Financial Markets, Money and the Real World
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Financial Markets, Money and the Real World

Paul Davidson

Paul Davidson investigates why the 1990s was a decade of financial crises that almost precipitated a global market crash. He explores the reasons why the global economy still struggles with the aftermath of these crises and discusses the possibility that volatile financial markets in the future will have real impacts on whole industries and national economic systems.
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Chapter 3: Uncertainty and Reality in Economic Models

Paul Davidson


A PARABLE: THE FABLE OF THE P’S, OR WHAT MORTALS THESE P’S FOOL! Many years ago in the never-never land of Chicago where the busy P’s of economic theory often flourish, there dwelt a wise and famous Knight (Frank H.) who recognized the sterility of using a classical economic theory that presumed the economic future could be reliably predicted by the use of probability theory. This Knight attempted to redirect the economics profession toward the study of relevant economic problems where the future was uncertain and therefore incapable of being reliably forecasted. If the future is merely risky, this Knight maintained, then these risks are measurable and by using probability theory the economic future is actuarially knowable. An uncertain economic future, however, is incapable of any measurement. Hence the term uncertainty must be restricted to ‘non-quantitative’ views about the future and it is this ‘true’ uncertainty, and not risk, the Knight insisted, that forms the basis of economic decision making.1 At about the same time, in a distant land across the seas, the brave and intelligent warrior, Keynes, who had also labored in the field of probability and nonmeasurable uncertainty, took up the cudgel and attempted to produce a revolution in economic thinking by developing a taxonomic structure that differentiated an uncertain future from a probabilistic risky one. Now it came to pass that with the upheaval of the Great Depression and the Second World War, politicians were open to Keynes’s proposals for policies to cure the outstanding faults...

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