Risk and uncertainty

Citation

Dow S (2019) Risk and uncertainty. In: Dimand RW & Hagemann H (eds.) The Elgar Companion to John Maynard Keynes. Cheltenham: Edward Elgar, pp. 255-61. https://doi.org/10.4337/9781788118569

Abstract
Uncertainty, as unquantifiable risk, was central to Keynes’s philosophy and economics, and continues to be relevant under modern conditions. For Keynes, knowledge is in general uncertain because of the organic nature of the subject matter; quantifiable risk is the special case. He developed a theory of how in practice we can still establish grounds for belief under uncertainty, drawing on weight of argument and multiple strands of reasoning, such that uncertainty is a matter of degree. The degree of uncertainty influences fundamentally the key variable in Keynes’s theory of effective demand: planned investment. Further, money plays a crucial role as the refuge from uncertainty, such that the rate of interest is a monetary rate. Applied to modern institutions and conditions, this theory is shown to explain the recent crisis.

Keywords
risk; uncertainty; Keynes; investment; liquidity preference; financial crisis

People

Professor Sheila Dow

Emeritus Professor, Economics