Uncertainty or certainty: What impacts the economy more?

[Loren Booda]

Which is worse for the economy: uncertainty or certainty?

 

[talk2glenn]

Defined how?

Speaking theoretically:

By definition, economics is the science of predictions based on observation and repeatability. Uncertainty can loosely be defined as outcomes which deviate from those predicted by theorem. When this happens, we must adapt existing or incorporate new theory until principle sufficiently predicts outcomes. In principle, then, theoretical uncertainty isn't "good" or "bad" per se; it's simply a matter of fact. There is always a degree of uncertainty in any scientific claim, but we have reasonable confidence in the theorems that we have given the data that we've collected.

Speaking behaviorally:

There is always a degree of uncertainty clouding the decisions that economic actors make; this is a function of scarcity. There is a shortage of time and resources that can be devoted to acquiring information, and a finite capacity for retaining it usefully. Even if the supply side of the information market were perfect (a simplifying principle generally held to be true in models - we assume that any desirable information is obtainable at some cost), these shortages mean that it can't all be had at the same time by everyone.

This uncertainty introduces risk, which is an economic bad. Before he will accept more risk (uncertainty), an actor will need to be compensated with more goods in order to hold welfare equal. For example, risk in the bond market is compensated with higher interest rates, and risk in the employment market is compensated with higher (if your the consumer) or lower (if your the supplier) wages.

Does that answer your question?

 

[Loren Booda]

Math with psychology - pretty cool. Thank you for your well-expressed introduction and definitions.

This is a science which I have not studied. Do some scientists actually consider economics mostly a non-science, or at best unpredictable - guessing the stock market, for instance?

Could these rules become somewhat obsolete or need major modification in today's economy?

 

[skilgannonau]

This is a science which I have not studied. Do some scientists actually consider economics mostly a non-science, or at best unpredictable - guessing the stock market, for instance?

Could these rules become somewhat obsolete or need major modification in today's economy?

Is it a science? Depends. Some people think it is, others don't (depends on who you ask really). If you define science by the criterion of prediction, using physics as a standard, then you would probably say no. But I think that is comparing apples with oranges. For example, in physics you have gravitation and electromagnetic force which gives you F=ma etc etc. There isn't any equivalent in the social world (as far as we know) which makes coming up with models to predict phenomena accurately much harder.

Does it matter if it is a 'science'? Personally I don't think so. The economics discipline fills a knowledge gap, people want to know why some things happen. Economics fills a need. The quest for accuracy in prediction is an never ending pursuit though.

Can economic models become 'obsolete or need major modification'? Most definitely. Again this is related to the lack of a set of fundamental force governing social interaction. Firstly, because economics lack a 'fundamental force' model or at least consensus in one framework, means economic models constantly evolve to reflect changes in understanding. Take for instances modern macroeconomics which was born in 1936 out of the Keynesian revolution, which was challenged by monetarism during 60s, both usurped by New Classical thinking from the 70s onwards, and which itself inspired New Keynesian economics during the 90s. Unless their is a fundamental breakthrough it's hard to see this changing. Secondly, the relationship between variables (that economists use in models) change over time, e.g. technology changes, even people and how they think change over time.

 

[skilgannonau]

Addendum:

In conclusion, I think the 'uncertainly' or lack of accurate prediction in economics stems from the lack of simple relationship governing social interaction i.e no 'fundamental force' in the social world.