Posts Tagged ‘uncertainty’
“I sensed myself in the presence of something I didn’t really know how to handle, didn’t understand.”*…
Bill Janeway, with sage advice– for businesses, but easily extensible to our personal lives– on how to live, and succeed, in an environment of radical uncertainty…
… From John Maynard Keynes at the University of Cambridge 90 years ago through Robert Lucas at the University of Chicago in the mid-twentieth century, economists have placed expectations at the core of market dynamics. But they differ on how expectations are formed. Are the data we observe the outcome of processes that are as “stationary” as physical laws, like those determining the properties of light and gravity? Or do the social processes that animate markets render future outcomes radically uncertain?
For a long generation starting in the 1970s, Lucas and his colleagues dominated economic theory, giving rise to different strands of Chicago School economics. While the Efficient Market Hypothesis asserted that prices in financial markets incorporate all relevant information, the Real Business Cycle Theory of New Classical Economics held that the macroeconomy is a self-equilibrating system whose markets are both efficient and complete. The system may be subject to external shocks, but it is not amenable to fiscal or monetary management.
This assumption of complete markets implies that we can overcome our ignorance of the future. It suggests that we could, at any moment, write contracts to insure ourselves against all the infinite possible future states of the world. But since perfect, complete markets obviously do not exist, the Chicago School’s Rational Expectations Hypothesis (REH) proposes that market participants will guide their forward-looking decisions by reference to a (generally implicit) model of how, on average, the world works and will continue to work. As a result, expectations will be tamed and aligned with efficient market equilibria.
For their part, Kay and King look further back to the pre-REH period, when Frank Knight and then Keynes correctly showed that our ignorance of future outcomes is inescapable. As Keynes famously put it in 1937:
By ‘uncertain knowledge’ … I do not mean merely to distinguish what is known from what is merely probable. … The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.
The shockingly unanticipated Global Financial Crisis of 2008 brought this insight back to the fore.
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The central question remains: Where can we find guidelines for mitigating the consequences of radical uncertainty? What basis is there for purposive action in the face of “We simply do not know”?
I see three paths forward. The first two are defensive, and the third is proactive. All three reject an exclusive focus on efficiency in the allocation of resources. Thus, they stand outside what remains the dominant paradigm of mainstream economics.
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Success in the real world demands a recognition that the future is unknowable. Three strategies: “What to Do About Radical Uncertainty,” from @billjaneway in @ProSyn. Eminently worth reading in full.
* James Baldwin, Sonny’s Blues
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As we contemplate complex contingency, we might recall that it was on this date in 1910 that George Herriman‘s signature characters, Krazy Kat and Ignatz Mouse, made their first appearance in the bottom of the frames in Herriman’s The Dingbat Family daily comic strip. They got their own strip three years later, scored a Sunday panel in 1916– and delighted readers with the surreal philosophical questions they raised until 1944.
“The only function of economic forecasting is to make astrology look respectable”*…
The pandemic economy has been strange and unpredictable from the get-go.
Throughout the past 14 months, the twists and turns have been surprising: The housing market boomed, the stock market soared, people got into day trading, everyone hoarded toilet paper, and lumber became a must-have. There’s been widespread disagreement about how much support from the government was needed, whether the country was doing too much or not enough, or whether help would come at all. We won’t know whether the country overshot or undershot the response for years, and there’s still uncertainty about what’s happening in the labor market, prices, and other areas. And the prevailing theme has been one that has nothing to do with the economy directly: As long as Covid-19 isn’t under control, the economy isn’t either.
“Having been a forecaster for 10 years, we were surprised all the time, because nobody has a crystal ball and particularly if you just pull out one data series, one month, there’s just no way,” said Claudia Sahm, a former Federal Reserve economist and now a senior fellow at the Jain Family Institute. “It’s going to be a wild ride; the data through the end of this year, they’re going to be tough.”
The country and the world are staring into a black box of uncertainty on the economy. It’s frustrating, but it’s also inevitable. Anyone who says they know exactly what is going on in the economy right now is lying. The same goes for anyone who says they know what’s going to happen next.
“Because of the unique nature of this crisis, there are going to be some swings,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute. “In a year, they’re going to be trivia questions, but right now we’re obsessing about them.”
Few people will probably remember two years from now that the price of used cars and trucks went up by 10 percent in April.
We know that the economy is different now than it was a year ago and that it will be different a year from now. What’s not clear is exactly how. And what we need now — including economists, experts, and policymakers — is the intellectual humility to recognize that’s the case.
“At this point, most things should be presumed temporary until proven permanent,” said Jed Kolko, chief economist at the jobs website Indeed.
It’s unnerving to admit what we don’t know, and the pandemic has been a real exercise in that. But after so long of staring into the abyss, maybe it’s time we embrace it…
Anyone who says they know exactly what’s happening in the economy is lying. Emily Stewart (@EmilyStewartM) explores that uncertainty and what it might mean: “The black box economy.”
* John Kenneth Galbraith
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As we consult the stars, we might note that today is National Be a Millionaire Day. While many sources confirm this celebratory fact, there’s no real information on its origin. The term “millionaire” was coined in France around 1719 to describe speculators in the Mississippi Bubble who earned millions of livres in weeks before the bubble burst; it seems first to have appeared in the U.S. in 1786, when Thomas Jefferson wrote about the French… so the “holiday” surely dates from sometime after that.
“The fool doth think he is wise, but the wise man knows himself to be a fool”*…
Naeem Hayat as Hamlet, with the Shakespeare’s Globe company, performs to migrants in the Jungle refugee camp on 3 February 2016 in Calais, France
William Shakespeare lived in an age of uncertainty. His society was traversing a number of unpredictable challenges that spun from the succession of the heirless queen Elizabeth to the ascent of a new class of merchants. But the biggest issue had to do with religious conflicts. In the premodern world, religion provided absolute certainty: whatever we knew was implanted in our mind by God. We didn’t have to look any further. Once that system of beliefs started to collapse, Europe was left with a yawning gap. Religion no longer seemed capable to explain the world. René Descartes and Shakespeare, who were contemporaries, gave opposite answers to the sceptical challenge: Descartes believed that our quest for knowledge could be rebuilt and founded on indubitable certainties. Shakespeare, on the other hand, made uncertainty a leitmotiv of all his works, and harnessed its creative power…
Lorenzo Zucca considers the poet as a philosopher: “Much ado about uncertainty: how Shakespeare navigates doubt.”
Of possible parallel interest: an informative review of Scott Newstok’s How to Think Like Shakespeare: Lessons from a Renaissance Education.
* Shakespeare, As You Like It, Act 5, Scene 1
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As we back the Bard, we might recall that it was on this date in 1600 that four plays, three by Shakespeare– Much Ago About Nothing, Henry V, and the source of today’s title quote, As You Like It— plus Ben Jonson’s Every Man in His Humour were officially entered into the Stationers’ Registry. Readers will recall that the copyright regimen was strict in Elizabeth’s time, as is now. But back then, copyright was literally that, the right to make a (first) copy: the Queen, concerned with sedition and determined to keep a tight rein on any and all published material in her realm, had decreed that no work could be printed in England without a license from the Stationer. In this particular instance all four plays were “stayed”–meaning that they were specifically noted in the registry as works not to be printed. The stay didn’t hold for long; within a few years, three of the four were published. Only one held out: for reasons scholars still debate, As You Like It didn’t appear in print until the famed First Folio edition of 1623.
“Although there is no progress without change, not all change is progress”*…
Schematic from Wells’ The Outline of History (1921), showing the rise of Europe, and the “mechanical revolution” leading to, writ in huge letters along the bottom, “The Great War” [source] (See bigger version here)
H. G. Wells worried constantly about the future of humanity. While he hoped for progress in human affairs, he was only too well aware that it was not inevitable and might not be sustained. Throughout his career he celebrated the technological developments that were revolutionizing life but feared they might lead to eventual degeneration or, as came to pass in 1914, a catastrophic war. He was also aware that there were disagreements over what would actually count as progress. Providing everyone with the benefits of modern industry might not be enough, especially as continued technological innovation would require the constant remodeling of society. Progressive steps introducing entirely new functions were episodic, open-ended and unpredictable, in both biological and social evolution. These uncertainties were compounded by a realization that, where technological innovation was concerned, it was virtually impossible to predict future inventions or what their long-term consequences might be. Even if progress continued, it would be much more open-ended than advocates of the traditional idea of progress had imagined…
In addition to the numerous pioneering works of science fiction by which he made his name, H. G. Wells also published a steady stream of non-fiction meditations, mainly focused on themes salient to his stories: the effects of technology, human folly, and the idea of progress. As Peter J. Bowler explains, for Wells the notion of a better future was riddled with complexities: “H. G. Wells and the Uncertainties of Progress.”
* John Wooden
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As we ponder posterity, we might recall that it was on this date in 1687 that (not yet Sir) Isaac Newton published Philosophiæ Naturalis Principia Mathematica (AKA “Mathematical Principles of Natural Philosophy”, AKA the Principia). In three volumes Newton laid out his laws of motion (the foundation of classical mechanics), his theory of universal gravitation, and a derivation of Kepler’s laws of planetary motion (which Kepler had obtained empirically).
As G.E. Smith wrote in the Stanford Encyclopedia of Philosophy,
Viewed retrospectively, no work was more seminal in the development of modern physics and astronomy than Newton’s Principia… no one could deny that [out of the Principia] a science had emerged that, at least in certain respects, so far exceeded anything that had ever gone before that it stood alone as the ultimate exemplar of science generally.
Title page of Principia, first edition
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