Shackle on uncertainty and expectations in economics9 December, 2013 at 15:40 | Posted in Economics | 1 Comment
AEN: Sir John Hicks has portrayed the 1930s as a period of great intellectual battles between what he portrays as the “Hayekians” versus the budding Keynesians. What are your memories of that time?
SHACKLE: Well, I don’t think it can really be said to have started until a small group of us went down to Cambridge on a Sunday afternoon in October 1935. That’s where we heard Joan Robinson and Richard Kahn and really learned about Keynes’s The General Theory. I didn’t really understand what The General Theory was going to be all about until I heard Joan Robinson. I don’t think you can say that a real battle began until after The General Theory had made some impact on us in that way–perhaps not even until after it came out. But up to 1935 there was a strong Hayekian influence at the LSE–people were greatly sold on Hayek’s views as expressed in Prices and Production; I should say that included Hicks and Lerner and Kaldor.
AEN: If you go through the economics journals for the couple of years after the appearance of The General Theory in 1936 and read the reviews of the book, e.g., Hicks’s first review, Frank Knight’s, Joseph Schumpeter’s, Jacob Viner’s, Dennis Robertson’s, and so on down the line, every one of them criticized the book severely. And if one compiles a list of all the criticisms made in those reviews, there is very little in Keynes’s arguments left unchallenged. Yet, within a few years, the book became the volume guiding economic theorists. Given the opposition to it by so many leaders in the profession, why?
SHACKLE: Well, I think the opposition was because the book’s object was to overturn the established theory of value, which it did. I think it’s fair to say that the accepted, the received, theory of value and distribution in those days could not possibly account for involuntary unemployment because its premises included something very like perfect knowledge; and, if everyone had perfect knowledge, why should they have allowed a disaster like the early 1930s? It didn’t make sense. The received theory of value and distribution up to the early 1930s was a theory of perfectly successful adjustment, perfect coordination. And, if things are perfectly coordinated, there’s no reason why anybody should be involuntarily unemployed.
Keynes pointed out that there was this contradiction requiring an explanation and he explained it. His theory of involuntary unemployment is perfectly simple and can be expressed in a paragraph, or in a sentence. If you express it in a sentence, you simply say that enterprise is the launching of resources upon a project whose outcome you do not, and cannot, know. The business of enterprise involves investment, the investing of large amounts of resources–huge sums of money–in things whose outcome you cannot be certain of, which could perfectly well turn into a disaster or a brilliant success.
The people who do this kind of investing are essentially gamblers and they can lose their nerve. And if they decide to withdraw from trade, they sweep their chips up from the table. If they decide it’s too risky, if their nerve gives out and they can’t bring themselves to go on investing, they cease to give employment and that is the explanation. When business is at all unsettled–when there’s any sign at all of depression–or when there’s been a lot of investment and people have run out of ideas, or when their goods are not selling quite as fast as they have been, they no longer know what the marginal value product of an extra man is–it’s non-existent. How can you say that a certain number of men have a certain marginal productivity when you can’t know what the per unit value of the goods they would produce if you employed them would sell for? …
AEN: You have emphasized the importance of expectations–that expectations are a product of an individual’s subjective perception of opportunities laying before him. The argument is made that a problem with radical subjectivists is that it almost seems as if they aren’t sure if reality exists, as if everything is just a product of the mind, totally unrelated to objective reality. How would you respond to that?
SHACKLE: I think that’s the view some take. I can only speak for myself and I don’t say that objective reality doesn’t exist–this is a philosophical problem far out of my depth. But I do think that what we do in our actions is based on what goes on in our own minds, and one way I have tried to put it is that the things which you can choose amongst have to be made by yourself. You can only choose actions and acts. When people say, I’m choosing a new suit, or I’m choosing a house, what they’re really saying is, I’m choosing which one to buy. It’s the actions they’re choosing. I think that the action must be formulated in one’s own mind–it’s a work of art, it’s a work of imagination. Your list of choosable things has to be constructed or composed by yourself before you can choose.
AEN: Some economists would respond by saying that you’ve made this conception so broad, so general, that there’s almost no determinism left in it. You can’t say whether this will happen or that will happen. How would you respond to that?
SHACKLE: In the most radical way, I’m afraid. I think there is pretty complete in-determinacy. I did spend a lot of energy trying to see if I could devise any theory of how expectations are formed and I ended with the conclusion that expectations are far too elusive and subtle to find out any principles or rules to explain their emergence. They’re based on suggestions and you get suggestions from any mortal thing that happens–that you happen to read, that you happen to hear. You get suggestions from anywhere. No mortal person can say where they come from. That, you see, is the trouble.
Economics started as an attempt to imitate physics, Newtonian physics, and I think in doing so, it got off on the wrong foot. You could ask an historian to explain the institutions in England in the eighteenth century, but would you try asking him what is going to happen during the next century? He’d say, “my goodness, man, of course I can’t tell you that!” He’d absolutely reject the notion of that sort of prediction. Well, if an historian can’t do it, why should an economist be able to do it? …
AEN: I take it that you don’t hold much confidence or faith in attempts at economic prediction through econometric techniques.
SHACKLE: No, frankly I don’t. I shall be shot out of the profession even further than I have been already; this will be the end of my career, if it hasn’t ended many years ago. However, I will be honest and say that I don’t think that economics can yield constants of the kind that physics does. Physicists have constants, e.g., the acceleration due to gravity, the table of atomic weights. I don’t believe that economics can have constants like that, You might make measurements which are all right for today. But, there are countless people whose interest it is to make nonsense of those measurements tomorrow. Well, now I have really been quite honest …
AEN: In a sense, what you’re suggesting is that a very large proportion of what has been built up in over two hundred years in economics as a discipline needs to be set aside, that it throws into question the very notion of what most economists view as what is required of economics to be a science?
SHACKLE: I’ve been saying for almost forty years that economics isn’t a science, and we ought not to call it a science.