Knowledge, Beliefs and Economics

Knowledge, Beliefs and Economics

Edited by Richard Arena and Agnès Festré

This book surveys how economists engage with knowledge and beliefs in various fields of economic analysis, such as general equilibrium theory, decision theory, game theory, experimental economics, evolutionary theory of the firm, financial markets and the history of economic thought.

Chapter 2: Expectations, Uncertainty and Beliefs in Marshallian and Post-Marshallian Analyses of Economic Systems

Brian J. Loasby

Subjects: economics and finance, economic psychology


Brian J. Loasby 2.1 MAKING SENSE Economies are complex systems, composed of many levels of partially interacting subsystems; and so they are necessarily beyond the detailed comprehension of any single brain within that system (Hayek 1952, p. 185). In seeking to understand them we are therefore obliged to resort to simplifications, omissions, aggregations of heterogenous elements which are treated as homogenous, and formulations that are false but manageable. We have to make sense of the world by creating representations; and it is a representation, not the presumed reality, that is the subject of both our theoretical manipulations and the decision processes of economic agents. In this chapter we shall consider the work of a group of economists who were particularly concerned that their analysis should adequately represent the economic systems and economic processes – including the cognitive processes of economic agents – that they were trying to understand. It is reasonable to try to adjust the particular combination of simplifications, shortcuts and admitted falsehoods that constitute a representation to the particular purposes or problems that we have in mind. Moreover, continued reliance on a particular kind of representation is necessary for progress in any scientific or productive endeavour, and this representation must be shared by those contributing to this endeavour, as Thomas Kuhn (1962, 1970) pointed out. However, it is essential not to confuse any representation with the truth that it purports to represent; the partial truths that may be attained by using any representation should therefore be exposed...

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