Why non-existence of uncertainty is such a monstrously absurd assumption

26 Oct, 2015 at 16:04 | Posted in Economics | 1 Comment

All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

check-your-assumptionsPerhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the marketplace, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.

I dare say that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.

This is particularly the case in his treatment of Money and Interest.

John Maynard Keynes

1 Comment

  1. One of my favourite quotes from Keynes. What is clear from this is that if we want to understand business cycles which are strongly linked to swings of gloom and irrational exuberance in financial markets we need to understand IRRATIONAL behaviour. We need to know some psychology and sociology. But what the ‘pretty and polite techniques’ (read not only classical, but ISLM. representative agent and other such gadgets) do is either ignore the crucial factor or even assume hyper-rationality.

    The Samuelson-Lucas-Sargent-New Keynesian project was very successful in undoing everything Keynes tried to achieve in the way we go about thinking about economics.

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