Addressing Uncertainty in Economics and in the Economy

Abstract

This paper explores the way in which society in general and economists in particular deal with fundamental uncertainty. It is argued that uncertainty is interdependent with the evolution of institutions and behavior, including that designed to help society cope with uncertainty. While some mainstream theory does address uncertainty, it employs a much narrower concept than fundamental uncertainty. But generally, in spite of the evident increase in fundamental uncertainty during the crisis, most mainstream theory ignores it. While ignoring uncertainty can at times be a successful coping mechanism, it is argued that, as a blanket coping mechanism, ignoring uncertainty seriously limits the realism of theory and therefore also practice and policy. It is concluded that economists should embrace uncertainty by tailoring methodologies and theories to address it. This would provide a more fruitful basis for policy aimed at reducing uncertainty in the economy and also reducing our own uncertainty.