D.G. Champernowne Book Review
Epistemics and Economics.A Critique of Economic Doctrines
by G. L. S. Shackle.
Sept. 1973, 908-910
PROFESSOR SHACKLE in this treatise does not make economics seem easy, but by his lucid discussion of economic theory he illuminates the subject and reveals how profound are the difficulties in a pseudo-science whose structure is laid on the foundation of shifting expectations.
He sets out to clarify these difficulties not by mathematical simplifications but by using ingenious imagery expressed in ornate prose. Although this is unlikely to suit the taste of every reader, a great many will find this method provides a profoundly instructive and a very enjoyable book. Consider for instance the following example of ingenious exposition, in the section entitled “expectational leverage” having given an account of Keynes’s doctrine that minor changes in “the state of the news” may exert a disproportionate effect on business expectations, as when a spell of sunny weather sends up the price of shares in ice-cream firms, the Professor repeats the point in the homely metaphor” the wheel of expectation touches the ground of actuality at only one point of a great circumference whose future rolling can only be guessed at from the jolts it now suffers.”
This treatise is arranged in six books.
The main theme is that current economic events are determined by economic decisions which in turn depend on subjective expectations of future economic events. These expectations inevitably are based on incomplete evidence concerning the past and the present: whereas future economic events must depend to a greater or less extent on future decisions both economic and non-economic by persons known and unknown. Decision making under these circumstances can only in part be rational, since not only are the probabilities of different possible courses of events mainly a matter of guesswork, but even completing a list of such courses of events is itself largely a matter of imagination. Since, for these reasons, economic events are determined by decisions which cannot be mainly based on rational calculation, it is easy to pick out unsatisfactory features in any economic theory which postulates any mechanism of rational decision-making.
Because of the important economic effects of “shifts in the state of the news” due to non-economic causes, the corpus of economic theory cannot
be divorced from politics, psychology, sociology, or in the final analysis meterology and even more remote fields of enquiry, if it is to be “applied.” The economist and econometrician need feel less shame because of the failure of their forecasts than for any confident pretensions to be able to prescribe or forecast at all: and to be fair, it is only the more brash who have displayed any such confidence. Book I “Economic Theory and the Scheme of Things Entire” elaborates on these points.
Pursuing the central theme that economic decisions are by their nature largely irrational, Book II examines the achievements and limitations of the Theory of Value which is based on the simplifying assumption of rational decision-making. Shackle argues that a satisfactory theory would have to make allowances for the important effects of “surprise” on decisions and prospective profits and hence on values.
Book III discusses Keynes’s attempts to enlarge theory so as to allow for the effects on expectations of surprising changes in the news. Windfall profits are the prime movers of prices in the Treatise on Money, and fitful shifts in the state of the news are the main determinants of the schedules both of the marginal efficiency of capital and of the liquidity preference for money in the General Theory. But “the Profession,” by playing down the importance of these manifestations of unreason in Keynes’s theories have been able to make them appear as mere generalisations of more orthodox theories. In Professor Shackle’s view, even Keynes himself never realised the full implication of what he had written, which was no less than that the main determinants of the economic future, and in particular of the effects of what we decide today, mainly consist, beyond a very close horizon, of largely irrational behaviour and other “surprises” about which we can hope as yet to know practically nothing.
Book IV returns to the criticism of theories based on knowledge and rational choice and deals in particular with simplifying assumptions such as the stationary state which remove the complications due to the passage of time.
Book V on the other hand discusses the devices used by various economists to deal with some of these complications: sympathetic consideration is given to
Finally in Book VI the author comes to grips with those theories which claim specifically to deal with risk and uncertainty in an economic context. Having introduced the reader to the various different concepts of probability to be found in the literature, he points out that a good deal of knowledge is still needed if one is to be able to apply these concepts usefully in any
economic situation. For example, one needs to know what are the possible effects of different decisions (in so far as they may be relevant to one’s own interests in the future) as a prelude to being able to form some idea of their relative probabilities. To put the same point differently one needs to know a complete list of the possible “states of the world“ which may be relevant to the effects of the decisions between which one is choosing, as well as to form some judgment of their probabilities. Professor Shackle again emphasises that some of the most important items in the news come as bolts from the blue. For this reason the “Theory of Games” is largely irrelevant to economic decision making: for by assuming known the “rules of the game” and the probabilities of the results of various pairs of strategies it eliminates every element of that surprise which is of paramount importance in economics as in war.
A short summary is provided (together with further references) of Professor Shackle’s own theories of expectations embodying his concept of potential surprise. But his object in the present work is not to construct theory but to review the limitations and the achievements of economic theory in general.
If general equilibrium theory deals with the unruffled surface of a lake, these theories embodying uncertainty and dynamic equilibrium may be said to deal with the orderly ebb and flow of the tides: but Professor Shackle’s view of such theories is revealed in another reverberant phrase “to talk of equilibrium in the speculative cut-throat business game was as though a man should make nice calculations of human buoyancy as a guarantee of survival in the Atlantic rollers which can shake the cliffs themselves.”