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Keynesian Uncertainty

Posted on the 18 September 2012 by Lachmannian @TheLachmannian

Note before I begin.. I am going to begin citing my sources, I have to start practicing citing my sources again


One of G.L.S Shackle’s favorite articles is “The General Theory of Employment” (Keynes 1937), in which it has shaped much of Shackle’s way of thinking (Shackle 1984: 391). Here is Keynes:

It is generally recognized that the Ricardian analysis was concerned with what we now call long-period equilibrium. Marshall’s contribution mainly consisted in grafting on to this the marginal principle and the principle of substitution, together with some discussion of the passage from one position of long-period equilibrium to another… Edgeworth and Professor Pigou and other later and contemporary writers have embroidered and improved this theory by considering how different peculiarities in the shapes of the supply functions of the factors of production would affect matters, what will happen in conditions of monopoly and imperfect competition, how far social and individual advantage coincide, what are the special problems of exchange in an open system and the like. But these more recent writers like their predecessors were still dealing with a system in which the amount of the factors employed was given and the other relevant facts were known more or less for certain. This does not mean that they were dealing with a system in which change was ruled out, or even one in which the disappointment of expectation was ruled out (Keynes 1937: 212, emphasis added).

Classical economics was performed by taking specific factors as given. Employment was given, prices were given, expectations were held neutral, and past events automatically determined future ones. All this, along with additional assumptions, is what made equilibrium analysis possible in the Ricardian framework. As Keynes put it these assumptions made possible for “pretty, polite techniques, made for a well paneled board room and a nicely regulated market” (1937: 215). While it is indeed a neat model that may be easy to illustrate, this system was liable to fail:

[Ricardian theory], being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface (Keynes 1937: 215, emphasis added).

We see the ontological uncertain Keynes pop out in this passage above. Certainty and security break down because new fears and hopes emerge. The classical model is one of illusion and when we remove the ‘illusion’ by introducing human action, expectations, and a role for time (making this a process), we see that modeling the market economy is no longer pretty or polite! Uncertainty was indeed the spine to Keynes’s overall theory [Shackle 1984: 391].

I should note that the “nihilist” comment made by Shackle (1984: 391) was probably a sentence implying this Keynes passage:

Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future (Keynes 1937: 215).

To Keynes, he already presumed that there would be economists at the time, probably ones that were loyal to the Ricardian framework, who thought of what Keynes said as too ”philosophical’, irrelevant to understanding the market economy. Maybe even rejecting Keynes’s philosophical claim on the ground that it quite clearly states that we know very little about the future (Keynes 1937: 215).

And even to this day, people still reject Keynes’s overall philosophical claims, or at least continue to follow those who made this mistake. For example Paul Samuelson automatically rejected this philosophical issue on the basis of the assumption of the ergodic axiom and did much work under this assumption, see for example, Samuelson’s “Optimality of Sluggish Predictors under Ergodic Probabilities” (1976) or “What Classical and Neoclassical Monetary Theory Really was” (1968). It is worth to note that his answer for using the ergodic assumption, thus rejecting Keynes’s philosophical emphasis, was on the grounds that if one rejected the ergodic principle, one rejected calling economics a science (1969: 12).

Samuelson does have a point, how can a subject be in the realm of the subject of science if we can not make precise quantitative predictions similar to how we do hard science?  There is no clear answer to this, but one argument that appeals to me is that there is a clear difference to what a hard science is and what a social science is. Different subjects often calls for different sets of tools and different questions to answer. Economics is in the category in trying to explain the ‘irrational’ subjective human.


Keynes, J.M. 1937. The General Theory of Employment. Quarterly Journal of Economics 51 (February): 209-23.

Samuelson, Paul A. 1968. What Classical and Neoclassical Monetary Theory Really was. The Canadian Journal of Economics 1 (February): 1-15.

—. 1969. Classical and Neoclassical Theory. In Monetary Theory, edited by R.W. Clower. London: Penguin Books

—. 1976. Optimality of Sluggish Predictors under Ergodic Probabilities. International Economic Review 17 (February): 1-17.

Shackle, G.L.S. 1984. Comment on the Papers by Randall Bausor and Malcolm Rutherford. Journal of Post Keynesian Economics 6 (Spring):   388-93.

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