What Happened to Knightian (and Keynesian) Uncertainty Post WWII?: A Philosophic History

In this paper I argue that in the period after 1945 in the main currents of academic (technical) economics a commitment to-so-called Knightian uncertainty got displaced by two strategies: i) a simple displacement strategy (heavily promoted by Arrow and Samuelson), in which un-measurable uncertainty simply got treated as quantifiable risk; ii) a sophisticated displacement strategy (due to Alchian), which turned uncertainty into randomness understood as a stochastic process. The point of my narrative is to illustrate what a so-called “Kuhn-loss” looks like in practice. In the philosophy of science literature, insights of discarded theories that cannot be articulated or recognized by the new theory are instances of Kuhn-losses. A Kuhn-loss is often accompanied by the suppression of long-standing objections or even reliable alternative approaches. This is not merely of philosophic interest; Kuhn helped popularize a view of paradigms that allowed social-scientific practitioners to claim that they need not answer all objections. This paper proceeds as follows in three main sections: first, I briefly use a remarkable, recent self-study by the Netherlands Bureau for Economic Policy Analysis (CPB) as an exemplar of the re-discovery of uncertainty in the wake of the financial crisis of 2008 and, in particular, to illustrate how difficult it is for these policy economists to find a way to describe it with their conceptual apparatus. Second, I briefly sketch the pre-1945 approach to uncertainty. In doing so I make two main points: A) uncertainty was accepted by thinkers as politically and intellectually diverse as Frank Knight and John Maynard Keynes. B) I distinguish between epistemic and metaphysical versions of uncertainty. Third, I describe what happened with uncertainty in the context of the formal revolution in economics. I describe the simple displacement strategy in general outline. I then analyze the sophisticated displacement in some more detail. I argue that uncertainty got displaced by successor concepts that are neither identical to it nor to each other.