Whither Keynesian Probability? Impolite Techniques for Decision-Making
European Journal of the History of Economic Thought, Forthcoming
18 Pages Posted: 6 Aug 2015
Date Written: March 2015
This paper focuses on Keynes’s understanding of individual decision-making under uncertainty and tries to address a question left mostly unexplained in the critical literature. On re-reading Keynes after the recent surge of interest induced by the financial crisis, a number of scholars have placed emphasis on well-known excerpts from the General Theory dealing with the “state of long-term expectations.” Keynes evidenced that future events conditioning economic activity in general, and investment in particular, “can only be forecasted with more or less confidence,” and that “the state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention,” while economic theory does not. In these instances, Keynes argued, people may fall back on “conventions,” which give them assurance that they are doing the right thing. As a result, “to behave in a manner which saves our faces as rational, economic men … we have devised for the purpose a variety of techniques.” But Keynes’s main message is that under uncertainty “[a]ll these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse.” For instance, conventional behaviour easily turns into herd behaviour, and financial markets are pervaded by alternating currents of euphoria and panic. So a question remains: how should Keynesian agents behave in markets continuously on the brink to fail? Are there, rephrasing Keynes, “impolite techniques” to be used under uncertainty or must we end up admitting that “we simply do not know,” and behave in a conventionally understood fashion? The paper offers a reading of Keynes suggesting that the thread going from Keynes’s Treatise on Probability to the General Theory and its defence provides a positive analysis of decision-making under uncertainty, and argues that placing emphasis on this positive analysis simply means adhering to Keynes’s long-standing commitment to interpret reasonable judgement in a (surely unconventional) probabilistic set-up.
Keywords: Keynes, probability, uncertainty, decision-making
JEL Classification: B21, D21
Suggested Citation: Suggested Citation