Uncertainty in Economics: A New Approach

203 Pages·2017·2.416 MB·English

by  Julia Köhn (auth.)

Contributions to Economics
Julia Köhn
Uncertainty
in
Economics
A New Approach
Contributions to Economics
Moreinformationaboutthisseriesathttp://www.springer.com/series/1262
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Julia Kohn
Uncertainty in Economics
A New Approach
JuliaK€ohn
Berlin,Germany
ISSN1431-1933 ISSN2197-7178 (electronic)
ContributionstoEconomics
ISBN978-3-319-55350-4 ISBN978-3-319-55351-1 (eBook)
DOI10.1007/978-3-319-55351-1
LibraryofCongressControlNumber:2017942769
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Preface
In mainstream economic theory, uncertainty is closely linked to the theory of
economicchoice.Particularly,sincethe1950stheepistemicaspectofuncertainty
dominatestheintellectualdebatesanduncertaintybecamemodelledasasubjective
probabilitybeliefofarationaleconomicagent.Severalattemptshavebeenmadeto
extend this approach and make it more realistic.1 Yet, the ontological aspects of
uncertaintyarestillnotreflectedineconomictheory.Theoverarchinggoalofthis
book is to seek a comprehensive understanding of the economic theory of uncer-
tainty and to appraise it critically. Based on this, I aim to develop a theory of
economic uncertainty that integrates epistemological and ontological aspects of
uncertainty. This book is based on my dissertation, which was supervised by
Professor Birger Priddat (Department of Economics) at Witten/Herdecke
University.
Therefore, I firstly should establish that ontological aspects of uncertainty are
similarlyimportantasepistemicones.InPartIofthisbook,Ithereforeanalysethe
concept of uncertainty in economic thought and show that originally uncertainty
was conceptualised as both epistemic and ontological. Only due to the economic
professions’ attempt to become acknowledged as a science, the more problematic
aspect of ontological uncertainty became neglected and the subjective probability
approachtouncertaintybecamedominantineconomictheory.
Secondly, Iwillexplore the ontological facetsofuncertaintyinPart II.Here, I
criticallyappraise theoriesofuncertainty thatemphasisetheontologicalcharacter
ofuncertainty.Itwillbecomeobviousthat,eventhough,thesetheoriesarenotpart
of the mainstream in economics, they contain significant critiques on the main-
stream approach, which explain the blindness of modern economics to economic
phenomena such as instability, slumps or excessive booms. Furthermore, these
approaches suggest that the positivistic and instrumentalist philosophy of the
science of economics inhibits a New Economic Uncertainty Paradigm, which
1Forexample,Simon(1955),KahnemanandTversky(1979)orGigerenzer(2002).
v
vi Preface
could reflect both the epistemic and ontological aspects of uncertainty and its
implicationsforeconomicbehaviour.
Based on these findings, I develop a new approach to the methodology of
economicsinPartIII,whichlegitimisesaNewUncertaintyParadigmineconomics.
The analysis suggests that taking uncertainty seriously in economics calls for a
fundamentalchangeinthemethodologyofeconomics,inwhichreasonablefiction
replacesrationalprobabilities.
Berlin,Germany JuliaK€ohn
References
GigerenzerG(2002)Boundedrationality:theadaptivetoolbox.MITPress,Cambridge
KahnemanD,TverskyA(1979)Prospecttheory:ananalysisofdecisionunderrisk.Econometrica
47(2):263–291
SimonHA(1955)Abehaviouralmodelofrationalchoice
Contents
1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 ManyFacesofUncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 FramingtheIssue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.3 AReadersGuide:OutlineandStructureoftheArgument. . . . 8
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PartI UncertaintyinEconomicThought
2 UncertaintyintheHistoryofEconomicThought. . . . . . . . . . . . . 17
2.1 TheUncertainFundamentofEconomics. . . . . . . . . . . . . . . . 18
2.2 TheMarginalRevolutionandProbabilisticUtility
Maximization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.3 FromReasontoRationalChoiceTheory. . . . . . . . . . . . . . . . 24
2.4 SeparatingUncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.5 SubjectiveProbabilityTheoryandUncertainty. . . . . . . . . . . . 31
2.6 TheJanus-FaceofUncertaintyinEconomics. . . . . . . . . . . . . 34
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3 Truth,ProbabilityandUncertainty. . . . . . . . . . . . . . . . . . . . . . . 39
3.1 TheChangingMeaningsofProbability. . . . . . . . . . . . . . . . . 39
3.2 Probabelism,CredibilityandtheFormalizationofScience. . . 41
3.3 TheProblemofInduction. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
3.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4 ThePrinciplesofEconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.1 BecomingtheScienceofEconomics. . . . . . . . . . . . . . . . . . . 50
4.2 RationalityandPrediction. . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.3 Econometrics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
4.4 ThePrinciplesofModernEconomics. . . . . . . . . . . . . . . . . . 58
4.5 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
vii
viii Contents
5 ProbabilityandNeoclassicalUncertainty. . . . . . . . . . . . . . . . . . . 63
5.1 BetweenObjectiveandSubjective. . . . . . . . . . . . . . . . . . . . . 63
5.1.1 ClassicalTheoryofProbability. . . . . . . . . . . . . . . . . 65
5.1.2 FrequencyTheoryofProbability. . . . . . . . . . . . . . . 67
5.1.3 LogicalTheoryofProbability. . . . . . . . . . . . . . . . . . 67
5.1.4 SubjectiveTheoryofProbability. . . . . . . . . . . . . . . 74
5.2 TheNeoclassicalUncertaintyParadigm. . . . . . . . . . . . . . . . . 79
5.2.1 ExpectedUtilityandSubjectivity. . . . . . . . . . . . . . . 82
5.2.2 RationalExpectationsandEfficientMarkets. . . . . . . 84
5.2.3 RationalExpectationsModelsinModern
Economics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.3 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
PartII PhilosophiesofUncertainty
6 TheOriginofProfit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
6.1 UncertaintyandProfit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
6.2 Uncertainty,KnowledgeandProbability. . . . . . . . . . . . . . . . 101
6.3 Uncertainty,ChangeandInstability. . . . . . . . . . . . . . . . . . . . 105
6.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
7 UncertaintyandEconomicInstability. .. . . . . . . . . . . . .. . . . . . . 109
7.1 KnowledgeandIgnorance. . . . . . . . . . . . . . . . . . . . . . . . . . . 110
7.2 UncertaintyandReason. . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
7.2.1 ConventionalKnowledge. . . . . . . . . . . . . . . . . . . . . 114
7.2.2 AnimalSpirits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
7.2.3 AKeynesianModelofChoiceUnderConditions
ofUncertainty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
7.3 Uncertainty,InstabilityandScience. . . . . . . . . . . . . . . . . . . . 119
7.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
8 TheDivisionofKnowledgeandUnknowledge. . . . . . . . . . . . . . . 125
8.1 TheNatureoftheEconomicProblem. . . . . . . . . . . . . . . . . . 126
8.2 Epistemology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
8.3 UncertaintyandthePriceMechanism. . . . . . . . . . . . . . . . . . 130
8.4 Economics,UnknowledgeandSurprise. . . . . . . . . . . . . . . . . 131
8.5 SurpriseandtheNon-NumericalTheoryofUncertainty. . . . . 134
8.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
9 TheNatureofEconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
9.1 RealismandOntology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
9.2 OpenandClosedSystems. . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Contents ix
9.2.1 CriticalRealism,SystemsandExplanation. . . . . . . . 143
9.2.2 StructureandDialectic. . . . . . . . . . . . . . . . . . . . . . . 144
9.2.3 DegreesofUncertainty. . . . . . . . . . . . . . . . . . . . . . 145
9.3 Non-randomness,PerformativityandUncertainty. . . . . . . . . . 146
9.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
PartIII MethodologyofUncertainty
10 ExtendingtheBoundariesofEconomics. . . . . . . . . . . . . . . . . . . . 157
10.1 OntologicalFoundationsofaNewPhilosophy
ofEconomics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
10.2 AReflexiveSystemandFallibility. . . . . . . . . . . . . . . . . . . . 160
10.3 LevelsofReflexivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
10.3.1 FirstOrderReflexivity. . . . . . . . . . . . . . . . . . . . . . . 164
10.3.2 SecondOrderReflexivityandtheStructure
ofEvents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
10.3.3 ThirdOrderReflexivity. . . . . . . . . . . . . . . . . . . . . . 166
10.3.4 Complexity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
10.4 TheUncertaintyCorridor. . . . . . . . . . . . . . . . . . . . . . . . . . . 168
10.5 EpistemologicalImplicationsfortheScienceofEconomics. . . 171
10.6 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
11 UncertaintyandFiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
11.1 TheCo-emergenceofFictionandProbability. . . . . . . . . . . . 177
11.2 UncertaintyandFictioninEconomics. . . . . . . . . . . . . . . . . . 181
11.2.1 FictionsandKnowledge. . . . . . . . . . . . . . . . . . . . . . 181
11.2.2 FictionsandUnderstanding. . . . . . . . . . . . . . . . . . . 182
11.2.3 Fictions,FutureandAction. . . . . . . . . . . . . . . . . . . 183
11.3 FictionalChoice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
11.3.1 Knowledge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
11.3.2 Fictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
11.3.3 IntentionsandBiases. . . . . . . . . . . . . . . . . . . . . . . . 187
11.3.4 WeightoftheArgument. .. . . . . . . . . . . . .. . . . . . . 187
11.3.5 Dynamics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
11.3.6 TheProcessofChoice. . . . . . . . . . . . . . . . . . . . . . . 188
11.4 Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
12 HumanAfterAll. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
12.1 Pluralism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
12.2 Humanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
12.3 Normativity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199