Brexit’s Keynesian Lesson: Fundamental Uncertainty Revisited

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“About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

An economist’s words but not meant to be a description of where things stand today in the aftermath of the Brexit referendum, though they might as well be. These are Keynes’s words from a 1937 article following the publication of his magnum opus, The General Theory of Employment, Interest and Money in 1936.

Equilibrium or Uncertainty? Looking to Philosophy
Much like the crisis of 2007-08 discredited economists’ fantasies of equilibrium, Brexit has delivered a painful and brutal lesson – made no easier by the slow pace with which it has been delivered – in the importance of recognizing uncertainty of the sort described by Keynes as a central theoretical proposition about capitalist economies. But there is an important difference between the two cases. Equilibrium was and remains a central organizing principle and point of reference in economic theory – sometimes even in the sort of economic theory which rejects equilibrium as a feature of actually existing capitalist economies. Equilibrium is perhaps the concept with which economics has become synonymous. In comparison, uncertainty remains a relatively obscure issue, though not necessarily in the academic literature which is conscious of economic theory being rooted in, among other things, epistemology – the branch of philosophy dealing with what we know, how we know it and what is knowable.

How important could a philosophical point be for an economy? Very important, as it turns out. On such distinctions between uncertainty and calculable probability depend our views about how people behave, and about the importance of money and institutions in an economy. These things in turn matter for policy. The policy implications of the philosophical foundations of economics are not trivial, and economists either engaging in cod-philosophy or dismissing philosophy altogether will do so at their own peril, not to mention the cost to a public whose livelihoods hang in the balance of Brexit-like battles.

Choice under conditions of scarcity, or uncertainty?

Put simply, philosophy turns out to be more practical than one might think. Keynes’s awareness of this particular philosophical issue and the fact that it was of immense importance to him is summed up well by Robert Skidelsky: “Classical economics was concerned with the logic of choice under conditions of scarcity; Keynes’s economics with the logic of choice under conditions of uncertainty.” The two definitions point to two fundamentally different kinds of economics founded on two fundamentally different views of what an economy is and how it functions.

A few years before the crisis of 2007-08, Robert Lucas claimed that macroeconomics’ “central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” Alas, practical purposes caught up with Lucas soon enough. The practicalities of uncertainty have now caught up with no-deal Brexiteers and the hubris of their certitude. Uncertainty is always lurking beneath the surface of an economy, threatening to break through and overwhelm if it hasn’t surfaced already. So too does Keynes lurk around economics and economists, sometimes easily forgotten and neglected, but continuously present, relevant and with something to offer – if one is interested.

Daniyal Khan is a PhD student in Economics at The New School.

References
Keynes, John Maynard. 1937. “The General Theory of Employment.” The Quarterly Journal of Economics 51: 209-223.

Lucas, Robert E. 2003. “Macroeconomic Priorities.” The American Economic Review 93, no. 1 (March): 1-14.

Skidelsky, Robert. 2003. John Maynard Keynes: 1883-1946: Economist, Philosopher, Statesman. New York: Penguin.

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