Uncertainty, Hirschman, and Mozart

June 30th, 2013 at 6:23 pm

A number of pieces I’ve read in recent days have led me to think about the role of uncertainty in economies, and particularly in the current economy, where the word is frequently heard.

What I find striking is a pervasive denial of the reality that economies are always fraught with uncertainty, as is much else in life, of course.  So how is it that in recent years, this has become a major complaint?  Given the fact that the future is unknown, isn’t complaining about uncertainty in the economy a bit like complaining about water for being wet?

Of course, many would respond—I get this in CNBC debates a lot—that uncertainty can be made worse by bad policy.  There’s enough uncertainty re the future without the Federal Reserve adding more, e.g., or the Affordable Care Act, or fiscal cliffs and debt ceilings.  Fair point, up to a point.

There’s a fundamental conservatism to that sentiment—the old Buckley’ism of “sitting athwart history, yelling Stop!”—that is, I’m afraid, both atavistic and wishful thinking.  It’s a complex, global economy where markets fail in big, problematic ways, and governments and central banks must respond.  In fact, today’s market volatility is not because the central bank is intervening; it’s due to  their warning that at some point soon, they’ll start intervening less.

Sure, if they never did anything, the question of when they’ll stop would be moot (or “moo,” as per Joey).  But that’s highly unrealistic.  Any reasonable cost-benefit analysis would argue strongly against the counterfactual of allowing the economy to crash so that later, we could avoid the withdrawal of stimulus.  “Don’t fix my broken leg, doc.  I don’t want to have to walk around with a cast, never knowing precisely when it will come off!”

The enemies of uncertainty do have a point when it comes to self-inflicted economic wounds like debt ceiling hostage situations and fiscal cliffs.  There, the cost-benefit goes solidly the other way.  So yes, there’s a cost to dysfunctional politics.  Frankly, I’ve been impressed with how well the US economy has performed even with Congress whacking away at it, including induced uncertainty and strong fiscal headwinds.

But the larger point is that you can’t have an economy without uncertainty.  Instead of complaining about it, consider some of the points in this Malcolm Gladwell piece on the late economist Albert Hirschman, who argued that doubt (or uncertainty) can be a great economic motivator.  It’s “what doesn’t kill you makes you stronger” economics, and while the article is a bit of a set up—all the e.g.’s show how uncertainty led to success; there are lots of e.g.’s going the other way—the fundamental point is a strong one.  In evaluating infrastructure projects in developing economies, Hirschman’s criteria for success were unique:

Instead of asking: what benefits [has] this project yielded, it would almost be more pertinent to ask: how many conflicts has it brought in its wake? How many crises has it occasioned and passed through? And these conflicts and crises should appear both on the benefit and the cost side, or sometimes on one—sometimes on the other, depending on the outcome…

The successful economic investors, governments, and institutions are not those that somehow eradicate uncertainty.  That’s impossible and is sure to create more problems than it would solve.  They are the ones with the creativity and the toolboxes flexible enough to figure out how to prevail in adversity.  And in that “figuring,” important discoveries are made.

In the midst of writing this little essay I had to drive somewhere and such was my good fortune that a sublime Mozart piano quartet was on the radio (this one).  Mozart wrote under very strict constraints.  I’m not talking about his precarious income, though there’s that too.  I’m talking about the rules of music and composition in his era that were straightjackets compared to what came later.  Yet those tight parameters did not thwart his genius at all; they provided it a context to shine.

What does that have to do with markets and policy today?  Well, Mozart did not to my knowledge complain that his concertos had to have three movements, the orchestra had to play the theme first, there had to be a second theme and it had to be in the dominant key relative to the first, and so on.  He thrived within those constraints.

The Fed has to unwind at some point.  We can’t keep wasting billions on inefficient health care, and there’s no pure market solution (see Arrow, half-a-century ago).  Recessions must be offset by fiscal and monetary policy or millions of workers will be needlessly exposed to potentially severe losses.

Though dysfunctional government and the willful economic ignorance of too many policy makers is eroding it, I still have faith in the ability of our economic system to deal with these challenges, including any uncertainty such dealings must engender.  In presenting this faith to my more conservative colleagues, I often find that they’ve got considerably less faith in the system than I do.  Which leads me to wonder, who’s the real capitalist here?

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6 comments in reply to "Uncertainty, Hirschman, and Mozart"

  1. Tom in MN says:

    Just as I wonder who the real patriots are when the R’s first response to any Constitutional limit they don’t like is to propose an amendment (or for Scalia to offer opposing arguments two days apart). The capitalist system is not designed to take the uncertainty out of economics — you need the communist system for that — and our Constitution is not designed to make governance (or law enforcement) easy, but to keep us free.


  2. jonas says:

    While you’re right that ‘uncertainty,’ defined objectively, is a natural and unavoidable feature of the macroeconomy, I think that the ‘certainty’ that is implied when the trader class and their representatives in the commentariat employ the term ‘uncertainty’ refers precisely to the market failures you describe. In other words, market failures (due to imperfect information, incomplete markets, etc) lead to arbitrage opportunities that are (more or less) certain. When the (big bad) government steps in to correct these market failures, that certainty is eroded.

    Clearly, the trader class is also upset by ham-handed government failures (debt ceiling, etc) as well. This ‘uncertainty’ may also refer to a reduction of the probability of an arbitrage opportunity, however.


  3. save_the_rustbelt says:

    Jared:

    Many of the superstars of the econ blogosphere (Krugman, Thoma, Delong and their groupies) vehemently deny business uncertainty has any role in our current economic problems, it is all inadequate demand and canbe fixed by more government spending.

    This reflects the isolation of academic economists from business reality, and a general lack of knowledge of business practice and problems among academics.

    Both demand and uncertainty are playing a role, and Obamacare is one of the biggest points of confusion and uncertainty.

    Bu then what do business people know about business? :)


    • jonas says:

      It is not that those whom you cite (pejoratively, but I’ll leave that aside) claim that uncertainty /never/ has an negative impact, rather they’ve cited studies that show uncertainty is not the problem /at this time./

      If the Grand Old Boss’s Party wants to limit uncertainty, they should not try to force the country into default, implicitly by refusing to raise revenue, or explicitly by refusing to sign the checks they’ve already written.

      The only uncertainty caused by PPACA is due to misinformation coming from the lunatic fringes like talk radio, radical-right message boards, and the House of Representatives. If we could stop relitigating this law, we could move on and implement it.

      Also, remember that ‘business’ and ‘the economy’ are not one and the same. Business people may know lots about business; this has no bearing on what they may or may not know about the macroeconomy.


      • SeattleAlex says:

        Bam!! I can tell you what I AM certain about and that is that your ‘slam of the week’ was brought to you by Jonas…


        • jonas says:

          Thanks for the shout, Alex. I try really hard, though, to avoid steering these discussions into political point-scoring. That sort of Politico-sports-pages nonsense obscures the fact that we’re talking about people’s lives. That’s what’s so infuriating about the ACA-information gamesmanship right now. I understand that one side will get a political win if the law is unsuccessful in its implementation, but why does that win need to come on the backs of poor people and sick people?

          This sort of thing is just a microcosm of the game professional Republicans have been playing for fifty years: “If we break the government, people will think us smart for saying government is broken.” I can respect ideological market fundamentalists (most of my professors are ideological market fundamentalists, after all); at least they actually believe the regressive gibberish they advocate.

          It’s the professional Republicans (and the professional Democrats) just out to score for their side whom I cannot respect.

          Anyways, thanks again, Alex.


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