Knowledge, Uncertainty, and Government Spending Links for Today

Lynne Kiesling

I’ve read a few very striking things this morning. On Tuesday at Econlog David Henderson made some comments about Russ Roberts’ commentary in Monday’s Boston Globe. Both are very good reads. David’s concise comment here reflects my thoughts:

And the best two sentences:

“But maybe we simply don’t have the knowledge to repair the economy from Washington. The economy is complex and the interaction between the financial sector and the real economy – between Wall Street and Main Street – is not well understood.”

In other words, if you don’t know what you’re doing, don’t do it. Hayek’s argument in two sentences.

Another discussion that has caught my attention over the past week is the Olivier Blanchard roundtable at the Economist; scroll down to the 29-30 January to read the comments from all of the roundtable participants, including Alberto Alesina, Robert Shiller, Tyler Cowen, and Mark Thoma. In addition to their analyses, I particularly appreciated the Free Exchange post on Knightian uncertainty, and how/why economists don’t really factor in Knightian uncertainty, which can lead to inaccurate analyses and poor policy recommendations:

Economists do not, in fact, follow Knight’s work very much. The discipline shys away from his concept of uncertainty (as distinct from risk), because it is, by definition, so hard to model. If economists could model it, then so could firms and investors. The future would be calculable, if not knowable, and there would be less excuse for bewildered inaction.

Paul Samuelson once went so far as to argue that economics must surrender its pretensions to science if it cannot assume the economy is “ergodic”, which is a fancy way of saying that Fortune’s wheel will spin tomorrow much as it did today (and that tomorrow’s turn of the wheel is independent of today’s). To relax that assumption, Mr Samuelson has argued, is to take the subject “out of the realm of science into the realm of genuine history”.

The scientific pose has great appeal. But this crisis is reminding us again of its intellectual costs. Knightian uncertainty may be fiendishly hard to fathom, but ignoring it, as economists tend to do, makes other phenomena devilishly hard to explain.

I always, always mention Knight and the distinction between risk and uncertainty when I teach, especially when I teach environmental economics, because of the importance of approaching economic policy analysis with humility and skepticism. Little did I know how much of an apostate I truly am …

Speaking of apostasy, the final thing that I found really striking this morning was Georgetown Law professor John Hasnas’ brief essay on what it feels like to be a libertarian right now. His words reflect much of what I have thought, and felt, for the past several months.

Libertarians spend their lives accurately predicting the future effects of government policy. Their predictions are accurate because they are derived from Hayek’s insights into the limitations of human knowledge, from the recognition that the people who comprise the government respond to incentives just like anyone else and are not magically transformed to selfless agents of the good merely by accepting government employment, from the awareness that for government to provide a benefit to some, it must first take it from others, and from the knowledge that politicians cannot repeal the laws of economics. For the same reason, their predictions are usually negative and utterly inconsistent with the utopian wishful-thinking that lies at the heart of virtually all contemporary political advocacy. And because no one likes to hear that he cannot have his cake and eat it too or be told that his good intentions cannot be translated into reality either by waving a magic wand or by passing legislation, these predictions are greeted not merely with disbelief, but with derision.

My frustration is perhaps not as palpable as John’s, because his work lies more directly in the areas that have been the focus of attention for the past several months than mine does. But I share his frustration, and will think of his words and vow to be less silent here.

I have not wanted to write here much for the past few months, because of my frustration, and because KP is not about politics or ideology. John’s essay inspires me to self-censor less. Thanks to Ed Lopez for the link.


3 thoughts on “Knowledge, Uncertainty, and Government Spending Links for Today

  1. I think the government is not going in the right direction because it have the diagnosis wrong.
    Lic. Aldo Abram thinks United State has used Argentine economic recipes that lead them to this crisis. Do you think that US will pay the same price Argentina did?

    You can read the full article in http://www.exante.com.ar/crisis%20financiera/US%20fall%20for%20using%20argentine%20methods.pdf
    Aldo Abram has predicted the crisis since 2004 when he published an article about it in one of the main economic newspaper in Argentina – Ambito Financiero. You can read the chronicle since them in http://www.exante.com.ar/editoriales.htm Spanish or searching in http://www.exante.com.ar/English/notas_anteriores.htm

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