Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo
Chapter 3: Understanding Crisis: On the Meaning of Uncertainty and Probability
Ekaterina Svetlova and Matthias Fiedler 3.1 INTRODUCTION The financial crisis of 2007–09 caused significant discontent about the current state of economic theory. In the manifesto ‘The financial crisis and the systemic failure of academic economics’, Colander et al. (2009, p. 2) wrote of ‘a systemic failure of the economic profession’. They argued that: [T]he current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, ‘systemic crisis’ appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon. (Ibid., p. 2) In this paper, we draw on the ideas of a neglected line of economic research to discuss the causes and consequences of the recent crisis. Against the background of the failure of traditional economic tools to analyse the financial turmoil of the last years, we explore the concepts of Frank Knight, John Maynard Keynes and George L.S. Shackle to search for an alternative explanation. These three economists belonged to one thematic school of economic thought. This school differs from the economic mainstream by its focus on knowledge about the future related to the understanding of risk and uncertainty. Those issues were considered to have been resolved by economists of both earlier...
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