Financial Markets, Money and the Real World
Show Less

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.
Buy Book in Print
Show Summary Details

Chapter 3: Uncertainty and Reality in Economic Models

Paul Davidson

Extract

3. 3.1 Uncertainty and reality in economic models 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...

You are not authenticated to view the full text of this chapter or article.

Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.

Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.

Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.


Further information

or login to access all content.