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by Yasuhiro Sakai (Author)
About the Author
Yasuhiro Sakai, Center for Risk Research, Department of Economics, Shiga University
About this book
This book critically discusses and systematically compares J.M. Keynes and F. H. Knight, two giants in the history of economic thought. In 1921 they both published apparently similar books on risk, probability, and uncertainty. However, while Knight's contribution on risk and uncertainty is now well recognized, Keynes's work on probability and uncertainty has been somewhat ignored in the shadow of his more famous The General Theory of Employment, Interest and Money (1936). Focusing on an earlier yet equally important volume by Keynes, A Treatise on Probability (1921), this book sheds a light on his outstanding ideas and the lasting influence on his later works, including The General Theory. There are few books that systematically discuss Keynes and Knight, although there are remarkable comparisons between Keynes's concept of probability and uncertainty and Knight's distinction between a measurable risk and a non-measurable uncertainty. This timely book unifies Keynes and Knight into a new, comprehensive approach to a very complex human behavior.
Brief contents
Part I History and Decision
1 How My Life and Work Have Been Influenced by J.M. Keynes and F.H. Knight: Introduction and Summary 3
1.1 The First Age of Uncertainty: Many Turbulent Events in the Twentieth Century 4
1.1.1 The Popular Book of J.K. Galbraith: Its Widespread Impact 4
1.1.2 The Fall of the Berlin Wall: Incredible Events beyond all Expectations 7
1.2 The Second Age of Uncertainty: The Return of the Old Masters and beyond 8
1.3 The Brief Outline of this Book 9
1.3.1 Part I: History and Decision 10
1.3.2 Part II: Market and Application 12
1.4 “Strong in the Rain”: Final Remarks 14
References 14
2 On the Economics of Risk and Uncertainty: A Historical Perspective 17
2.1 A Long and Rich History: An Introduction 17
2.2 The Economics of Risk and Uncertainty: The Six Stages of Development 19
2.2.1 The Initial Age as the First Stage: Greatness and Suffering of Blaise Pascal 19
2.2.2 The “B-A” Age as the Second Stage: Daniel Bernoulli and Adam Smith on Risk 23
2.2.3 The “K-K” Age as the Third Stage: Keynes and Knight on Uncertainty 27
2.2.4 The “N-M” Age as the Fourth Stage: Von Neumann and Morgenstern on Strategy and Game 28
2.2.5 The “A-S” Age as the Fifth Stage: The Arrow-Akerlof-Spence-Stiglitz Quartet on Imperfect Information 29
2.2.6 The Uncertain Age as the Sixth Stage: The Return of Keynes and Knight and Beyond 30
2.3 J.M. Keynes and F.H. Knight on the Role of Uncertainty in Human Behavior 30
2.4 The Spirit of Geometry Versus the Spirit of Fineness: Final Remarks 34
References 36
3 J.M. Keynes on Probability Versus F.H. Knight on Uncertainty: Reflections on the Miracle Year of 1921 39
3.1 1921 as a Miracle Year: An Introduction 39
3.2 Keynes on Probability and Uncertainty 41
3.2.1 The Meaning of Probability 41
3.2.2 Keynes’ Strange Chart of Probability: An Attractive Partial-Order Network 42
3.2.3 Keynes’ Theory of Induction: Reappraisal of Several Case Studies 45
3.2.4 Keynes on Uncertainty: The General Theory of Employment, Interest and Money 47
3.3 Keynes Versus Knight: With Special Reference to Risk, Probability, and Uncertainty 49
3.3.1 Keynes on Probability and Uncertainty 49
3.3.2 Knight on Risk and Uncertainty 51
3.4 Hicks on Decision and Probability: How Hicks Was Influenced by Keynes and Knight 54
3.4.1 Economics on the Edges of Both Sciences and History 54
3.4.2 Decision and Probability 55
3.5 Beyond Keynes and Knight: Concluding Remarks 58
References 59
4 Daniel Ellsberg on J.M. Keynes and F.H. Knight: Risk, Ambiguity, and Uncertainty 61
4.1 Daniel Ellsberg as a “Man in Paradox”: An Introduction 62
4.2 Uncertainties that Are Not Risks 63
4.2.1 Keynes and Knight: Their Similar yet Different Views 63
4.2.2 Arrow’s Skepticism About Knight on Uncertainty 66
4.3 Ambiguity and Risk 68
4.3.1 Keynes on the “Two-Color Urn” Problem 68
4.3.2 Ellsberg on the “Three-Color Urn” Problem 70
4.3.3 Alternative Ways to Resolve Ellsberg’s Paradox 72
4.4 Econs Versus Humans: Concluding Remarks 76
References 77
Part II Market and Application
5 Involuntary Unemployment Versus “Involuntary Employment”: J.M. Keynes and Beyond 81
5.1 J.M. Keynes, F.H. Knight, and Y. Takata: An Introduction 81
5.2 Involuntary Unemployment a la Keynes 84
5.2.1 A Very Terribly Written Book of Macroeconomics 84
5.2.2 The Original Framework: The Aggregate Supply and the Aggregate Demand 85
5.2.3 Involuntary Unemployment: A New Concept in the Labor Market 88
5.2.4 Takata on Keynes: Another Look at Involuntary Unemployment 91
5.3 “Involuntary Employment”: Another New Concept Beyond Keynes 93
5.3.1 Depression Economics: Old and New 93
5.3.2 Unhappy Workers Dispatched by Outside Agencies 94
5.3.3 N. Takahashi’s New Approach to “Involuntary Employment”: Looking Beyond Keynes 96
5.4 The Impact of Piketty’s New Book: Concluding Remarks 98
References 99
6 Frank H. Knight on Uncertainty and Profit: Manager Versus Entrepreneur 101
6.1 M. Bronfenbrenner as “Prof. Sharp Tongue”: Some Traces of F.H. Knight 101
6.2 Risk, Uncertainty, and Profit: Knight’s Theory of Trinity 104
6.2.1 How Uncertainty Is Radically Distinct from Risk 104
6.2.2 Three Types of Probability Situations 106
6.3 Enterprise and Profit 110
6.3.1 The Effects of Uncertainty on the Organization 110
6.3.2 Manager Versus Entrepreneur 111
6.4 Bronfenbrenner on “the Chicago School”: Final Remarks 112
References 113
7 Frank H. Knight on Market Thinking: Reflections on the Logic and Ethics of the Capitalist Economy 115
7.1 What Money Can and Cannot Buy: An Introduction 116
7.1.1 Michael Sandel on the Moral Limits of Markets 116
7.1.2 Gary Becker on the Economics of Marriage 117
7.1.3 F. H. Knight Versus M. Friedman: H. Uzawa’s Remark 118
7.2 The Ethics and Ideology of General Equilibrium Theory 119
7.2.1 The Life and Work of “Professor Fixed Point” 119
7.2.2 The Brouwer Fixed Point Theorem 121
7.2.3 The Equivalence Between the Walras Existence Theorem and the Brouwer Fixed Point Theorem 122
7.3 Welfare Implications of General Equilibrium 125
7.3.1 The Impact of the Cold War on the Economics Profession 125
7.3.2 Market Equilibrium and Pareto Optimality 127
7.4 F. H. Knight’s Strong Objections Against the Capitalist Economy 128
7.4.1 Knight’s Unique Position: A Pluralist Insight 128
7.4.2 Knight’s Strong Objections Against the Market Economy 129
7.4.3 Inheritance, Luck, and Effort: A Graphical Interpretation 131
7.4.4 Risk, Uncertainty, and Moral Hazard: A Graphical Analysis 133
7.5 The Disappointing Performance of the Economics Profession: 134
References 135
8 An Application to Nuclear Power Generation: From Daniel Bernoulli to J.M. Keynes and F.H. Knight 139
8.1 “Strong in the Rain”: Fukushima and Chernobyl 139
8.2 The Place of Risk and Uncertainty in Economics 141
8.2.1 People’s Concept of Risk in Daily Life 141
8.2.2 Individual Decision-Making Under Risk: The General Framework 142
8.2.3 The Allocation Problem of a Power Plant 143
8.3 Nuclear Power Generation: The Interactions of Economic and Psychological Factors 145
8.3.1 The Two Opposite Views: Pro and Con 145
8.3.2 Psychological Factors: Their Effects on Payoff Matrices and Probabilities 147
8.4 A Generalization of the Expected Utility Theory: J.M. Keynes and F.H. Knight 149
8.5 Selection of Appropriate Projects in the World of True Uncertainty 152
8.5.1 Paul Slovic and F.H. Knight: Beyond Measurable Risks 152
8.5.2 Application of the Maximin Rule to the Selection of Power Plants 153
8.6 Louis Pasteur Versus Torahiko Terada: Concluding Remarks 155
References 156
Series: Evolutionary Economics and Social Complexity Science (Book 18)
Pages: 157 pages
Publisher: Springer; 1st ed. 2019 edition (August 30, 2019)
Language: English
ISBN-10: 9811379998
ISBN-13: 978-9811379994
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