On “Natural” Uncertainty: The Philosophical Underpinnings of Uncertainty in Economics, with Special Reference to Knight and Strauss

Abstract

While current discourse has failed and will continue to fail to adequately integrate uncertainty into economic theory, this work explores how political philosophy can provide a better understanding of uncertainty. Specifically, political philosophy can answer most of the questions posed by Frank Knight's proposition of uncertainty in economic theory. In elaborating on Knight's reservations relating to Pragmatism, this work suggests that Knight's approach might well be revised to more adequately embrace the recent developments in American philosophy, especially those suggested by Leo Strauss. Significantly, it can be argued that Strauss provides a stronger foundation for the proposition of uncertainty in economic theory than Knight's application of Pragmatism around 1921. An understanding of uncertainty, which is based on Strauss, might be referred to as “natural” uncertainty, and this form of uncertainty may provide a point where political philosophy might begin to gain some traction within economic theory.

Keywords:

• uncertainty
• Knight
• Strauss
• manliness
• pragmatic philosophy
• Aristotle
• economics

Notes

Summers recognizes the influence of uncertainty from a fairly orthodox viewpoint, and that includes the recognition Knightian uncertainty, and there is no special influence of Knight on the work of Summers. As this work shows, Marshall is the founder of orthodox economics, to which Summers generally refers (Marshall ([1890] 1961), and is the main author that Knight engages with in his most famous work, Risk, Uncertainty and Profit ([1921] 1985), to develop his argument for the existence of uncertainty.

See Tarullo (2009). Usually, “positive” science refers, among other things, to analysis or theories which only attempt to describe how things exist, in contradistinction to how things “should” be. “Positive” also refers to the idea of ‘value free’ science, as pioneered by Weber, apart from others. Here, the opposite of positive becomes “normative.”

Mansfield provides a detailed description of manliness in his recent book on the topic (Mansfield 2006). As this work will indicate, manliness is irrelevant for modern social science, as chance or uncertainty, is seen to be “overcome” by the “process” of scientific progress (Mansfield 2006, x).

(Strauss 1964, 42). See also Mansfield (2006), where the discussion of manliness addresses decision-making under uncertainty. Contrast the discussion with Nietzsche [1884] 1956, [1886] 1993, [1887] 1996, 1910.

A selection of the literature on Knight is as follows: (i) Boudreaux and Holcombe (1989), (ii) Emmett (1989, 1994a, 1999a, 1999b, 1999c), (iii) Gonce (1972, 1994), (iv) Gordon (1974), (v) Graham (1947), (vi) Hammond (1991), (vii) Johnson (1952), (viii) Kern ([1985] 1988, 1987), (ix) Le Roy and Singell (1987), (x) Razeen (1997), (xi) Runde (1998a, 1998b, 1998c), (xii) Schweikhardt (1988), (xiii) Shils (1981), and (xiv) Wick (1973).

Uncertainty is much more than a “technical problem” in modern economics. Rather, modern economics remains unable to incorporate uncertainty, as the philosophical system it relies on is largely the same as Marshall initially provided, which is a largely Hegelian system of philosophy.

In the midst of the technological and scientific overthrow of the humanities, Knight supported the establishment of The Committee on Social Thought at the University of Chicago, as founded in 1941, by John U. Nef, Frank Knight, Robert Redfield, and Robert M. Hutchins.

This article can be misconstrued as a “pairing” of two authors, yet it is about subject matter, as opposed to authors. Specifically, the subject matter is uncertainty, and the use of a philosophical position to drive debate and analysis. Here, Knight does not pluck uncertainty out of the air, but bases his explanation on a philosophical system that he had real concerns about; American Pragmatism as mainly proposed by Dewey. Strauss had similar concerns to Knight, about Pragmatism, yet these concerns are driven from an entirely different philosophical position, where uncertainty is not something foreign to the philosophical system, but represents a cornerstone of the philosophical system (Cropsey ([1963] 1987),

Breit and Ransom (1982), Champernowne (1969), Hands (2006), Dewey, D. (1990), Nash (2003). See also attempts to avoid Knightian uncertainty altogether (Ellsberg 1961).

A detailed consideration of the problems with the use of Pragmatic philosophy by Knight is beyond the scope of this work.

Like Hegel's view of the march of history towards ever greater freedom, Marshall depicts the evolution of economics as an ever continuing drive towards greater freedom in enterprise and trade (Groenewegen 1990, 78). Groenewegen argues that while Marshall took his bearings from the Idealist philosophy of Hegel, he gradually reduces reliance upon it (Groenewegen (1990, 80); see also Hicks (1931)).

(Dewey, J. [1916] 1960, 1929; 23, Knight [1921] 1985, 22–50; Boisvert [1988] 1996). Neither the author, nor Knight is uncritical of Dewey (Dewey, J. ([1882–1888] 1967, [1895–1898a] 1967, [1895–1898b] 1967). Knight's criticism of Dewey is reasonably well known, as well as that of Strauss (Strauss [1959a] 1988, 279–81; Bloom 1990a, 1990b, 1987, 1993). See also James ([1890] 1981, 1897, 1909); Peirce (1868a, 1868b, 1958); Platt (1908; 1909); Rockefeller (1991).

Dewey comes to a somewhat similar conclusion to that of Nietzsche, by rejecting German Idealist philosophy (Weber ([1948] 1968, 302); Nietzsche ([1887] 1996, 98, essay 3, para. 12); Bloom (1987, 195); and Dannhauser ([1963] 1987, 845).

Accordingly, the Humean (Hume [1739] 1985; 1748), as well as the German Historical School, focus on prediction, based on past experience, is questioned Dewey, J. ([1903–1906] 1976, 1915).

See also, Nash (2003) and Mirowski (1987). Also, see Dewey J. (1939).

Dewey, J. ([1916] 1960, 68); Knight ([1921] 1985, 202–3); Rorty (1979).

Marshall ([1890] 1961, [1919] 1920; Nash and Rybak (2009); Nash (2003).

Specifically, Knight defines uncertainty as follows,

We shall accordingly restrict the term “uncertainty” to cases of the non-quantitative type. It is this “true” uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition (Knight [1921] 1985, part one, ch.1, para. 26).

In selecting some of Knight's criticisms of Pragmatic philosophy, the author does not claim that this represents an exhaustive list or that it expresses any ranking of these problems (Hands 2006).

Misunderstanding of Knight was not confined to those distant from Knight but was evident even in his students. For example, Milton Friedman authored Essays in Positive Economics (1953).

An adequate treatment of Strauss is beyond the scope of this work, as Strauss, and others, have already provided detailed accounts (Strauss [1936] 1963, 1952, 1953, [1959a] 1988, [1959b] 1989, 1964, 1970; Bloom 1987, 1990b, 1993; Duhs, 2006; Mansfield 2006).

Others have summarized the work of Strauss in much more detail, so the following is merely a brief sketch of some of the ideas of Strauss.

Allan Bloom elaborates on Strauss on many memorable occasions (Bloom 1987, 284).

Hobbes, T. (Chapter XIII, [1651] 1950); see also Strauss ([1936] 1963).

Also, Smith was important (Cropsey [1963] 1987).

Strauss argues that Hegel finds a fundamental rationality in the historical “process.” where man drags himself upwards, towards a more perfected state, by the use of universal ideals being met (Strauss [1959b] 1989, pp. 89–94). For a discussion of Idealist philosophers, see the following: (i) Flay 1984, (ii) Hassner ([1963a] 1987, [1963b] 1987), (iii) Scruton ([1982] 1997), (iii) Pippin (1991, 1993, 1996), and (iv) Singer ([1983] 1997). In addition, see Hegel ([1821] 1967, [1837] 1956) and Kant ([1787] 1929, [1790] 1997). Compare this philosophy to that of the early modern philosophers, such as Machiavelli ([1513] 1985, [1517] 1996), Hobbes ([1651] 1950), Rousseau ([1762a] 1968, [1762b] 1991; [1770] 1964), and Hume ([1739] 1985, 1748). Also see Gildin (1983). In addition, compare this Idealist philosophy to the critique by Schopenhauer ([1819] 1969, [1844] 1969) and Nietzsche (Nietzsche [1884] 1956, [1886] 1993, [1887] 1996). In interpreting Nietzsche, one should be careful to refer to commentary from many sources. For example, refer to the following: (i) Dannhauser ([1963] 1987), (ii) Deleuze ([1962] 1983), (iii) Hollingdale (1995), (iv) Tanesini (1995), and (v) Tanner ([1994] 1997). In addition, when considering the relative merits of Idealist philosophy, bear in mind the contrast between the modern philosophers and the ancient philosophy of Plato, and others (Plato 1991). Strauss provides an elaboration of this contrast (Strauss (1952). More recently, others have added to this Straussian interpretation, such as Bloom ([1963] 1987, 1987), Mansfield ([1991] 1993), and Fortin (1996). Compare this Straussian interpretation to that of the existentialists (Heidegger 1971, Satre 1956). In addition, compare and contrast the enclosed analysis, especially the Idealist philosophers, to the struggle evident in German economics during the nineteenth century, which might be partly attributable to the discussion of Idealist philosophies (Herbst [1965] 1972, 1995; Hodgson 2000).

In other words, the quest for certainty, overcame the need for a “normative” or moral dimension, allowing the Pragmatists to complete the final engineering project; the social engineering of mankind, using the physical sciences as a means of establishing a new, more perfected, state (Strauss [1959b] 1989, pp. 94–98; Dewey, J. 1929).

Knight also had a serious interest in Weber, as Knight translated Weber's, General Economic History ([1927] 1950); a well-regarded translation.

Here, Strauss critiques Max Weber's epistemology, and his creation of the fact-value distinction, among other things.

In this respect, Bloom interprets Dewey and the Pragmatists to be naïve optimists, with regard to the possible application of positive science to the humanities (Bloom 1987, 194–5).

Arrow (1950). Further elaboration on Arrow is outside the scope of this work. A social welfare function (SWF) is an ordered set of aggregated preferences for a grouping of economic actors, which is predicated on the basis that this grouping, or society as a whole, is capable of coherently ranking one state of affairs by reference to others. Arrow defines “coherence” according to a series of assumptions. For example, a governmental body may rank the maximization of employment above the maximization of shareholder value in the case of a takeover situation. The SWF can be thought of as a means of as operationalizing and testing notions of the “public good.” See also Arrow (1948, [1951a] 1963, [1951b] 1971, 1970) and Rybak (2010). Sen (1966). While further elaboration of Sen is outside the scope of this work, the following might be of some assistance: Sen (1970, 1979, 1985, 1986, 1988, 1993, 1995, 1999, 2009). A discussion of Sen is not within the scope of this work. Some correctly interpret Sen as a revision of Rawls, who neatly avoids the issues that he needs to address, when dealing with the tradition of political philosophy (Bloom 1975, 662). Duhs also insightfully comments on this important and misunderstood issue (Duhs 2006, 138; 2008, 177).

Some of the other works by Knight, apart from RUP, are as follows: Knight (1913a, 1913b, 1915, 1916, 1920, 1920a, 1920b, 1926, 1932, [1933] 1951, 1935, 1935a, 1937, 1940, 1943). See also Nash and Rybak (2009); Cropsey ([1963] 1987); Hardt (2009); and Salter and Spencer (2000). Coase (1937). See also Coase (1960, [1988] 1991, 1994); Cowling and Sugden (1998); Demsetz (1997). Other explanations of the firm are as follows: Alchian and Demsetz (1972), Dugger (1983), Hart (1990, 1995), Hart and Holmström (1987), Hart and Moore (1990, 1999), and Williamson (1975, 1981, 1998, 2000). Specifically, Coase effectively contradicts his own methodology, by failing, in a most serious way, to consider the assumptions on which his own contribution is created (Coase 1937, 386). The issue of whether Pragmatic philosophy was important to Knight has been dealt with elsewhere (Nash 2003). However, by way of summary, it can be noted that Pragmatic philosophy generally refers to the work of the following: (i) Dewey, J. ([1882–1888] 1967, 1891, [1895–1898a] 1967, [1895–1898b] 1967, [1903–1906] 1976, [1927] 1987, 1929), (ii) James ([1890] 1981, 1897, 1909), and (iii) Peirce (1868a, 1868b, 1958). While this list does not represent a complete collection of Pragmatic philosophy, it should be emphasized that this work makes no claims about which philosopher was the more dominant or important in terms of Pragmatism, because this topic is covered in extensive literature. For an analysis of Dewey see the following: (i) Boisvert ([1988] 1996), and (ii) Rorty (1979). While Knight is not exactly candid about the origin of his theory of knowledge, he does initially confirm the general influence of Pragmatism in a footnote to RUP. As Knight notes,

While debate about the relative importance of perfect competition, to Marshallian economics, can be anticipated, the reference to perfect competition still exists. In addition, one should also bear in mind the influence of Spencer upon Marshall (Hodgson 2000).