Keynes, Uncertainty and the Global Economy
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Keynes, Uncertainty and the Global Economy

Beyond Keynes, Volume Two

Edited by Shelia C. Dow and John Hillard

The revival of interest in Keynesian economics since the late 1980s reinstates the importance of Keynes’s contribution to economic theory and policy. This is the second of two volumes in which authoritative contributions are presented by an outstanding group of international experts to celebrate Keynesian economics, and to review and further the developments of post Keynesian economics of recent years.
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Chapter 6: Trust, time and uncertainty

Beyond Keynes, Volume Two

Vicky Allsopp

Extract

6. Uncertainty, rationality and learning: a Keynesian perspective Alessandro Vercelli I INTRODUCTION Human rationality is at the same time condition and consequence of learning, since learning is based on rationality and rationality is implemented through learning. Therefore whatever conception of rationality is proved to be unable to explain the aims and characteristics of the learning process should be considered as suspect. This is the case with ‘substantive rationality’, which is still the prevailing conception of rationality in economic theory. Substantive rationality implies that a rational agent never makes systematic mistakes, not only ex ante but also ex post (Vercelli, 1991). This has the uncomfortable implication that a rational agent has no economic incentives to avoid systematic mistakes: strategic learning, which aims to avoid systematic mistakes in order to discover a strategy more profitable than that adopted so far, would be deprived of any economic value and would become unintelligible. This makes also altogether unintelligible, at least from the economic point of view, the genesis and foundations of substantive rationality. It seems therefore inescapable to conclude that substantive rationality cannot be justified in empirical terms under its own assumptions, and therefore cannot be accepted unless we believe in some sort of pre-established harmony between individual decisions and economic reality. It is controversial whether ‘Bayesian rationality’, that is the conception of rationality underlying Bayesian decision theory, succeeds in overcoming the limitations of substantive rationality. I will argue in this chapter that Bayesian rationality itself is unable to analyse in a...

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