Economics and politics - comment and analysis
15. August 2016 I Heiner Flassbeck I Economic Policy, Economic Theory

What J.M. Keynes meant by ‘We simply do not know.’

In these times of crisis and stagnation sometimes amazing things happen. The executive editor of the Financial Services of the Frankfurter Allgemeine, Gerald Braunberger, cited two extremely important quotations of John Maynard Keynes, not, as one could expect, in order to refute or denounce him, but as evidence of the state of the world that we are in (see here). It is clear that something is starting to slip. We expected this already for a long time, but previously it was not successful because all dissent was blocked by the inertia which is created by the forces of the powerful ruling doctrine.

With the words ‘We simply do not know,’ Keynes describes in his General Theory what he calls ‘objective uncertainty.’ There is simply no way in which one can foresee certain events or developments because they are objectively unknown. The past does not predict the future. This constitutes a fundamental break with the dominant neoclassical world view. The neoclassical doctrine assumed then and even today that there are observable regularities in the development of the economy, which, once they are detected, just have to run their course: policy is to be limited to minor interventions and corrections. Such is the power of, ultimately, the free market.

My friend and colleague Paul Davidson drew exactly here the dividing line between Keynesian and orthodox economics (for example in a book Economic Reform now!, which was published 2014 by Palgrave). Davidson says, and he is right, that the assumption that all uncertainty can be reduced to a known and objective probability distribution constitutes the core of the ‘panglossian optimism,’ which makes the prevailing the proponents of the neoclassical doctrine believe that free competition leads to socially optimal results (see page 15 of the above-mentioned book) .

Davidson criticizes also Paul Samuelson, who many still consider to be a Keynesian, because he wanted to build economic science on the the basis of what Davidson calls an ergodic statistical process or an ergodic axiom.

To accept the ergodic axiom is to make the claim that economics is just like the exact sciences. Economics should, in principle, be able to make completely correct predictions. Davidson uses the example of astronomy. Astronomer have no difficult in calculating the orbits of celestial bodies and they are capable of predicting the occurrence of an eclipse up to the exact second. ‘We simply do not know,’ on the contrary, means nothing else than that such economics and other social sciences are not capable of this. In economics and the other human sciences, we deal with processes that do not obey the ergodic principle. In all human action, there is always unpredictability.

When we understand this difference, we can easily see why, as Braunberger writes, “nine years after the outbreak of the financial crisis (…) the world economy (has) still not regained its dynamic growth.” His conclusion, however, is again based strictly on the ergodic axiom and it is therefore wrong :

“Aging societies, high private and public debts in an ever faster changing world and an economy which does not seem capable of stimulating technological progress all contribute to uncertainly in a situation of historically low inflation and interest rates. From a political perspective, the world is getting increasingly chaotic. People do not know what to expect.”

But nothing decisive ever falls from the sky, least of all technological progress. In a non-ergodic world, everything is primarily the result of human thought and action. Imagine the most simple case: the majority of policy-makers strongly believe in the ergodic axiom and they do not know the indissoluble connection between private debt and public debt. These uninformed decision-makers systematically interpret the world wrong and draw the wrong conclusions. Finally, this completely confuses a lot of people because expected results never occur.

When policy-makers try to cut government debt in a situation in which households save and businesses do not investment, the result can only be complete failure. Without proper insight into the real relationships and driven by the panglossian hope that, at the end, the great laws of the universe will take care of everything, you will only cut government spending and make the whole situation far worse. The world will, as a consequence become more chaotic, because policy-makers failed to produce the desired result.

Only open discussion, knowledge and understanding can lead us out of this misery.  But exactly the possibilities to discuss, recognise other points of view and to change one’s opinion are blocked for ideological reasons in Germany and throughout Europe. This is the breeding ground for ‘The Cult of Action for Action ‘s Sake,’ as the great Umberto Ecco once put it in his essay ‘Eternal Fascism.’