Re-Reading Keynes after the Crisis: Probability and Decision (original) (raw)
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Whither Keynesian probability? Impolite techniques for decision-making
This paper focuses on Keynes's understanding of individual decision-making under uncertainty and tries to address a question left mostly unexplained in the critical literature. On re-reading Keynes after the recent surge of interest induced by the financial crisis, a number of scholars have placed emphasis on well-known excerpts from the General Theory dealing with the " state of long-term expectations. " Keynes evidenced that future events conditioning economic activity in general, and investment in particular, " can only be forecasted with more or less confidence, " and that " the state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention, " while economic theory does not. In these instances, Keynes argued, people may fall back on " conventions, " which give them assurance that they are doing the right thing. As a result, " to behave in a manner which saves our faces as rational, economic men … we have devised for the purpose a variety of techniques. " But Keynes's main message is that under uncertainty " [a]ll these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. " For instance, conventional behaviour easily turns into herd behaviour, and financial markets are pervaded by alternating currents of euphoria and panic. So a question remains: how should Keynesian agents behave in markets continuously on the brink to fail? Are there, rephrasing Keynes, " impolite techniques " to be used under uncertainty or must we end up admitting that " we simply do not know, " and behave in a conventionally understood fashion? The paper offers a reading of Keynes suggesting that the thread going from Keynes's Treatise on Probability to the General Theory and its defence provides a positive analysis of decision-making under uncertainty, and argues that placing emphasis on this positive analysis simply means adhering to Keynes's long-standing commitment to interpret reasonable judgement in a (surely unconventional) probabilistic setup .
Keynes’s Treatise on Probability at 100 years: its most enduring message
SSRN Electronic Journal, 2021
On the occasion of the assessment of the enduring influence of Keynes's Treatise on Probability at 100 years, this paper focuses on its relevance for decision theory. The paper places emphasis on Keynes's introduction of the epistemic notion of probabilities that often are non-numerical, as a theoretical object intended to replace frequency probabilities. The paper argues that, as non-numerical probabilities make it possible to deal with uncertainty as if individuals were endowed with interval-valued probabilities, Keynes's 1921 critique of contemporary frequency probability theory turns out to be relevant also with regard to the yet to be established subjective probability theory. Although non-numerical probabilities were used by Keynes to criticize the contemporary application of probability to conduct, it must be acknowledged that, still today, they may constitute an appropriate tool for decision-making when confronting uncertainty, as he hinted at in his late 1930s correspondence with Hugh Townshend.
Economy & finance, 2020
The authors of this paper set out to answer the question of whether Keynes's logical theory of probability had an impact on his own economic thinking. The authors review criticisms that had been expressed previously; then, with regard to the applicability of the classical concept of probability to economics, they introduce the foundations of Keynes's logical theory of probability and the difficulties involved in its practical application. This is followed by an examination-within the Keynesian conceptual framework-of the role of uncertainty. The next sections are given over to an analysis of the role of "animal spirits", and of expectations, with a discussion of investment decisions made from positions of uncertainty. This train of thought focuses on the dilemma of whether there was continuity or a break, over time, in the role of probability in economics within the Keynesian conceptual framework. After this, the authors outline the competing 20 th century interpretations of probability embodied by the rearticulated version of relative frequency theory on the one hand, and the evolution of probability theory outside the economics paradigm on the other. The authors conclude with their assertation that probability theory did have a considerable impact on Keynes's thinking on economic theory.
Keynes on probability and decision: evidence from the correspondence with Hugh Townshend
In the literature on his philosophical ideas the correspondence Keynes had with Hugh Townshend over the just-published General Theory has attracted significant attention. Excerpts from the exchange have been used as a relevant piece of evidence by scholars who claim that Keynes came to reject rational decision criteria, thus focusing on the necessity for economic agents to form expectations on market sentiment, rather than fundamentals. This note concentrates instead on the whole correspondence and tries to show that a comprehensive reading of the exchange between Keynes and Townshend, unfolding through the years 1936-1938, suggests that its discussion thread was more technical than usually understood. It is argued that the correspondence provides evidence for the fact that Keynes still had a keen interest in a problem left unsolved in the Treatise on Probability, namely, the definition of an alternative to what he termed «normal ethical theory» in the Treatise and identified with «strict mathematical calculation» in the General Theory. The correspondence reveals that the issue of whether a useful decision rule can be devised under uncertainty still appears central in Keynes’s thought in 1938.
Probability and Arguments: Keynes's Legacy
Cambridge Journal of Economics, 2021
John Maynard Keynes's A Treatise on Probability is the seminal text for the logical interpretation of probability. According to his analysis, probabilities are evidential relations between a hypothesis and some evidence, just like the relations of deductive logic. While some philosophers had suggested similar ideas prior to Keynes, it was not until his Treatise that the logical interpretation of probability was advocated in a clear, systematic and rigorous way. I trace Keynes's influence in the philosophy of probability through a heterogeneous sample of thinkers who adopted his interpretation. This sample consists of Frederick C. Benenson, Roy Harrod, Donald C. Williams, Henry E. Kyburg and David Stove. The ideas of Keynes prove to be adaptable to their diverse theories of probability. My discussion indicates both the robustness of Keynes's probability theory and the importance of its influence on the philosophers whom I describe. I also discuss the Problem of the Priors. I argue that none of those I discuss have obviously improved on Keynes's theory with respect to this issue.
The Road Less Travelled: Keynes and Knight on Probability and Uncertainty
Social Science Research Network, 2022
Knight's risk/uncertainty distinction is reviewed in its original context as a contribution to the theory of profit. Knight's approach to probability is paralleled by Ludwig von Mises, as emphasised by recent developments in strategic entrepreneurship theory. Von Mises distinguishes between class probability (i.e., risk) and case probability (i.e., uncertainty) in contrast to the frequentist approach of his brother, Richard von Mises. Keynes's contribution to probability and uncertainty is reviewed, focusing on his logical theory of probability in A Treatise on Probability which he more fully contextualised subsequently in the General Theory. Keynes's fragmentary later philosophical writings are reviewed to provide some insight into the contextual issues encountered. The key contributions of Knight and Keynes are summarised as signposts for 'The Road Less Travelled'. The possibilities of a Keynesian-Knightian synthesis as a way forward are considered by comparing these signposts. However, it is concluded that, although there is some common ground between Knight and Keynes, there are fundamental differences particularly associated with the definition of confidence that preclude any meaningful synthesis.
Researchgate , 2023
Hishiyama's 1969 article laid out a logical plan for the economics profession to come to terms with Keynes's A Treatise on Probability and the connections between it and Keynes's General Theory. The plan was direct, clearcut, unambiguous and uncomplicated. Economists needed to actually read Keynes's A Treatise on Probability and examine to what extent Keynes's applications of probability, weight, expectations, uncertainty, confidence and decision making in the General Theory could be mapped from the A Treatise on Probability into the General Theory. Unfortunately, this plan, straightforward as it was, was quickly derailed by Donald Moggridge ,the editor of the CWJMK. Moggridge’s fateful, horrendous and incomprehensible decision, to place at the very front of the 1973 edition of the CWJMK, Volume 8, Brathwaite’s editorial foreword,pp.xiv to xxii, completely sabotaged the chance that any economist had of studying Keynes’s Logical theory of probability from an unbiased position.This was due to the fact that the editorial foreword by Braithwaite presented, in disguised and camouflaged form ,the intellectually worthless and baseless claims made by Frank P Ramsey in his reviews of 1922 and 1926. Thus, all students, especially those at Cambridge, England were treated to an assessment of Keynes’s A Treatise on Probability that presented Keynes’s work as being out of date, logically flawed and erroneous. Part II of the A Treatise on Probability, correctly described by Emile Borel in his first 1924 review, as being the heart of Keynes’s logical theory of probability, was dismissed as being worthless by Braithwaite. The result of Moggridge’s foolishness and ignorance was that, instead of studying the A Treatise on Probability, based on the merits of what Keynes had actually written and accomplished or by reading the reviews of Bertrand Russell (1922),F Y Edgeworth (1922), C D Broad (1922), and the second reviews of E B Wilson (1934) and E. Borel (1939),all economists ,who were studying Keynes’s logical theory ,were diverted onto the false path of seeking out how to simultaneously try to connect the A Treatise on Probability to the General Theory while also, at the same time, trying to patch up what they had been led to believe were the many seriously flawed parts of Keynes’s analysis. The result was that F P Ramsey’s completely false claims, about supposed epistemological, methodological, logical and philosophical errors in Keynes’s work, became unanimously accepted as being a correct summary of Keynes’s logical theory of probability by all economists in the 20th and 21st centuries working either on Keynes’s A Treatise on Probability and/or on the linkages between the A Treatise on Probability and the General Theory. Of course, Ramsey’s view of Keynes's work on probability is ludicrous, preposterous and incomprehensible, as all of Ramsey’s claims turn out, after a careful and detailed examination and analysis is made of all of the 35 paragraphs that comprise the material in Ramsey’s 1922 and 1926 papers dealing with Keynes, to be completely worthless and total nonsense. The result is that the economics profession now finds itself back in the position it originally found itself in in 1969,but with a much more difficult ,and perhaps insurmountable and impossible ,task before it ,since everything written on Keynes’s logical theory of probability , as presented by Keynes in the A Treatise on Probability , has been turned into a God awful ,bloody, intellectual mess of confusion, based on the severely erroneous Ramsey reviews, by economists .This means that everything written on Keynes’s A Treatise on Probability between 1975 ,starting with E . Weintraub’s HOPE article, and ending in 2023 with Clarke’s book, published by the University of Cambridge Press and Gerrard’s 2023 article, in the January issue of the Cambridge Journal of Economics ,needs to be retracted and removed from the academic literature .There is no article or book that has been published in any economics journal or university press since 1975 that is not severely marred by the references made to Ramsey’s reviews. The reference to Venn is Venn ,J.(1888,3rd ed.).The Logic of Chance.New York,Macmillan.