A rejoinder to O'Donnell's critique of the ergodic/nonergodic explanation of Keynes's concept of uncertainty

Abstract:

O’Donnell’s attack on the ergodic/nonergodic approach to Keynes’s uncertainty concept is erroneous. Keynes’s produced a general theory by imposing fewer restrictive axioms than classical theory. Keynes’s explicitly attacked the classical theory’s axiom that an actuarially certain knowledge regarding the future is available to decision makers; thus Keynes’s analysis rejects the ergodic hypothesis. Keynes’s theory does not substitute the assumption that all economic activity must be nonergodic. Keynes’s theory simply permits an analysis where the payout for some economic decisions (e.g., “animal spirits” investment spending) are made under uncertainty, i.e., without actuarial knowledge of the future payout of such spending decisions. O’Donnell’s epistemological approach implicitly supports the laissez faire view that there should not be any government interference with operation of free product and financial markets for government interference policies may only worsen future outcomes in a world where humans including Keynes, economists, and government officials do not have the capability to understand how the economy works.

Key words::

• ergodic
• uncertainty
• ontological
• epistemological
• probability distribution

Notes

¹I am grateful to an unnamed referee who provided this information regarding the history of the development of ergodic stochastic theory and the reference to Jos Uffink’s demonstration that Keynes’s separation of uncertainty from probability had an effect on those who were studying ergodicity.

²In the General Theory, Keynes (1936, p. 152) continued this attack on the use of probability theory when he wrote “Nor can we rationalise our behavior by arguing that to a man in a state of ignorance errors in either direction are equally probable, so that there remains a mean actuarial expectation based on equi-probabilities. For it can easily be shown that the assumption of arithmetically equal probabilities based on a state of ignorance leads to absurdities.”

³These sentences do not appear in The Collected Writings of John Maynard Keynes, vol. 17. B. Schefold (1980, pp. 175–176) has called attention to the fact that these sentences do not appear in The Collected Writings.

⁴Even if ignorant due to some epistemological view of O’Donnell, Bayesian probability theorists insist these ignorant humans will calculate an actuarial expectation based on equi-probabilities (see note 2).

⁵Thus longitudinal lines on a global model of the Earth that are parallel at the equator will meet at the north and south poles of the globe.

⁶This mathematical proof is available at http://smat.epfl.ch/courses/theory/week2.ht.pdf.

Additional information

Notes on contributors

Paul Davidson

Paul Davidson is the founding coeditor of the Journal of Post Keynesian Economics.