Chapter 4: About Uncertainty, Risk and Limited Knowledge
[Keynes’s] perception [was] that economies did not behave in the way economists said they did, that something vital had been left out of their accounts, and it was this missing element which explained their malfunctioning. . . . Keynes accused economists of his day of abstracting from the existence of uncertainty [;] . . . human beings take decisions in ignorance of the future. (Skidelsky, 1992: 538–9) INTRODUCTION In this chapter I will explore some of the consequences of the specific assumption related to aggregate behaviour and the formation of expectations at the macro-level. While doing this I will concentrate on the difference between risk and uncertainty.1 This will be done firstly through an analysis of the individual decision-maker’s situation, which can be characterized by a kind of double uncertainty related to both the microand the macro-level. To begin with, the future conditions are uncertain on the individual level (health, income and family situation), which has to be combined with the overall macroeconomic uncertainty related to unemployment, inflation, interest rates, and so on. Individual uncertainties can, due to the ‘law of large numbers’, in varying degrees be transformed to risk, which can be handled through different kinds of insurance policies (private companies or through welfare state institutions). Secondly, there will always be uncertainty associated with the consequences of an individual action for two reasons: we do not know the future and we do not know the outcome of other people’s reactions. The macroeconomy outcome when many actors act even under the condition of identical macroeconomic signals...
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