The Economic Consequences of G L S Shackle's Ignorance of Keynes's Theory of Probability, Uncertainty, and Decision Making

Abstract

G L S Shackle’s justification for creating his non-probabilistic, anti-inductive, deductivist, falsificationist, degree of disbelief, potential surprise, ascendancy function, focus gain-loss approach to decision making was founded on his misbelief that no theory of probability, including J M Keynes’s logical approach to probability, was capable of incorporating a residual hypothesis specifying an unknown additional possible course of action available to the decision maker, where the summation of the set of all probabilities, each probability being mapped in a one-to-one, onto correspondence with the set of all possible outcomes, would be less than 1. Shackle believed that all extant theories of probability required the assumption of additivity. This additivity condition, which would have to hold as a necessary condition in all theories of probability, including Keynes’s, meant that such theories could not deal with real uncertainty, which involved a lack of knowledge of some or all of the possible outcomes and/or consequences that might occur in the future.

Shackle completely failed in his lifetime to recognize that Adam Smith, George Boole and J M Keynes had already incorporated non additivity into their logical approaches to probability. For instance, Keynes had already succeeded in creating a non-linear, non additive decision theory when Shackle was 5 years old. Shackle’s ignorance of Keynes’s magnum opus, the 1921 A Treatise on Probability(TP), means that his attempt to introduce non linearity and non additivity into decision making was equivalent to trying to reinvent the wheel, since Boole and Keynes had already accomplished Shackle’s task long before Shackle entered grammar school. Shackle also presented a technically inferior, more difficult and unclear approach when compared to that developed by Boole and Keynes.

An examination of Shackle’s commentary on Keynes’s General Theory (GT) reveals that Shackle simply had no idea about what Keynes’s approach to probability, based on interval estimates and equality-inequality constraints, was all about. This has led to a situation where economists and philosophers in the 20th Century had no idea about how Keynes operationalized his logical approach to probability and decision making.

For instance, the American, English, and Italian Post Keynesian schools, along with their Institutionalist and heterodox allies, due to their ignorance of Keynes’s TP-GT approach, unwittingly substituted Shackle’s rival theory of uncertainty as their foundation instead of building on Keynes’s TP-GT approach. The consequences have been catastrophic. Shackle’s unsupported claim was that there was only either a state of complete uncertainty or certainty. Keynes, of course, had already correctly defined uncertainty in both the GT and TP as having different gradations based on his weight of the evidence analysis in chapters 6 and 26 of the TP. Keynes completely rejects Shackle.

The major consequence has been the complete rout of these schools’ economic and philosophical positions in their intellectual battles with the Benthamite Utilitarians, who completely control almost all university/college economics departments. The remnants of these Post Keynesian schools meet annually and lament their feebleness, lack of relevance and impotence. Of course, this was destined to happen since Shackle is simply not close to Keynes as either a theorist or technician. Four types of belated rear guard actions that the nearly extinct remnants of Post Keynesianism can consider, as possible alternative courses of action aimed at slowing down the neoclassical juggernaut in the future, are discussed - (a) admit their egregious errors and return to Keynes’s GT and TP, (b) ally themselves with Paul Krugman’s and Joseph Stiglitz’s use of imperfect and asymmetric information analysis, (c) build on the work of Daniel Ellsberg’s 1962 dissertation analysis of ambiguity, and/or (d) ally themselves with the econophysics followers of Benoit Mandelbrot and Nassim Nicholas Taleb, with their distinction between the wild risk of the Cauchy distribution versus the mild risk of the Normal distribution.

There are no other choices, although, given the emphasis these schools of thought place on the importance of one’s imagination, they can, of course, imagine themselves spending their last days daydreaming and creating all kinds of kaleidoscopic rival hypotheses in which they are successfully able to challenge the neoclassical schools of thought.

Keywords: probability, uncertainty, decision making, weight of the evidence, G L S Shackle

JEL Classification: B23, B30, B41, E12