Rationality and expectations; Keynes’ analysis

 

Issues in economics: can uncertainty be allowed for fully by means of probability calculations?  What sort of account can be given of investment behaviour under conditions of irreducible uncertainty about the future; and what, if anything, constitutes rational economic action in such circumstances?

 

Philosophy employed: work on the problems of induction (Hume, Popper, Warnock, Goodman, Strawson) and on rational action.

 

Argument

 

  1. Analysis of Keynes’ position on the general basis for our decisions about the future, and for investment decisions in particular (see ‘structure diagram’).  Points of difference from Minsky’s and Shackle’s interpretations.
  2. Antecedents in Humean sceptical philosophy, with the latter’s special emphasis on:

i.                     absence of deductive guarantees about future events

ii.                   fact that we ‘have to’ reason, act, decide

iii.                  custom as the ‘great guide’ of life

  1. Keynes’ Treatise on Probability (non-numerical probabilities; difficulties in the Benthamite calculus of risk).
  2. Discussion of how far, in persevering in making future-regarding decisions despite the strength of sceptical arguments, we are acting sensibly, reasonably, rationally (Hollis on routine action; Lenz on following custom; Goodman on ‘projectibility’; Strawson on acceptance of inductive reasoning being part of what we mean by ‘reasonable’ or ‘rational’; Simon on procedural versus substantive rationality).  Some apparent inconsistencies in Keynes’ statements; sense in which he holds that ‘we do not know’ what the future will bring in the short and in the longer term; his remarks on conventions and stability.

 

Upshot: If Keynes is right about the limited scope for forecasting events with numerical probabilities, then it can be argued that it is rational (in a common sense of that term) to take custom as the ‘guide’ of economic life. (Or is a slightly weaker upshot all that’s warranted – that this isn’t irrational?)  (Compare Greenspan on the ‘irrational exuberance’ involved in the stock market bubbles)

 

Note: a longer version of much of today’s argument can be found in Meeks, ‘Keynes on the rationality of decision procedures under uncertainty’ in Thoughtful Economic Man (ed. Meeks, JGM), Cambridge University Press.

 

(Dr. J G T Meeks)