International Journal of Applied Economics and Econometrics, Volume 19, No.3, July-September 2011, pp.1-20
16 Pages Posted: 31 Jan 2011 Last revised: 1 May 2012
Date Written: January 30, 2011
J.M. Keynes and F. von Hayek had completely different views about the meaning of the term “uncertainty” as it was related to the concept of knowledge. Keynes viewed uncertainty through his concept of the weight of the argument, V, (a logical operator) and weight of the evidence, w (a mathematical variable). Uncertainty, U, is an inverse function of w so that one can write U=f (w). The existence of complete, relevant knowledge requires that w=1, where w is defined on the closed unit interval [0,1]. A degree of uncertainty occurs if w<1. A w<1 means that the relevant knowledge is not just incomplete but is missing and/or not available to any decision maker. A w=0 means that there is no relevant knowledge. Keynes viewed the case of 0
Hayek’s definition of uncertainty is that relevant knowledge is completely dispersed into small or tiny bits and pieces. All of the total information/knowledge is divided up among the set of decision makers. However, this dispersed knowledge, while scattered, is complete. Market prices concentrate this dispersed knowledge into a form that alert, savvy, knowledgeable entrepreneurs can understand and act on efficiently. Market prices concentrate the relevant knowledge so that uncertainty is eliminated for savvy, smart, alert entrepreneurs. This is equivalent to arguing that w =1 for alert entrepreneurs.
Keynes’s and Hayek’s definitions of uncertainty directly conflict with each other. Keynes argues that, especially in the case of producer goods, w, while w is not equal to 0, is little, flimsy, vague, ambiguous, small, fluctuating,and tiny. The prices of producer good DO NOT concentrate the knowledge so that savvy, alert entrepreneurs can act on it efficiently. Hayek argues that they do. The conflict over the meaning of uncertainty is insurmountable. The Hayekian outcome is not possible in a world of Keynesian or Knightian uncertainty.
Keywords: Uncertainty, Knowlwdge, Weight of Evidence, Keynes, Hayek
JEL Classification: B22, B12
Suggested Citation: Suggested Citation
Brady, Michael Emmett, Comparing J.M. Keynes’s and F. Von Hayek’s Differing Definitions of Uncertainty as it Relates to Knowledge: Keynes’s Unavailable or Missing Knowledge Concept Versus Hayek’s Dispersal of Knowledge Concept (January 30, 2011). International Journal of Applied Economics and Econometrics, Volume 19, No.3, July-September 2011, pp.1-20. Available at SSRN: https://ssrn.com/abstract=1751569 or http://dx.doi.org/10.2139/ssrn.1751569