Uncertainty in the history of economic thought

Abstract

Uncertainty as many faces in contemporary economics. These different faces emerged since the 1950s. They are the consequence of an historical debate in the science of economics, which dates back to the early days of modern economics in the eighteenth century. Since then, economists have an ambivalent relation to the problem of uncertainty, which expresses itself in a Janus-face definition of uncertainty. On the one hand, there is the Fundamental Uncertainty Paradigm, which acknowledges uncertainty as a fundamental source of economic phenomena and which perceives the economy as a not perfectly determined system and economic action as not purely random. Therefore, the knowledge problem is argued to be insurmountable in economics. On the other hand, there is what I call the Neoclassical Uncertainty Paradigm, which assumes that the knowledge problem can be overcome on the basis of rational choice theory combined with subjective probability beliefs. The opponents of this concept are aware that it is unrealistic and hypothetical, yet they argue that it is the only way forward in a modern science of economics. This chapter delineates the emergence of this Janus-face conception of uncertainty. I begin with a critical discussion on the knowledge problem in economics and the early desire for general laws and rational economic action. Then, I discuss the methodological and theoretical advancements of the marginal revolution, which lead to the evolution rational choice theory, which will be discussed in the third section. In the fourth section, I concentrate on the classical distinction between risk and uncertainty in the 1920s. Afterwards I briefly introduce the becoming of the concept of subjective probability theory, which allowed economists to reinterpret uncertainty as a form of quantifiable risk. As a consequence, the Janus-face concept of uncertainty evolved. The last section summarizes my findings.