Tuesday, 17 June 2008

Caplan on radical uncertainty

Bryan Caplan takes the Austrian school to task again. He writes
Austrian economists often attack the mainstream for ignoring something they call "radical uncertainty," "sheer ignorance," or sometimes "Knightian uncertainty." A common Austrian slogan is that "Neoclassical economists study only cases where people know that they don't know; we study cases where people don't know that they don't know."
He then asks that someone from the Austrian school to do at least one of two things
1. Explain his point using standard probability language. What probability does "don't know that you don't know" correspond to? Zero? But if people really assigned p=0 to an event, than the arrival of counter-evidence should make them think that they are delusional, not than a p=0 event has occured.

2. Give a good concrete example.
These seem like good challenges. But what are good replies?


Matt B said...

What probability does "don't know that you don't know" correspond to? Zero?

I'd have thought the Austrian answer is: it isn't possible to calculate a probability without knowing how the size of the denominator. That is: we don't know what the set of future possibilities includes.

But for any positive number on the top line, the fraction will always exceed zero. So Austrians would probably scream "false premise!"

Seems like an odd question by Caplan. However uncertain the future is, that uncertainty will always be completely resolved by any given date in favour of something. I don't think Austrians deny that. So p=0 cannot be right.

Paul Walker said...

A neoclassical response could be; but we can form a subjective probability even if we can't form an objective one. Even if you don't know all the possible events you can still come up with subjective probabilities for the events you do know about.

Crampton said...

Bryan would always like to throw in a "5% chance something I haven't thought of happens".

I'm pretty sympathetic to Bryan. I cannot understand at all how Kirznerian entrepreneurship doesn't just reduce to search theory with a parameter on an individual's entrepreneurial efficacy that enters multiplicatively with search effort.