Saturday, November 24, 2012
Tuesday, November 20, 2012
This afternoon (November 17, 2012) I heard Richard Epstein talk on the implications of the recent election for the economy. He gave the annual distinguished scholar lecture as the SEA meetings. To hear Epstein talk is awe-inspiring. Hard to describe. Always without notes, he delivers intricate, clever, funny, insightful prose without hesitation, seamlessly weaving his web of logic, backwards and forward, while making knockdown points.
What he said today reinforced my conviction that Obama is by far the worse of the two candidates we faced in this election - though both were pretty bad. Epstein's knowledge of the details of each and every Obama program, the law, the economics, the bureaucracy, ... left me with little doubt on this score - and pretty pessimistic for what lies ahead. In addition Epstein has the rather unique advantage of knowing Obama personally from his University of Chicago days.
This is a situation where personality matters a lot. According to Epstein, Obama is the exact opposite of his convivial exterior. He is someone who is unlikely to change his mind on anything and who takes criticism extremely badly. He brings to the White House not your standard self-serving, but flexible politician. He is, rather, someone who is a principled and stubborn believer in policies and values antithetical to the health of the American economy and its civil society. His serious agenda is not the "liberal" agenda of the 1960's which focused on civil rights; rather it is the agenda of the Progressive era in America, wherein social planning politician sought, by the power of government, to redesign society from top to bottom. And you see this in every part of the various programs he has already addressed.
Healthcare, financial regulation, environmental policy, protectionism in international trade, trade unionism, education, and more. In every case Obama has skillfully constructed a powerful regulatory apparatus. Where he has been able to use Congress he has obtained the legislation he wanted (and designed), legislation deliberately vague, so as to leave as much discretion for the bureaucracy as possible. Where legislation was unnecessary, or unobtainable, he has resorted to administrative discretion, issuing decrees often without the necessary Congressional approval. He knows that the regulated companies and organizations have the option of either obeying or taking the government to court, and that the latter is costly inconvenient and risky, so they almost always comply. In this way, little by little, our freedoms are regulated away.
Epstein pointed out that the accumulating regulations act like taxes to sap the creative power of private economic initiatives and when combined with macro tax and spend policies can only have one outcome. The prospect for the future is one of dwindling growth, smaller technological advances, less capital investment in America and slowly declining standards of living, not only for or mostly for the 1%.
I wish I could do his analysis justice. I can't even come close. But he has expressed this in parts in various places available on the internet and I will be looking for them so as to be able to share more specific detail.
Friday, September 28, 2012
The name of this blog Against the Current is accurate. But I don’t relish it. It saddens me. My latest disappointment comes upon finding that many with whom I agree on a great variety of issues, hold views that I consider to be untenable and even offensive when it comes to foreign policy.
I have said on this blog and elsewhere that foreign policy is out of my comfort zone – not my area of expertise. So now, provoked by my discomfort, I am taking the plunge. I don’t think I can avoid it any longer. Please accept these thoughts as very much the ruminations of an amateur with much to learn.
For clarity of exposition, permit me the inaccurate extensive use of the terms “we,” “us,” “they,” and “them”. Many of my friends take the L A L A approach – “leave them alone and they will leave us alone.” I think in many (most) cases, they may be right. But surely not in all cases. In most cases it may not matter. The default position should be “leave them alone.” We should not, without overwhelming evidence, assume that they are a real threat to us, one that justifies the kind of interventions that have occurred. I would argue our best position is mostly to wait and see and respond when absolutely necessary. Preemption may be indicated, but it needs to be very carefully justified.
I cannot but condemn much of the past and present actions of our international agencies and special forces who violate the freedoms and rights of domestic and foreign citizens sometimes with massive and enduring humanitarian consequences. The lack of success of almost all of our foreign invasions should give us pause as to what we can and should try to achieve. These “war actions” are types of central-planning and, as such, are doomed to fail. They face impossible knowledge problems in trying to build or rebuild societies and they face impossible incentive problems that prevent proper oversight, the detection and prevention of enormous waste and corruption. They are a very big part of our overgrown government and runaway fiscal problems, and are serious threats to the cause of freedom. Much more could, should and has been said about this – for example.
But, sometimes the threat IS real and significant. The tricky part is knowing when it is and (just as important) what to do about it. In these cases the LALA principle may not work.
The LALA principle rests on the assumption that it is OUR actions, our interventions, that are responsible for the hatred directed against us. The attack of 9/11 would not have occurred but for the cumulative affect of our provocative actions. This type of assertion meets with a very hostile reception. It seems to carry unpalatable moral implications, excusing acts of terror. And its proponents mostly poison the chances of it receiving adequate consideration by the contemptuous and patronizing way in which they present it. It may, however, be true. The traction and support that terrorists receive may be a result of the groundswell of resentment that we have created. The problem is, this is impossible to prove either way. And appeals to the history yield conflicting interpretations. This is no more evident that in the case of Israel vis a vis its enemies. In many ways the Israel-Palestinian situation is a microcosm of the bigger picture.
Some have asserted that (radical Islam) Islamism is a creature of our making and did not exist as a force until recently. But this is very contentious. Pan-Arabism, and the commitment to a unified Arabia cleansed of foreign influence, had strong affinities to Islamism. And the early Muslim Brotherhood, through its sister organization led by Haj Amin al-Husseini, the grand mufti of Jerusalem (an active Nazi propagandist), effectively disrupted any attempt at the establishment a peaceful two-state solution as conceived by the British partition plan and as embraced by many Jews and Arabs alike in 1948. Everything that has transpired since then is basically an unfolding of this initial fateful turn of events.
Applying the LALA principle to Israel in light of the history from 1948 till today, makes little sense to me. There the threat is real. And it is an existential threat. There is a fundamental asymmetry of goals. “Leave them alone” will not suffice to placate them, because they don’t want Israel there – see here. It is not what Israel does that is the problem – though it may aggravate the problem. It is where and what Israel is.
So my LALA friends who seem to think that all that needs to be done is to force the parties to sit down and talk, are sadly and dangerously deluded. Any attempt to achieve real peaceful coexistence has to begin with a plan to get acceptance of Israel’s right to exist by those who have power in the Arab world. Clearly some of my LALA friends understand this. So, they conclude maybe it is for the best if Israel did not exist. It is this kind of cavalier conclusion that shuts down any type of civil discourse. It stinks of anti-Semitism. See also here.
But this really has little to do with American foreign policy fundamentals. LALAs should refrain from statements that indicate how little they understand or appreciate the threats that Israel faces. Their position opposing government foreign aid and military intervention does NOT imply an anti-Israel position. It does not imply the need to vilify Israel or call for its demise. It does not imply denying the right of Israelis to defend themselves.
Thus while we might oppose any government funding of settlements and any coercive displacement of Palestinians to facilitate the establishment of settlements (as I do), we cannot, in good conscience, require of Israel to dismantle its checkpoints, dismantle its fence, and generally stand down in its attempt to combat acts of terror. That makes no sense. These measures have proven incredibly effective in keeping Israel’s population safe after suffering for years a horrendous barrage of attacks directed specifically against civilians, where they live, shop, learn, and play. These measures create great hardships, but, in the final analysis, they are effectively imposed on Israel as much as they are imposed on the Palestinians, by the presence of a real, credible, significant, terrifying danger. Similarly, calls for Israel to withdraw to 1967 borders, or beyond, make no sense. The same threats that exist now, existed before 1967 all the way back to 1948, except that Israel was defending less secure borders. The settlements are not the fundamental obstacle to peace. Nor is the “occupation.” The refusal to recognize Israel’s legitimacy, and actions taken in support of that, are the fundamental problems. The LALA principle does not apply.
On the matter of foreign policy more generally, I am much less confident. When considering the state of the Muslim world in general, and especially the ubiquity and nature of Islamic fundamentalism, I find it difficult to believe that all of the resentment we face can be attributed to our actions. There is a definite chicken-egg problem. But this may be no obstacle to a the achievement of a much smaller foreign footprint. Careful, but sensible and effective diligence may be called for rather than grand interventions.
The case of Iran is very problematic because we cannot be sure we are dealing with a “rational” opponent, one that can be deterred. The LALAs are confident that we are, that even if Iran were to get the bomb, they would be no more dangerous than Pakistan (not much comfort there) and would never use it for fear of the kind of retaliation it would provoke. Distorted news reporting on both sides make a good assessment very difficult.
War with Iran is becoming more likely. The trumpets are sounding. I think it would be a big mistake – a worse proposition than Iraq or Afghanistan. But what is the correct response short of the LALA position? Netanyahu wants to draw a red line around the processing of final-stage enriched uranium. I guess what he means is that if Iran should proceed past that step, its facilities – which are big and visible – should be bombed or otherwise destroyed. Not a full-scale war, but a terrifying prospect nevertheless – where would it lead?
This is as far as my amateur ruminations take me.
Wednesday, September 19, 2012
HT: Lawrence Rosenbloom.
It’s hard for me to understand how so many Jews continue to think that Obama is a friend of Israel. The inimitable Melanie Phillips provides ample evidence (albeit just the tip of the iceberg) to show exactly the opposite.
My biggest problem with Obama is not his attitude towards Israel. It’s much more fundamental than this. Obama is quite simply un-American at his core – in everything he stands for and does. By this I mean he is totally out of sympathy with what America has meant to many from its inception – standing for the values of constitutionalized individual freedom and responsibility. He is ashamed of these core values and he has done and will do his best to sabotage them – in socializing medicine, vilifying the profit motive and the achievement of commercial success, regulating financial markets out of existence, solidifying the power of the incredibly destructive public labor unions (being heavily in their debt), destroying the power and incentive to produce cheap energy, and generally expanding the power of government and the structure of taxation to create a European nanny state. The devastation of the last four years is manifest. Everywhere you look you see the establishment of open-ended bureaucracies, empowered by pages and pages of yet-to-be specified rules and regulations handed down by small committees with enormous discretion to control prices and dictate the terms of private transactions. It is impossible to overstate the danger he poses for the long-term freedom and financial stability of each and every American. And the dangers are all the more daunting because of their insidious nature, hiding as they are beneath the voluminous padding of verbose sweeping regulatory documentation. Obama is, among his other multiple personas, the consummate bureaucratic saboteur, ably assisted by a talented team of like-minded arrogants. The prospect of another four years of this keeps me awake at night.
His stance on Israel is really only a corollary of his general mind-set. He is a European-style universalist and apologist for all the virtues of Western civilization and he regards Israel as a manifestation of that tradition of “Western oppression.” It is just ridiculous to think that Obama represents the party that is in Israel’s interest. It is only because of the powerful Christian bias toward Israel that Obama’s anti-Israel agenda is likely to be ineffective.
For the record: I am not an expert on foreign policy. I have big problems with the policy stance of both major parties – with Romney and Obama, and with the general presumption of the responsibility of America as the world’s policeman. I believe a much less-involved America, would be stronger, would be better both for America and for democracies like Israel. But that is beside the point to what I say above.
Into my inbox last week popped an email from Michelle Obama. "Thank you for an amazing week... Can you chip in $5 or more to stand with Barack today?"
For some reason, I have been on the Obama campaign mailing list for the past four years -- which is a hoot since, from the get-go, I have warned about Obama's extremist, Black-Power, Israel-hating background and circle, and that he would be a disaster for Israel and the west.
So it has proved. Yet astoundingly there are Jews who believe he has been the most Israel-friendly US president in history.
Which only goes to show the propensity of the liberal mind to outright hallucination when faced with the implosion of its shibboleths. The passion for Israel in the Bible-believing "red states" guarantees a level of support that not even the most virulent White House anti-Zionist could overturn.
But that doesn't mean a president can't undermine Israel by more circuitous means - as Obama has done. He has put Israel at grievous risk by his view of the world, which has neutralised America's power abroad and strengthened its enemies.
Although we are told he wants to stop Iran from developing nuclear weapons, his limp dealings have allowed it to continue inexorably with its nuclear programme (despite reports of sabotage) and extend its power in the region.
Last week, Secretary of State Hillary Clinton refused to issue a "red line" threat of ultimate force on the grounds that "negotiations are the best approach". But as Bibi protested in the row with Obama that boiled over this week, that allows Iran a clear run to the bomb. By the time the US decides Iran has to be forcibly stopped, it will be too late. It will already have the bomb.
Second, the Obama administration has consistently distanced America from Israel and cosied up instead to its Arab and Muslim attackers. Thus it backed the 2010 nuclear non-proliferation summit that singled out Israel for condemnation while excluding Iran from criticism - and has worked behind the scenes to neutralise Israel's nuclear deterrent, its ultimate defence against genocide.
It went ahead with a special operations exercise with 19 Arab and Muslim countries, while excluding Israel from a counter-terrorism conference at Turkey's insistence.
Last July, it invited the UN Commissioner for Human Rights and notorious Israel- critic Navi Pillay to "brief" the Security Council on Israel's supposed crimes - and in the process drew an effective moral equivalence between the behaviour of Israel and Syria.
Obama tried to bounce Israel into withdrawing to its 1949 "Auschwitz borders", pressured it over settlement building, which merely hardened Palestinian rejectionism, and failed to hold Mahmoud Abbas responsible for repeatedly declaring he would never accept Israel as a Jewish state.
Meanwhile, last week's Democratic convention descended into farce when its panicky attempt to restore references deleted from the party's programme to God, and to Jerusalem as Israel's capital, was booed.
Whether they were booing God, Jerusalem or the clearly out-of-order chairman is irrelevant. There was not even a two-thirds majority to put both deletions back into that Obama-centric programme - which still left out the party's previous rejection of Hamas, the Palestinian demand for unlimited immigration to Israel and any return to the 1949 borders.
This is a shocking way to treat an ally. When that ally is facing existential attack, it is unspeakable.
Obama is a menace to the security of Israel and the west and an American tragedy. What is astounding is that so many Jews refuse to see this and continue to support both him and his morally bankrupt Democratic Party. That is the Jewish tragedy.
Saturday, August 25, 2012
Considering the concept of heterogeneity throws light on the relationship between quantity and quality.
All observation and explanation proceeds on the basis of classification (categorization). Phenomena are grouped into categories according to our perception of their essential similarity (homogeneity). The elements of any category (class) might be different in some respects, but in all respects that ‘matter’ to us they are identical. Items within a particular category can be counted, quantified. The ability to quantify is crucially dependent on being able to count items in this manner. The number and type of categories (variables) is known and fixed. Thus, the arrival of a new category cannot be accommodated within a scheme of simple quantitative variation and must be considered to be a change in quality. Qualitative differences are categorical differences.
All quantitative modeling proceeds on the basis of the assumption that the individual elements of any given quantifiable variable are identical (homogeneous) and are different in some important respect from those of another variable. Variables are essentially distinguishable categories. In addition the elements of a quantifiable category do not interact with each other – else they could not be simply counted. Each element is an independent, identical instance of the class. (Most obvious is the case of ‘identical randomly distributed variables’). This does not preclude the elements themselves being complex – being the result of lower-level interactions, like identical molecules or biological cells, which are incredibly complex phenomena.
We may think of this in terms of structure. Structure implies connections/interactions. A structure is composed of heterogeneous items that are more than simply a list of those items. There is a sense of how the heterogeneous items work together to ‘produce’ something. (We see here how a capital-structure is both a metaphor for and a particular case of the phenomenon of complex structures in the world.) A structure is an ‘order’ in Hayek’s sense, in which it is possible to know something about the whole by observing the types and the ways in which they are related, without having to observe a totality of the elements. Structures are relational. Elements are defined not only by their individual characteristics but also by the manner in which they relate to other elements. These interactions are, in effect, additional variables.
Thus, though the elements of a quantifiable category may be unstructured, these elements may be composed of structured sub-elements. This is the basis of the phenomenon of modularity. Self-contained (possibly complex) modules may be quantified. This dramatically simplifies the organization of complex phenomena, as has been noted in a fast growing literature on the subject. Modularity is a ubiquitous phenomenon in both nature and in social organizations. It is an indispensable principle of hierarchically structured complex systems. The benefits of modularity in social settings include the facilitation of adjustment to change, and of product design, and the reaping of large economies in the use and management of knowledge (see for example work by Baldwin and Clark 2000, Langlois 2002, 2012) and it is clearly an aspect, perhaps the key aspect, of Lachmannian capital-structures. Capital-goods themselves are modules, which are creatively grouped into capital-combinations which constitute the modules of the (non-quantifiable) capital-structure.
Returning to the theme of the relationship between quantity and quality, quantitative modeling works when both the independent and dependent variables are meaningful, identifiable quantifiable categories that can be causally related. The model ‘works’ then in the sense of providing quantitative predictions. The inputs and outputs can be described in quantitative terms. But, when the outcome of the process described by the model is a new (novel) category of things, no such quantitative prediction is possible. Ambiguity in the type and number of categories in any system destroys the ability to meaningfully describe that system exclusively in terms of quantities. We have a sense then of the effects of heterogeneity. Variation applies to quantitative range.Heterogeneity (variety) applies to qualitative (categorical) range.Diversity incorporates both, but they are significantly different. Heterogeneity may not be necessary for complexity, but heterogeneity does militate in its favor. For example, compound interaction betweenquantitative variables (categories) can be an important characteristic of complex systems, but complex systems are likely to result from substantial heterogeneity, especially where heterogeneity is open-ended, in the sense that the set of all possible categories of things is unknown and unknowable.
Heterogeneity rules out aggregation, which, in turn, rules out quantitative prediction and control, but certainly does not rule out the type of ‘pattern prediction’ of which Hayek spoke. In fact, erroneously treating heterogeneous capital as though it were a quantifiable magnitude has led to misunderstandings and policy-errors, such as the those associated with the connection between investment and interest rates - errors that could have been avoided with a better understanding of capital heterogeneity and its effects. The capital-structure is complex, but it is intelligible. We can understand and describe in qualitative (abstract) terms how it works and render judgment on economic policies that affect it. And, as a result of Hayek’s insights into complex phenomena, we have an enhanced appreciation of what is involved.
Baldwin, C. Y and K. B. Clark (2000), Design Rules (Cambridge, Mass.: MIT Press).
Langlois, Richard N. (2002), ‘Modularity in Technology and Organization,’ in Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization, N. J. Foss and P. G. Klein, 24-47. Aldershot: Edward Elgar,.Langlois, Richard N. (2012), ‘The Austrian Theory of the Firm: Retrospect and Prospect,’ Review of Austrian Economics, forthcoming.
Monday, June 11, 2012
WHAT DO WE KNOW FOR CERTAIN ABOUT UNCERTAINTY?
Peter Lewin, University of Texas at Dallas
THE LEGATUM INSTITUTE
Charles Street Symposium
SUNDAY, 10 JUNE, 2012
Thank you very much to the Legatum Institute and to Jeffrey Gedmin, Robert Hahn, Dalibor Rohac and Hemal Shah and all the organizers of this inaugural Charles Street Symposium. I am honored to have been invited and delighted to be part of this exciting venture.
My subject tonight is uncertainty and what we know about it. Surprise, mystery, anxiety and, of course, profit, are all implications of this phenomenon that we call uncertainty. Pretty much everything we know about humans in their social lives is connected to uncertainty, the fact that we do not know what is going to happen; people plan, they relish, they fear, but they don’t really “know” for sure what is going to happen. As George Shackle would say, we live in the fleeting present, imperfectly remembering the past, anticipating the uncertain future. In that sense the uncertain future is very much part of the present, and it shapes everything we are and everything we do.
So uncertainty refers to a “lack of knowledge” to the not-knowing. And we know that we don’t know. No less an authority than Donald Rumsfeld informs us:
The truth is, there are things we know, and we know we know them – the known knowns. There are things we know that we don’t know – the known unknowns. And there are unknown unknowns; the things we do not yet know that we do not know.
My topic tonight concerns this “meta-knowledge” – this knowledge of not-knowing. What does it mean to know that we don’t know? What is the nature of this knowledge, and what are its implications?
On this our teachers tell us different things? Permit me a brief account of my own experience. I came of age as an economist under the tutelage of Ludwig Lachmann. For him uncertainty was of the radical variety and it was lethal for the standard neoclassical framework. Unless economics as a discipline could figure out how to incorporate this real, this radical, uncertainty, it was doomed to irrelevance at best, and to the propagation of arrogantly administered disastrous economic policy at worst. Later, as I discovered the extensive work of Friederich Hayek, this approach was reinforced – though, of course, Lachmann and Hayek differ in some important respects. Hayek’s Nobel prize lecture on the ‘Pretense of Knowledge’ is the culmination of a particular way of thinking about uncertainty.
In September of 1972, I arrived at the University of Chicago as a Ph.D. student. My first class in price theory was taught by Milton Friedman. Frank Knight had very recently passed away, and my introduction to Friedman featured a box of unsold copies of Risk, Uncertainty, and Profit that had been brought from Knight’s office. These free copies were made available to us students on a first-come-first -served basis; and so it came to pass that the copy of Knight’s masterpiece that I have on my bookshelf is the one I received that day. But, more important for our subject tonight, is that, after the books were distributed, Friedman then presented us, his new students, with a short discourse about Knight’s central idea. He explained that Knight had thought that there was a fundamental difference between risk and uncertainty, because the latter could not be cast in a probability framework. Knight makes a distinction between decision-making contexts in which the list of possible outcomes is known, and probabilities can be assigned to the elements of this list; and contexts in which the list of possible outcomes is unknown. It may be, of course, that though the list of outcomes is known, their probabilities of occurring are not. This is a sort-of intermediate position between risk and uncertainty – but is perhaps closer to risk than uncertainty because at least the decision-maker can guess at the probabilities. The case of unknown, unimagined outcomes, is categorically different. It is genuine uncertainty and it is ubiquitous. It is the basis for entrepreneurial action and for profit.
In what seems to me a momentous turn, Friedman thought, as he told us that day, that Knight was mistaken, because, since the advent of modern statistical theory including Bayesian theory, we now know that it’s all a matter of how you set it up. Friedman suggested, and, of course this is the basis of the famous Friedman-Savage expected-utility choice theory, that all decisions were informed by a kind of subjective-probability analysis that allows the theorist to model decisions as if they were sampling from hypothetical probability distributions. The probabilities must add up to 100%, because whatever the decision-maker does not know about the possible outcomes can be allocated to a residual category which takes up the remaining, unallocated probability. It may be that this prior probability-distribution is not very informative – it may be a very diffuse prior distribution – but, in principle, says Friedman, there is no difference between risk and uncertainty.
What is being reflected here, in the different perspectives of Hayek and Friedman, is a difference in methodology that is wider than the Grand Canyon. Friedman is implementing the latter-day Chicago maxim, “if you can’t measure, measure anyway” because if you can’t measure you don’t really know. Hayek would of course say that if you try to measure the ummeasurable you engage in a pretense of knowledge. Less elegantly, the proverbial drunk man looking for his keys under the lamppost, comes to mind.
Though, confused at the time, as might be expected of a very average, unsophisticated graduate student, I have now come to think that Friedman’s approach is an instance of the wider “abuse of reason” that occupied Hayek for many decades. This refers to the presumption of economists, and some other social scientists, that what the physical sciences had taught us was that, everything is knowable, at least in principle, and that scientific progress consists of discovering those constant relationships among underlying variables, which correspond to real-world phenomena. In short, scientific progress consists of simply finding out how things work and we can do this by observing the world and its regularities.
Obviously, I don’t have the time, nor the inclination, to examine this fundamental issue tonight. I will just say that the Friedman (mainstream) position has come under attack from many directions, and is something shared by most, if not all, of the various schools of heterodox economics. We social scientists are starting to get comfortable with the idea that there is a lot that is unknown and is likely to remain so for a while, as well as the much more revolutionary idea, that there is a lot that is unknowable. So before we begin in earnest we need to dispose of this obligatory, well-known distinction between risk and uncertainty, which, I believe to be very real. The well-defined outcome of a game of chance is fundamentally, categorically different from the multitude of unknown and unknowable outcomes that we face every day as part of the unfolding of time. Novelty, surprise, the unimaginable are real. And it is this type of uncertainty that I will be talking about.
So I suggest that the first thing we know about uncertainty, is that it is real and it is radical. But what does that mean exactly? Does it mean simply and only that we don’t know what can and will happen? Does it mean that what will happen not yet determined? Or both? Is it just a matter of epistemology? Or is uncertainty a matter of the world itself, of ontology? On this one, I am going to punt. I don’t know. I have no knowledge of quantum mechanics and I have no understanding of what it means to say that a particle has the potential to be a wave but that this is not yet determined. In economics, in the work of Hayek, Lachmann, Mises, Keynes, Schumpeter, Simon, Kirzner, Taleb and many others we have the implication that there are certain things that we cannot know because they are part of very complex processes. We may understand these processes, and we may recognize outcomes as part of a wide range of permissible and intelligible outcomes, but we cannot “know” these processes sufficiently to predict outcomes in any detail, for example by predicting the values of certain measurable variables. So, the question we are begging and ignoring is basically; is this complexity a matter of knowledge or is the world intrinsically unpredictable, uncomputable, undecidable. Such are the debates in the field of modern “complexity studies,” and so I will leave it to them. What matters for us, it seems to me, is that uncertainty is real and we know this for sure.
What else do we know about uncertainty? Well we know that uncertainty is unavoidable. But it is not irremediable. The consequences of uncertainty can be mitigated. Most basically, there is insurance. For the life-insurance company, death is an instance of a class of homogeneous instances whose occurrence can be assigned a probability. The insurance company faces a situation akin to risk. For the individual, by contrast, death is a single unique event – a matter of extreme uncertainty. So the individual can leverage the difference to mitigate the consequences, at least for his heirs. In other ways, we act to minimize the consequences even of events that we cannot imagine, except to say that they are “bad”. And I think here there is a distinction to be made between unknowable, unimaginable future events and knowable possible categories of consequences that can result. And this may give us substantial theoretical traction, as in the use of agent-based modeling that the advent of the computer age has made so attractive.
We know also that uncertainty is uncomfortable, well mostly. Sometimes we like it, like when we read a mystery novel, or watch a football game. We don’t want to know what is going to happen. That would spoil the experience for us. Also, if uncertainty implies that the outcome is likely to be good, or when it postpones the arrival of something bad, we may welcome uncertainty. But in many other respects, uncertainty is definitely unpleasant. It is responsible for the anxiety we feel. And we know that in some cases this can be debilitating. In other, less extreme, cases it can be very costly.
On a recent visit to Tbilisi, Georgia I saw an interesting strategy for reducing uncertainty. The traffic lights are equipped with timers – they count down the seconds till the next change. In this way the motorist knows exactly when the light is going to change. Apparently this has reduced road-rage and car accidents. Is this an unintended metaphor? All action is planned action, by definition. It presupposes the categories of means and ends and thus causality. Uncertainty tends to disrupt this connection, to make our planning more difficult and fill us with apprehension. This is no more true than in the context of economic policy. Providing “timers” – solid constraints and interpretable signals - for economic policy could reduce the uncertainty we feel about it.
The words I quoted from Donald Rumsfeld were spoken in the context of assessing the consequences of going to war, and trying to make decisions about what to do next at each turn of events. It is but a graphic example of economic policy decision-making under real uncertainty. In this context, perhaps the most significant and startling implication of uncertainty is that it threatens the value-fact divide, the very possibility of wertfrei economics. Making informed policy-decisions in a world in which the consequences are radically uncertain, means that what you decide depends crucially on where you put the burden-of-proof – what you consider to be the default position, what you require to be disproved before action can be taken. The simplest, and most relevant example is the identification of a so-called “market-failure” prior to deciding that policy intervention is necessary. Will this imply proving that a market-failure exists, or, in other words, disproving the assumption that the market is efficient? Or will it imply, proving that the market is efficient and disproving the assumption that it is not? Whichever you choose, because we are dealing with real uncertainty and complex processes, it is probably impossible to disprove the null-hypothesis. Your choice, therefore, will depend not on disinterested science, but, rather on which type of error you consider most egregious and wish to avoid, in other words on your values. The greater the degree of causal ambiguity, the greater the importance of the burden-of-proof. And uncertainty is all about causal ambiguity.
Uncertainty can mean not only not-knowing what is going to happen. It can also imply not knowing how to deal with what happens when it does, not knowing how to act or how to fix something or how make something you will need. So, much of our discussion about uncertainty is about mitigating and coping mechanisms. An interesting case is the case of novelty in economic life. Economic growth and development are very much about the discovery and introduction of new products and services, new production methods, new resources and materials, new modes of organization, etc. Gaining and maintaining a competitive advantage in the marketplace involves being innovative. How can you plan for this? Much research these days is about what kinds of organizations are most likely to be innovative. It’s a big subject. I will say only that it is very much about the management of knowledge-generation within organizations in the same way that Hayek perceived of knowledge-generation in a decentralized market economy.
In fact, uncertainty is, from another systemic perspective, necessary, desirable and empowering. Without it life would be dull and it would be static. There would be no entrepreneur and there would be no profit, there would be no novelty, no need to figure out how to cooperate, so no Sesame Street moments, no mystery and, of course, no conferences like this. It would be a world completely different from our own. One of the thematic outcomes of my own work is the conviction that the world is becoming more uncertain all the time, even while our ability to deal with this uncertainty is improving dramatically. We generate and experience a greater degree of complexity and uncertainty precisely because we can handle it. In many ways that is the story of the information age.
But how, exactly, does this happen? I think the key is being able to predict, with sufficient degree of accuracy, what other people will do under various circumstances. As Adam Smith pointed out, each of us is dependent upon the cooperation of thousands of other people for even the most simple accoutrements of life. That is the miracle of the market. But the market would not work without a shared common language, without a firm shared basis in the law, in custom, in the norms we follow every day without even thinking about it. These social realities are what we often refer to as social institutions and they are what allow us to act in a world of radical uncertainty. So, I will end with an brief explanation of how I believe this occurs.
It’s all a matter of inconsistent expectations which lead to uncertain and complex situations. As Hayek pointed out, the expectations of economic agents are ‘data’ for action. Expectations relating to uncertain future events imply the introduction of the unpredictable expectations of others upon who actions the success of our actions depends. Inconsistent expectations can mean inconsistent actions, disorder and disequilibrium. The new-classical counterrevolution was built on pointing out that expectations are best understood to be ‘rational’ – hence not all that unpredictable. And that debate is still not quite over. But I want to go in a different direction.
I suggest we need to unpack the concept of ‘expectations’ and ask the question ‘expectations of what?’ Obviously individuals have expectations about many different things. But, only some of these are likely to differ much across individuals. Those that form the basis of institutions, expectations about the ‘rules of game’ are likely to be very uniform across individuals. We may say that these expectations are informed by knowledge of the ‘social laws’ concerning how others will (almost) invariably behave in given situations. These expectations are likely to be very congruent. By contrast those expectations relating to the outcomes of introducing a new product, a new advertising approach, a new technology, a new competitive strategy, are not informed by such ‘hard’ knowledge. These are likely to be all over the place. Yet, such actions will not be deterred on account of the diffuseness of expectations and the uncertainty, the causal ambiguity that this implies. The entrepreneur acts precisely because he believes he is different and he knows better than the rest, absent which there would be no profit in it. Thus, somewhat paradoxically, predictability in one sphere of action is the necessary ingredient for coping with its absence (novelty) in another sphere. (Loasby 1991, 1994). We may invoke, as is often done, the analogy of a sports game, the fact that the outcome (the score, and the details of the action) cannot be predicted with any degree of certainty does not prevent the game from being played. On the contrary, it is this very unpredictability that adds to its attraction. What is predictable are the consequences of any infringement of the rules of the game, the fact that the losers will probably accept the result peacefully and so on. And it is this that allows the game to be played.
But whence the “rules of the game”? Another analogy - an individual walks across the mall full of snow and leaves a trail of footprints. Someone following him finds it helpful to walk in his footsteps (pun intended). Those who follow do the same and eventually they make a path through the snow that is of benefit to all who walk it (Kirzner 1992: Introduction). The original trailblazer is an unintentional institutional entrepreneur. The general principle here is the operation of network-effects – the more people use the network the greater the benefits for each (Liebowitz & Margolis 1994). Social institutions are complex phenomena and they are networks. A network of this kind is one in which the individuals who participate benefit from a shared (frequently tacit) understanding of how to proceed – a common standard (like a telephone technology, a language group, a religious group, a commonly accepted means of payment, a system of commercial laws, etc.). These ‘external benefits’ are the network effects that imply that there is feedback from individual action to other individuals, in the direction of producing uniform expectations regarding each other’s behavior (choices).
In this way, we can provide plausible choice-theoretic arguments showing how individuals perceive the benefits of choosing common modes of behavior. In other words, social institutions are likely to emerge spontaneously from individual action and to grow spontaneously to an optimum size. And there are many examples of convergent social processes, perhaps the most familiar being the emergence of money (Menger 1871).
Uncertainty exists, we know that for certain, but we also know that it has many aspects. Experience tells us that while we cannot predict who will succeed and who will not, while we cannot predict which products will emerge and be popular, while we cannot foresee the nature of future technologies, living in liberal democracies we strongly believe that the process will be peaceful and will be orderly. The fruits of this dynamic process depend crucially on our (predictable) willingness to accept the consequences of its unpredictability. That willingness is the vital predictable part. Indeed, as with other such complex adaptive orders, what we have in the market process is the emergence of an unpredictable but intelligible ‘order’ and we are able to explain this process in a readily accessible and intuitive way deriving from our understanding of human action. Uncertainty is real, it is unavoidable, but not irremediable, it is uncomfortable but it is necessary and it does not preclude us from acting. All of this we know for certain.
Kirzner, I. (1992). The Meaning of Market Process. London and New York: Routledge
Loasby, B. (1991) Equilibrium and Evolution: An Exploration of Connecting Principles in Economics Manchester: Manchester University Press.
______ (1994) ‘Evolution Within Equilibrium’, Advances in Austrian Economics. 1