Adam Smith on Uncertainty, Degrees of Uncertainty and Public Policy Impacts

26 Pages Posted: 4 Aug 2014

See all articles by Michael Emmett Brady

Michael Emmett Brady

California State University, Dominguez Hills

Date Written: August 3, 2014

Abstract

Smith was the first economist and/or philosopher to understand how uncertainty; (a) was different from risk calculations based on fair/unfair lotteries where there was a large amount of evidence; (b) would have to be represented mathematically by intervals; (c) that uncertainty came in degrees or gradations; (d) that the mathematical theory of probability would at best be a limiting case that could be used only when there was a stable, highly repeatable phenomenon being investigated; and (e) that uncertainty would have negative impacts on an economy.

Smith and Keynes both understood the negative impacts that could result from constantly changing/attempting to change the tax code in order to generate increased government tax revenue and/or spending. Uncertainty about future tax rates would negatively impact future levels of capital investment and output.

Keynes‘s support for using an activist, expansionary fiscal policy, centered on increased government spending, was limited to the case of a depression where the Smith Keynes injunction against allowing the banking system to make loans to speculators for debt leverage had not been properly enforced.

Keywords: Uncertainty, interval estimates, lower bound, JM keynes, decision making

JEL Classification: B12, B30, B40

Suggested Citation

Brady, Michael Emmett, Adam Smith on Uncertainty, Degrees of Uncertainty and Public Policy Impacts (August 3, 2014). Available at SSRN: https://ssrn.com/abstract=2475523 or http://dx.doi.org/10.2139/ssrn.2475523

Michael Emmett Brady (Contact Author)

California State University, Dominguez Hills ( email )

1000 E. Victoria Street, Carson, CA
Carson, CA 90747
United States

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