The Concept of Uncertainty in Post Keynesian Theory and in Institutional Economics
Ferrari-Filho, Fernando, Conceicao, Octavio Augusto Camargo, Journal of Economic Issues
There seems to me to be no other economist with whose general way of thinking I feel myself in such genuine accord.
--Keynes to Commons, 1927
John Maynard Keynes and the Post Keynesians demonstrate that, in an uncertain and unknown world, economic agents prefer to retain money rather than make investment decisions. The consequence of this rational preference is the possibility of unemployment resulting from insufficiency of effective demand. Institutionalists believe that the "economic environment" has nothing to do with the notion of "equilibrium," as well as that money is a fundamental institution of the capitalist system because it affects the preferences and actions of economic agents. In both schools of thought, we can observe at least two essential aspects of the dynamic of contemporary economies. These are, first, that the economy is a historical process (which means that uncertainty matters) and, second, that institutions, both political and economic, are indispensable to the task of "modeling" economic events.
Considering the idea above, the Post Keynesian and institutionalist theories try to answer the following questions: How do economic agents make rational decisions? How do they form expectations? Why do they retain (or decide not to retain) money? Can the institutional environment influence economic decisions? If so, in what way? The answers to these questions lie in the concept of uncertainty linking the two schools of thought.
As is commonly known, uncertainty is the fundamental element of Keynes' theory. 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" (1975, 57). 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.
This article aims at exploring the concept of uncertainty in the Post Keynesian and institutional economic theories. 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. This implies that the article also analyzes the theoretical similarities between Post Keynesians and institutionalists on the social institutions related to money and the essential properties of money in an entrepreneur economy.
The article is divided into three sections. The first presents the concept of monetary economy developed by Keynes and the Post Keynesians. The idea is to show that individual expectations, so crucial to decision making, are directly related to a favorable institutional environment. The next section examines the idea of uncertainty in institutionalist theory. It also shows that, for institutionalists, money is an essential institution in the economic system. Finally, the third section, in terms of conclusion, links the two schools of thought, emphasizing the concept of uncertainty and the relevance of institutions.
Money and Uncertainty: The Essence of Keynes" Monetary Economy
Keynes' primary legacy consists in demonstrating the logic of a monetary economy. (1) In such an economy, fluctuations in effective demand and employment occur because, in a world in which the future is uncertain and unknown, individuals prefer to retain money, postponing consumption and investment decisions. As Keynes said, "booms and depressions are phenomena peculiar to an economy in which ... money is not neutral" (1973b, 411, emphasis added).
Why, in Keynes' economy, is money not neutral? In other words, how does retaining money protect against uncertainty regarding individual transaction and production plans? The explanation is in Keynes' General Theory of Employment, Interest, and Money (referred to below as GT). …