The role of uncertainty in economics.

2. October 2011 by Publius.

It is time to remember Carl Menger. He is usually noted for founding the Austrian school of economics. His critical discovery, however, was far more basic. His whole system was based on uncertainty; like Kurt Vonnegut in a later time, he believed that nobody knows what is really going on. The German economists, whom he opposed, followed the German philosophers Kant, Hegel, and Nietzsche and accepted their belief in the rational superman who could, in fact, know everything.

This is the fundamental difference in belief that leads, in those who follow Menger, to free markets while those who follow the Germans are inevitably lead to some form of socialism.

So, today this philosophical difference boils down to this: for the Keynesians to be correct, it must be possible for the rational superman to exist, and, in addition, our leaders must be numbered among them. Whatever you believe about the possible existence of supermen, I submit that you cannot possibly believe that the world leaders, whether political, social, or economic, are among them.

Menger’s solution, on the other hand, requires that economic decisions are essentially chaotic. Menger lived far before chaos theory was understood, or even proposed,  but had the mathematical tools been available to him, he would have embraced chaos theory. His belief in uncertainty led him to believe that it was best that economic decisions where best distributed over large numbers. Had he understood chaos, he would have understood that they must be so distributed.

Coming soon - the role of Nash equilibria in economic decisions.

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