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Chapter 26: Keynesian Uncertainty and Money
26 Keynesian uncertainty and money Giuseppe Fontana 1. Introduction In the last few decades the economic profession has been making fast progress in recognizing the fundamental importance of uncertainty in explaining economic behaviour. The basic idea is that increasing the realism of the psychological underpinnings of economic theory will generate more powerful theoretical insights and better economic policy (Rabin, 1998). Unfortunately, this new literature does not seem to be aware of the longstanding research programme on Keynesian uncertainty. Uncertainty is a central theme in the economic and philosophical writings of Keynes. He argued that the orthodox approach in both probability theory and economic theory had limited the analysis to the special cases of certain or probabilistic knowledge. He lamented that the orthodox approach had excluded considerations of the eﬀects of uncertainty on economic behaviour and left economists in ignorance of what was excluded. For this reason he sought to develop a more general theory of probability and of knowledge which could lead to a fuller appreciation of the nature and role of uncertainty in economics. It is the basic proposition of this chapter that Keynes’s theory of probability and knowledge has continuing relevance as a contribution to economic theory. His original analysis and further developments by Post Keynesian scholars provides the foundation for a more general theory of decision-making under uncertainty which can be used to explain several economic phenomena including the long-run demand for a stock of liquid assets and related possibility of involuntary unemployment, as well as...
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