A Good Economist Knows What He Doesn’t Know

I’ve been banging the “uncertainty” drum (as opposed to “risk”) for a few months now (see here, here, here, and here):

In his latest book, Keynes’s biographer Lord Robert Skidelsky argues that you just can’t insure against some risks. In fact, some expectations shouldn’t be called risks at all. One of Keynes’s least appreciated contributions, also voiced by his contemporary Frank Knight, was the importance of uncertainty, events in the future that we can’t measure or predict because we don’t have enough information or computational capacity.

Markets depend on prices, and prices depend on information, rational behavior, and predictable distributions of random shocks. When those foundations break down, governments are the only institutions that have the ability to restore order, from central banks injecting liquidity during credit crunches to regulators preventing or monitoring new innovations (be they financial derivatives or oil rigs) with uncertain social costs.

One important example that I haven’t spent enough time talking about is…   Continue reading “A Good Economist Knows What He Doesn’t Know”