Academic journal article Journal of Economic Issues

Uncertainty and Probability in Institutional Economics

Academic journal article Journal of Economic Issues

Uncertainty and Probability in Institutional Economics

Article excerpt

Philosophical theories of the nature and meaning of probability can be distinguished from the mathematics of probability theory. The latter subject is not particularly controversial. However, there are different theories of the meaning of probability, and these theories involve corollary notions about under what circumstances probabilistic calculation is or is not meaningful as a guide to human conduct. The problem of uncertainty then is not strictly a mathematical problem. It involves the meaning of probability and its relation to intentional behavior.

Over the history of thought regarding the nature of probability, there has been a broad range of such conceptions (Hacking 1975). One might include at least the following categories: (i) probabilities are a priori degrees of rational belief; (ii) probabilities are subjective assessments of risk; (iii) probabilities are ex post empirical frequencies; and (iv) probabilities are real propensities, which exist in nature.

Which concepts of probability, and corollary concepts of uncertainty, are appropriate for institutional economics? At least since the 1990s, if not earlier, post Keynesian uncertainty concepts have played a role in institutional economics (e.g., Minsky 1996; Ferrari.Filho and Conceicao 2005; Dequech 1999; 2000a; 2000b; 2001; 2003a; 2003b; 2003c; 2004; 2005a; 2005b).

The following quote from a recent article in the Journal of Economic Issues captures the flavor of this influence:

   As Hyman Minsky wrote, to comprehend Keynes 'it is necessary to
   understand his sophisticated view about uncertainty, and the
   importance of uncertainty in his vision of the economic process.
   Keynes without uncertainty is something like Hamlet without the
   Prince' ... For institutionalists, in a world of incomplete and
   imperfect information institutions are necessary to force economic
   agents, with limited insights, to adopt strategies characterized by

   conventions ... The concept of uncertainty is very important
   because it allows us to understand not only the instability of
   contemporary economies but, above all, the relevance of
   institutions in coordinating them. (Ferrari-Filho and Conceicao
   2005: 580)

The present paper agrees with others that post Keynesian uncertainty theory provides a basis for an institutional approach to the problem of uncertainty. It is argued, however, that even when uncertainty is distinguished from probabilistic risk, most, if not all, uncertainty concepts still imply an underlying theory of probability.

John Maynard Keynes came to regard his own early theory of probability as problematic. However, there is deep controversy over whether or not he recanted his theory in favor of a subjectivist position. This controversy probably will never be resolved. As a consequence, some ambiguity remains regarding whether Keynes' theory of probability is necessary for post Keynesian uncertainty concepts. While the present paper is not a critique of Keynes' theory of probability, I argue that recent contributions in post Keynesian uncertainty theory are compatible with a new, essentially institutional, theory of probability, which retains some important features of Keynes' earlier theory but without its difficulties.

Keynes argued that all human knowledge is subjective in the sense that it is known by individuals and therefore is relative to the individual's acquaintance with facts and perception of logical relations. However, he argued that there exists among individuals an objective aspect, due to the existence of a "common intellectual and motivational constitution" (Davis 1991, 98). For Keynes, this common constitution stems both from the constitutions of our minds and from the access that individuals can gain, via logical intuition, to a domain of probabilities, which he conceives as objective logical relations. I argue that Keynes was right to think that a common constitution exists among people, but, while that commonality stems partly from natural selection, human institutions, rather than access to a domain of logical relations, can be held to account for that common constitution. …

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