Table Of ContentEvolutionary Economics and Social Complexity Science 18
Yasuhiro Sakai
J.M. Keynes
Versus
F.H. Knight
Risk, Probability, and Uncertainty
Evolutionary Economics and Social Complexity
Science
Volume 18
Editors-in-Chief
TakahiroFujimoto,Tokyo,Japan
YujiAruka,Tokyo,Japan
TheJapaneseAssociationforEvolutionaryEconomics(JAFEE)alwayshasadhered
to its original aim of taking an explicit “integrated” approach. This path has been
followed steadfastly since the Association’s establishment in 1997 and, as well,
since the inauguration of our international journal in 2004. We have deployed an
agendaencompassingacontemporaryarrayofsubjectsincludingbutnotlimitedto:
foundations of institutional and evolutionary economics, criticism of mainstream
viewsinthesocialsciences,knowledgeandlearninginsocio-economiclife,devel-
opment and innovation of technologies, transformation of industrial organizations
andeconomicsystems,experimentalstudiesineconomics,agent-basedmodelingof
socio-economic systems, evolution of the governance structure of firms and other
organizations, comparison of dynamically changing institutions of the world, and
policy proposals in the transformational process of economic life. In short, our
starting point is an “integrative science” of evolutionary and institutional views.
Furthermore,wealwaysendeavortostayabreastofnewlyestablishedmethodssuch
as agent-based modeling, socio/econo-physics, and network analysis as part of our
integrativelinks.
More fundamentally, “evolution” in social science is interpreted as an essential
key word, i.e., an integrative and /or communicative link to understand and
re-domain various preceding dichotomies in the sciences: ontological or epistemo-
logical,subjectiveorobjective,homogeneousorheterogeneous,naturalorartificial,
selfish or altruistic, individualistic or collective, rational or irrational, axiomatic or
psychological-based,causalnexusorcyclicnetworked,optimaloradaptive,micro-
ormacroscopic,deterministicorstochastic,historicalortheoretical,mathematicalor
computational, experimental or empirical, agent-based or socio/econo-physical,
institutionalorevolutionary,regionalorglobal,andsoon.Theconventionalmean-
ingsadheringtovarioustraditionaldichotomiesmaybemoreorlessobsolete,tobe
replaced with more current ones vis-à-vis contemporary academic trends. Thus we
arestronglyencouragedtointegratesomeoftheconventionaldichotomies.
These attempts are not limited to the field of economic sciences, including
management sciences, but also include social science in general. In that way,
understandingthesocialprofilesofcomplexsciencemaythenbewithinourreach.
Inthemeantime,contemporarysocietyappearstobeevolvingintoanewlyemerg-
ing phase, chiefly characterized by an information and communication technology
(ICT) mode of production and a service network system replacing the earlier
established factory system with a new one that is suited to actual observations. In
the face of these changes we are urgently compelled to explore a set of new
properties for a new socio/economic system by implementing new ideas. We thus
arekeentolookfor“integratedprinciples”commontotheabove-mentioneddichot-
omiesthroughoutourserialcompilationofpublications.Wearealsoencouragedto
create a new, broader spectrum for establishing a specific method positively inte-
gratedinourownoriginalway.
Editors-in-Chief
TakahiroFujimoto,Tokyo,Japan
YujiAruka,Tokyo,Japan
EditorialBoard
SatoshiSechiyama,Kyoto,Japan
YoshinoriShiozawa,Osaka,Japan
KiichiroYagi,Neyagawa,Osaka,Japan
KazuoYoshida,Kyoto,Japan
HideakiAoyama,Kyoto,Japan
HiroshiDeguchi,Yokohama,Japan
MakotoNishibe,Sapporo,Japan
TakashiHashimoto,Nomi,Japan
MasaakiYoshida,Kawasaki,Japan
TamotsuOnozaki,Tokyo,Japan
Shu-HengChen,Taipei,Taiwan
DirkHelbing,Zurich,Switzerland
Moreinformationaboutthisseriesathttp://www.springer.com/series/11930
Yasuhiro Sakai
J.M. Keynes Versus
F.H. Knight
Risk, Probability, and Uncertainty
YasuhiroSakai
DepartmentofEconomics
CenterforRiskResearch,ShigaUniversity
Hikone,Shiga,Japan
ISSN2198-4204 ISSN2198-4212 (electronic)
EvolutionaryEconomicsandSocialComplexityScience
ISBN978-981-13-7999-4 ISBN978-981-13-8000-6 (eBook)
https://doi.org/10.1007/978-981-13-8000-6
©SpringerNatureSingaporePteLtd.2019
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This book is dedicated to the memory of
Prof. Lionel W. McKenzie
Prof. Hirofumi Uzawa
Prof. Takashi Negishi
Toko, Tora, and Nao
Preface
“Naturaldisastersaremostlikelytovisituswhentheyareleastexpected.”Thiswas
a famous maxim told by Torahiko Terada (1878–1935), a distinguished Japanese
scientist and essayist. Even after he passed away, his witty remarks have been
reproducedsomanytimesandareveryinfluentialeventoday.
AccordingtoTerada,amaninthestreethasaninclinationtoforgetinconvenient
truthssuchasearthquakes,wildfires,tsunamis,andvolcaniceruptions.Wisewords
arenotwelcometotheear.However,thenatureitselfwillneverforgetthosetruths
as if it would laugh at human nature of negligence and inaction. When natural
disasters are least expected and almost out of our memory, they tend to visit us,
thusconstantlyalarmingtheferocityofnature.Inshort,afearfulnaturaldisasterhas
atendencytocometotheforgetfulhumanmind.
Wemustrecallthatmanydisastersarealsoman-madeinmoderntimes.Among
man-made great damages are wars, epidemics, oppression, depression, mass
unemployment, inequality, and hyperinflation. Speaking of myself, a large-scale
airraidduringtheSecondWorldWarandanausterelifeduringandjustafterthe
wararestillretainedinmymemory.Withthelapseoftime,however,thenumber
of older generations will decrease, and the one of younger generations will
increase. As a result, the miserable memory of war times tends to gradually fade
awayamongthepeople.
Thethemeofthisbookissimpleandstraightforward.Inthehistoryofeconomic
thought, it is quite unfortunate that the serious problems associated with risk,
probability, and uncertainty have been rather neglected so far. We have to point
out, however, the presence of the two superstars who have energetically discussed
the impact of risk and uncertainty on economic and human activities. They are
J.M.Keynes(1883–1946),whowasbornwithasilverspoonintheOldWorld,and
F.H. Knight (1885–1972), who wasbornwith awoodenspoonintheNewWorld.
They have very different backgrounds in many ways. It is in 1921, however, that
bothofthempublishedapparentlysimilarbooksofriskanduncertainty.
Keynesleftthefollowingimpressivesentencetousin1921:“Inmostbranchesof
academic logic, such as the syllogism or the geometry of ideal space, all the
ix
x Preface
arguments aim at demonstrative certainty. They claim to be conclusive. But many
otherargumentsarerationalandclaimsomeweightwithoutpretendingtobecertain.
InMetaphysics,inScience,andinConduct,mostofthearguments,uponwhichwe
habitually base our rational beliefs, are admitted to be inconclusive in a greater or
lessdegree.Thusforaphilosophicaltreatmentofthesebranchesofknowledge,the
studyofprobabilityisrequired”(Keynes,ATreatiseonProbability,1921,p.3).
SowroteKeynesalmost100yearsago.Unfortunately,Keynes’scontributionon
probabilityanduncertaintyhasbeenmoreorlessunderestimatedinthedarkshadow
ofhismoreshiningbook,TheGeneralTheoryofEmployment,InterestandMoney
(1936). It should be noted, however, that in his 1937 article published 1 year later
than the abovementioned book, he repeatedly emphasized an important role of
uncertainty played in economic decisions: “By ‘uncertain’ knowledge, let me
explain, I do not mean merely to distinguish what is known for certain from what
isonlyprobable.Thegameofrouletteisnotsubject,inthissense,touncertainty....
Ortheexpectationoflifeisonlyslightlyuncertain.ThesenseinwhichIamusing
thetermisthatinwhichtheprospectofaEuropeanwasisuncertain,orthepriceof
copper... About these matters there is no scientific basis on which to form any
calculable probability whatever. We simply do not know” (Keynes, “The General
Theory of Employment, Interest and Money,” Quarterly Journal of Economics,
February1937).
As Keynes has noted, we live in the world of uncertainty. We simply do not
know.Undoubtedly,suchphilosophicalviewofKeynesonhumanconductandthe
worldaffairswasalsosharedbyhiscontemporaryman,Knight.Indeed,Knight,an
American hardheaded philosopher who had never met the British gentleman
Keynes, wrote the following sentences in 1921: “Uncertainty must be taken in a
sense radically distinct from the familiar notion of Risk, from which it has never
been properly separated. The term ‘risk’ as loosely used in everyday speech in
economic discussion...are categorically different ...It will appear that a measurable
uncertainty, or ‘risk’ proper, as we shall use the term, is so far different from an
unmeasurable onethatitisnotineffect anuncertaintyatall.Weshallaccordingly
restrict the term ‘uncertainty’ to cases of the non-quantity type. It is in this ‘true’
uncertainty,andnotrisk,ashasbeenargued,whichformsthevalidtheoryofprofit
andaccountforthedivergencebetweenactualandtheoreticalcompetition”(Knight,
Risk,UncertaintyandProfit,1921,pp.19–20).
So wrote Knight almost 100 years ago. It is in the miracle year of 1921 that
KeynesandKnightpublishedapparentlysimilar,butsubtlydifferent,booksonthe
economics of risk, probability, and uncertainty. It is really interesting to see how
Keynes’ concept of probability and uncertainty can be compared to Knight’s dis-
tinction between a measurable risk and a non-measurable uncertainty. As will be
showninthemaintextofthisbook,whiletheylooksomewhatsimilarinoneaspect,
theyaredefinitelydifferentinanotheraspectandsometimesevenantagonistic.
In a more historical perspective, the relationship between Keynesand Knightis
really complex and rather strange. It has an interesting history of separating,
approaching, separating again, and approaching again. So, it is high time for us to
Preface xi
investigate how and to what extent Keynes and Knight are similar (or different) in
termsofvision,ideology,tool,andpolicyimplications.
Inthe1970s,theinfluentialeconomistGalbraithonceadvocatedtheFirstAgeof
Uncertainty. Almost 50 years have passed since then. For those years, so many
“blackswans”orhighlyimprobableevents,alaNassimNicholasTaleb,tookplace
successively.ThefallofBerlinWallin1989followedbythecollapseoftheSoviet
Union, the bankruptcy of Lehman Brothers in 2008 followed by the Great Reces-
sion,andtheoutbreakoftheGreatEastJapanEarthquakeandTsunamifollowedby
the explosion of Fukushima nuclear generation in 2008 were surely among those
blackswans.
At present, we are supposed to live in the Second Age of Uncertainty. All the
existingknowledgeanddoctrinesarenolongerreliable.AsKeynesrightlysaid,we
simply do not know. And as Knight noticed, we have to deal with the unfamiliar
notionoftrueuncertaintydistinctfromthefamiliaroneofrisk.Inordertosolveso
many difficulties and problems facing us today, the emergence of new superstars
suchasthenewKeynesandthenewKnightwouldurgentlybeneeded.Whilethis
bookdealswithriskanduncertainty,onethingshouldbequitecertain.Wehaveto
learnnewlessonsfromoldteachings.Asthesayinggoes,wherethereisawill,there
isaway!
ThepreparationofthisbookhasbeenmadepossiblebytheJapaneseMinistryof
Education, Culture, Sports, Science and Technology through Grant-in-Aid for
Scientific Research. Thanks are due to the late Professor Lionel W. McKenzie
(Rochester) and Professor Hirofumi Uzawa (Tokyo, Chuo) and Professor Takashi
Negishi (Tokyo, Aoyama) for their everlasting encouragement and the staff mem-
bers ofCenterfor Risk Research, Shiga University,for theirgenerousassistance.I
amalsodeeplygratefultoProfessorKiichiroYagi(Kyoto,Setsunan),ProfessorYuji
Aruka(Chuo),andothercouncilmembersoftheJapanAssociationforEvolutionary
Economics (JAFFE) for their helpful advices and useful comments for doing my
researchforalongtime.Andlastbutnotleast,Iwouldliketosayspecialthanksto
Mr. Yutaka Hirachi and other staff members of Springer Japan for their kind
suggestionsandconstantencouragement.
Hikone,Shiga,Japan YasuhiroSakai
3May2019
