J.M. Keynes Versus F.H. Knight Risk, Probability, and Uncertainty Evolutionary Economics and Social Complexity Science Volume 18 Editors-in-Chief TakahiroFujimoto,Tokyo,Japan YujiAruka,Tokyo,Japan TheJapaneseAssociationforEvolutionaryEconomics(JAFEE)alwayshasadhered to its original aim of taking an explicit “integrated” approach. This path has been followed steadfastly since the Association’s establishment in 1997 and, as well, since the inauguration of our international journal in 2004. We have deployed an agendaencompassingacontemporaryarrayofsubjectsincludingbutnotlimitedto: foundations of institutional and evolutionary economics, criticism of mainstream viewsinthesocialsciences,knowledgeandlearninginsocio-economiclife,devel- opment and innovation of technologies, transformation of industrial organizations andeconomicsystems,experimentalstudiesineconomics,agent-basedmodelingof socio-economic systems, evolution of the governance structure of firms and other organizations, comparison of dynamically changing institutions of the world, and policy proposals in the transformational process of economic life. In short, our starting point is an “integrative science” of evolutionary and institutional views. Furthermore,wealwaysendeavortostayabreastofnewlyestablishedmethodssuch as agent-based modeling, socio/econo-physics, and network analysis as part of our integrativelinks. More fundamentally, “evolution” in social science is interpreted as an essential key word, i.e., an integrative and /or communicative link to understand and re-domain various preceding dichotomies in the sciences: ontological or epistemo- logical,subjectiveorobjective,homogeneousorheterogeneous,naturalorartificial, selfish or altruistic, individualistic or collective, rational or irrational, axiomatic or psychological-based,causalnexusorcyclicnetworked,optimaloradaptive,micro- ormacroscopic,deterministicorstochastic,historicalortheoretical,mathematicalor computational, experimental or empirical, agent-based or socio/econo-physical, institutionalorevolutionary,regionalorglobal,andsoon.Theconventionalmean- ingsadheringtovarioustraditionaldichotomiesmaybemoreorlessobsolete,tobe replaced with more current ones vis-à-vis contemporary academic trends. Thus we arestronglyencouragedtointegratesomeoftheconventionaldichotomies. These attempts are not limited to the field of economic sciences, including management sciences, but also include social science in general. In that way, understandingthesocialprofilesofcomplexsciencemaythenbewithinourreach. Inthemeantime,contemporarysocietyappearstobeevolvingintoanewlyemerg- ing phase, chiefly characterized by an information and communication technology (ICT) mode of production and a service network system replacing the earlier established factory system with a new one that is suited to actual observations. In the face of these changes we are urgently compelled to explore a set of new properties for a new socio/economic system by implementing new ideas. We thus arekeentolookfor“integratedprinciples”commontotheabove-mentioneddichot- omiesthroughoutourserialcompilationofpublications.Wearealsoencouragedto create a new, broader spectrum for establishing a specific method positively inte- gratedinourownoriginalway. Editors-in-Chief TakahiroFujimoto,Tokyo,Japan YujiAruka,Tokyo,Japan EditorialBoard SatoshiSechiyama,Kyoto,Japan YoshinoriShiozawa,Osaka,Japan KiichiroYagi,Neyagawa,Osaka,Japan KazuoYoshida,Kyoto,Japan HideakiAoyama,Kyoto,Japan HiroshiDeguchi,Yokohama,Japan MakotoNishibe,Sapporo,Japan TakashiHashimoto,Nomi,Japan MasaakiYoshida,Kawasaki,Japan TamotsuOnozaki,Tokyo,Japan Shu-HengChen,Taipei,Taiwan DirkHelbing,Zurich,Switzerland Moreinformationaboutthisseriesathttp://www.springer.com/series/11930 Yasuhiro Sakai J.M. Keynes Versus F.H. Knight Risk, Probability, and Uncertainty YasuhiroSakai DepartmentofEconomics CenterforRiskResearch,ShigaUniversity Hikone,Shiga,Japan ISSN2198-4204 ISSN2198-4212 (electronic) EvolutionaryEconomicsandSocialComplexityScience ISBN978-981-13-7999-4 ISBN978-981-13-8000-6 (eBook) https://doi.org/10.1007/978-981-13-8000-6 ©SpringerNatureSingaporePteLtd.2019 Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpartofthe materialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation, broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformation storageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodology nowknownorhereafterdeveloped. Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthispublication doesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfromtherelevant protectivelawsandregulationsandthereforefreeforgeneraluse. The publisher, the authors, and the editorsare safeto assume that the adviceand informationin this bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernortheauthorsor theeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinorforany errorsoromissionsthatmayhavebeenmade.Thepublisherremainsneutralwithregardtojurisdictional claimsinpublishedmapsandinstitutionalaffiliations. ThisSpringerimprintispublishedbytheregisteredcompanySpringerNatureSingaporePteLtd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore This book is dedicated to the memory of Prof. Lionel W. McKenzie Prof. Hirofumi Uzawa Prof. Takashi Negishi Toko, Tora, and Nao Preface “Naturaldisastersaremostlikelytovisituswhentheyareleastexpected.”Thiswas a famous maxim told by Torahiko Terada (1878–1935), a distinguished Japanese scientist and essayist. Even after he passed away, his witty remarks have been reproducedsomanytimesandareveryinfluentialeventoday. AccordingtoTerada,amaninthestreethasaninclinationtoforgetinconvenient truthssuchasearthquakes,wildfires,tsunamis,andvolcaniceruptions.Wisewords arenotwelcometotheear.However,thenatureitselfwillneverforgetthosetruths as if it would laugh at human nature of negligence and inaction. When natural disasters are least expected and almost out of our memory, they tend to visit us, thusconstantlyalarmingtheferocityofnature.Inshort,afearfulnaturaldisasterhas atendencytocometotheforgetfulhumanmind. Wemustrecallthatmanydisastersarealsoman-madeinmoderntimes.Among man-made great damages are wars, epidemics, oppression, depression, mass unemployment, inequality, and hyperinflation. Speaking of myself, a large-scale airraidduringtheSecondWorldWarandanausterelifeduringandjustafterthe wararestillretainedinmymemory.Withthelapseoftime,however,thenumber of older generations will decrease, and the one of younger generations will increase. As a result, the miserable memory of war times tends to gradually fade awayamongthepeople. Thethemeofthisbookissimpleandstraightforward.Inthehistoryofeconomic thought, it is quite unfortunate that the serious problems associated with risk, probability, and uncertainty have been rather neglected so far. We have to point out, however, the presence of the two superstars who have energetically discussed the impact of risk and uncertainty on economic and human activities. They are J.M.Keynes(1883–1946),whowasbornwithasilverspoonintheOldWorld,and F.H. Knight (1885–1972), who wasbornwith awoodenspoonintheNewWorld. They have very different backgrounds in many ways. It is in 1921, however, that bothofthempublishedapparentlysimilarbooksofriskanduncertainty. Keynesleftthefollowingimpressivesentencetousin1921:“Inmostbranchesof academic logic, such as the syllogism or the geometry of ideal space, all the ix x Preface arguments aim at demonstrative certainty. They claim to be conclusive. But many otherargumentsarerationalandclaimsomeweightwithoutpretendingtobecertain. InMetaphysics,inScience,andinConduct,mostofthearguments,uponwhichwe habitually base our rational beliefs, are admitted to be inconclusive in a greater or lessdegree.Thusforaphilosophicaltreatmentofthesebranchesofknowledge,the studyofprobabilityisrequired”(Keynes,ATreatiseonProbability,1921,p.3). SowroteKeynesalmost100yearsago.Unfortunately,Keynes’scontributionon probabilityanduncertaintyhasbeenmoreorlessunderestimatedinthedarkshadow ofhismoreshiningbook,TheGeneralTheoryofEmployment,InterestandMoney (1936). It should be noted, however, that in his 1937 article published 1 year later than the abovementioned book, he repeatedly emphasized an important role of uncertainty played in economic decisions: “By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what isonlyprobable.Thegameofrouletteisnotsubject,inthissense,touncertainty.... Ortheexpectationoflifeisonlyslightlyuncertain.ThesenseinwhichIamusing thetermisthatinwhichtheprospectofaEuropeanwasisuncertain,orthepriceof copper... About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know” (Keynes, “The General Theory of Employment, Interest and Money,” Quarterly Journal of Economics, February1937). As Keynes has noted, we live in the world of uncertainty. We simply do not know.Undoubtedly,suchphilosophicalviewofKeynesonhumanconductandthe worldaffairswasalsosharedbyhiscontemporaryman,Knight.Indeed,Knight,an American hardheaded philosopher who had never met the British gentleman Keynes, wrote the following sentences in 1921: “Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term ‘risk’ as loosely used in everyday speech in economic discussion...are categorically different ...It will appear that a measurable uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an unmeasurable onethatitisnotineffect anuncertaintyatall.Weshallaccordingly restrict the term ‘uncertainty’ to cases of the non-quantity type. It is in this ‘true’ uncertainty,andnotrisk,ashasbeenargued,whichformsthevalidtheoryofprofit andaccountforthedivergencebetweenactualandtheoreticalcompetition”(Knight, Risk,UncertaintyandProfit,1921,pp.19–20). So wrote Knight almost 100 years ago. It is in the miracle year of 1921 that KeynesandKnightpublishedapparentlysimilar,butsubtlydifferent,booksonthe economics of risk, probability, and uncertainty. It is really interesting to see how Keynes’ concept of probability and uncertainty can be compared to Knight’s dis- tinction between a measurable risk and a non-measurable uncertainty. As will be showninthemaintextofthisbook,whiletheylooksomewhatsimilarinoneaspect, theyaredefinitelydifferentinanotheraspectandsometimesevenantagonistic. In a more historical perspective, the relationship between Keynesand Knightis really complex and rather strange. It has an interesting history of separating, approaching, separating again, and approaching again. So, it is high time for us to Preface xi investigate how and to what extent Keynes and Knight are similar (or different) in termsofvision,ideology,tool,andpolicyimplications. Inthe1970s,theinfluentialeconomistGalbraithonceadvocatedtheFirstAgeof Uncertainty. Almost 50 years have passed since then. For those years, so many “blackswans”orhighlyimprobableevents,alaNassimNicholasTaleb,tookplace successively.ThefallofBerlinWallin1989followedbythecollapseoftheSoviet Union, the bankruptcy of Lehman Brothers in 2008 followed by the Great Reces- sion,andtheoutbreakoftheGreatEastJapanEarthquakeandTsunamifollowedby the explosion of Fukushima nuclear generation in 2008 were surely among those blackswans. At present, we are supposed to live in the Second Age of Uncertainty. All the existingknowledgeanddoctrinesarenolongerreliable.AsKeynesrightlysaid,we simply do not know. And as Knight noticed, we have to deal with the unfamiliar notionoftrueuncertaintydistinctfromthefamiliaroneofrisk.Inordertosolveso many difficulties and problems facing us today, the emergence of new superstars suchasthenewKeynesandthenewKnightwouldurgentlybeneeded.Whilethis bookdealswithriskanduncertainty,onethingshouldbequitecertain.Wehaveto learnnewlessonsfromoldteachings.Asthesayinggoes,wherethereisawill,there isaway! ThepreparationofthisbookhasbeenmadepossiblebytheJapaneseMinistryof Education, Culture, Sports, Science and Technology through Grant-in-Aid for Scientific Research. Thanks are due to the late Professor Lionel W. McKenzie (Rochester) and Professor Hirofumi Uzawa (Tokyo, Chuo) and Professor Takashi Negishi (Tokyo, Aoyama) for their everlasting encouragement and the staff mem- bers ofCenterfor Risk Research, Shiga University,for theirgenerousassistance.I amalsodeeplygratefultoProfessorKiichiroYagi(Kyoto,Setsunan),ProfessorYuji Aruka(Chuo),andothercouncilmembersoftheJapanAssociationforEvolutionary Economics (JAFFE) for their helpful advices and useful comments for doing my researchforalongtime.Andlastbutnotleast,Iwouldliketosayspecialthanksto Mr. Yutaka Hirachi and other staff members of Springer Japan for their kind suggestionsandconstantencouragement. Hikone,Shiga,Japan YasuhiroSakai 3May2019
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