Comparing J M Keyness and F von Hayeks Differing Definitions of Uncertainty as It Relates to Knowledge: Keyness Unavailable or Missing Knowledge concept

versus Hayeks Dispersal of Knowledge concept

Michael Emmett Brady Lecturer School of Business Administration Department of Operations Management California State University, Dominguez Hills Carson, California USA

Abstract: J M Keynes and F von Hayek had completely different views about the meaning of the term uncertainty as it was related to the concept of knowledge. Keynes viewed uncertainty through his concept of the weight of the argument, V,(a logical operator) and weight of the evidence, w(a mathematical variable).Uncertainty ,U, is an inverse function of w so that one can write U=f(w).The existence of complete ,relevant knowledge requires that w = 1 ,where w is defined on the closed unit interval [0,1].A degree of uncertainty occurs if w < 1.A w < 1 means that the relevant knowledge is not just incomplete but is missing and/or not available to any decision maker. A w=0 means that there is no relevant knowledge. Keynes viewed the case of 0<w<1 as, in general, being the relevant one. However, there is one extremely important case where w either equals 0 or is very close to 0.This concerns investment in long lived, fixed, durable, capital ,producer goods subject to technological change, advance and innovation over time . Prices are part of the relevant knowledge available to entrepreneurs. However, market prices do not concentrate the unavailable information so that w<1.w=1 is a limiting case that will occur or approach close to w=1 in some of the physical, life and

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natural sciences. However, this is not the case in economics, business, finance or social sciences, in general. Hayeks definition of uncertainty is that relevant knowledge is completely dispersed into small or tiny bits and pieces. All of the total information /knowledge is divided up among the set of decision makers. However, this dispersed knowledge, while scattered, is complete. Market prices concentrate this dispersed knowledge into a form that alert, savvy, knowledgeable entrepreneurs can understand and act on efficiently. Market prices concentrate the relevant knowledge so that uncertainty is eliminated for savvy, smart, alert entrepreneurs. This is equivalent to arguing that w =1 for alert entrepreneurs. Keyness and Hayeks definitions of uncertainty directly conflict with each other. Keynes argues that ,especially in the case of producer goods, w ,while w is not equal to 0,is little, flimsy, vague, ambiguous ,small , fluctuating ,and tiny. The prices of producer good DO NOT concentrate the knowledge so that savvy, alert entrepreneurs can act on it efficiently. Hayek argues that they do. The conflict over the meaning of uncertainty is insurmountable. The Hayekian outcome is not possible in a world of Keynesian or Knightian uncertainty.

Section 1.Introduction The meaning of the term uncertainty is extremely important in the debate between Keynes and Hayek concerning the operational capability of a capitalist economy to provide a macroscopic full employment level of employment for all available resources. Keynes gave a formal mathematical definition to the term weight ( uncertainty in his General Theory (GT,1936)) in his A Treatise on Probability (TP,1921)in chapter 26 on p.315 in the course of specifying his conventional coefficient ,c, of weight and risk that summarized Keyness interval estimate approach to probability as presented in chapters 15,17,20 and 22 of the TP. Keynes also gave a clear verbal definition of weight in the first paragraph of chapter 6 on p.71.Both definitions are identical. This leads to the following denion: 0 < w < 1, where w=K/(K+I),where K is the total relevant knowledge and I is the total relevant Ignorance. Like probability ,K+I equals 1,since it is normalized on the closed unit interval [0,1].I-w= I/(K+I). Keynes specifically links his GT concept of uncertainty to the TPs weight of the evidence on p.148 and 240 of the GT. His reference is to chapter 6,which is a prerequisite to understand chapter 26. A footnote in chapter 6 directs the alert reader to chapter 26. Hayek provide no such formal analysis of his concept uncertainty as being the dispersion of knowledge into bits of tiny pieces among the large number of competing decision makers in a complex economic environment. The rest of this paper examines Hayeks and Keyness arguments .it is demonstrated that there is no overlapping areas of either Keyness or Hayeks approaches.

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Section 2.Hayeks view of Knowledge and uncertainty-1937 I think that the field in which, as one would expect, the discussion of the assumptions concerning foresight first attracted wider attention was the theory of risk] . The stimulus which was exercised in this connection by the work of Frank H. Knight may yet prove to have a profound influence far beyond its special field. (Hayek,p.34)

In the light of our analysis of the meaning of a state of equilibrium it should be easy to say what is the real content of the assertion that a tendency toward equilibrium exists. It can hardly mean anything but that, under certain conditions, the knowledge and intentions of the different members of society are supposed to come more and more into agreement or, to put the same thing in less general and less exact but more concrete terms, that the expectations of the people and particularly of the entrepreneurs will become more and more correct. (Hayek,p.41)

The significant point here is that it is these apparently subsidiary hypotheses or assumptions that people do learn from experience, and about how they acquire knowledge, which constitute the empirical content of our propositions about what happens in the real world. They usually appear disguised and incomplete as a description of the type of market to which our proposition refers; but this is only one, though perhaps the most important, aspect of the more general problem of how knowledge is acquired and communicated(Hayek,p.43)

The questions I have just discussed concerning the conditions under which people are likely to acquire the necessary knowledge, and the process by which they will acquire it, have at least received some attention in past discussions. But there is a further question which seems to me to be at least equally important but which appears to have received no attention at all, and that is how much knowledge and what sort of knowledge the different individuals must possess in order that we may be able to speak of equilibrium. It is clear that, if the concept is to have any empirical significance, it cannot presuppose that everybody knows everything. I have already had to use the undefined term "relevant knowledge," that is, the knowledge which is relevant to a particular person. But what is this relevant knowledge? It can hardly mean simply the knowledge which actually influenced his actions, because his decisions might have been different not only if, for instance, the knowledge he possessed had been correct instead of incorrect but also if he had possessed knowledge about altogether different fields.(Hayek,p.45)

The problem which we pretend to solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals. (Hayek,p.46)

How can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess ? To show that in this sense the spontaneous actions

of individuals will, under conditions which we can define, bring about a distribution of resources which can be understood as if it were made according to a single plan, although nobody has planned it, seems to me indeed an answer to the problem which has sometimes been metaphorically described as that of the "social mind." But we must not be surprised that such claims have usually been rejected, since we have not based them on the right grounds.(Hayek,p.48)

It is interesting to note that Hayek provides no citations to works that explicitly deal with uncertainty as used in the standard sense as lack of relevant knowledge in his 1937 article. Hayek fails to deal with the term, uncertainty , as it is used in Schumpeters 1912 work, Knights Risk, Uncertainty and Profit, and Keyness GT. Hayek refers to risk only and cites Irving Fisher ,for whom there was no difference between the terms risk and uncertainty. Nor does Hayek use similar words that are substitutes for uncertainty ,such as vagueness, unclearness, ambiguity.etc.

Hayek failure to discuss the concept of unavailable knowledge or the lack of knowledge leads to the following question . Did Hayek have a concept of uncertainty that had a completely different meaning from the use of the term by Schumpeter, Knight or Keynes ? Hayek does repeat his idea of bits of information dispersed throughout the decision making population. Obviously ,this means that for any individual decision maker information will be incomplete since each decision maker only has a small piece o f the entire puzzle. However, all of the pieces of the puzzle are available to the set of all decision makers. The problem is not that there are pieces of the puzzle that are missing or unavailable to the decision maker. This is precisely the problem as viewed by Keynes, Schumpeter and Knight .Only Keynes gave a precise and exact ,formal analysis. Unless the weight of the evidence, w,=1,there is missing or unavailable evidence or evidence that is lacking and cant be attained from some source. The set of all decision makers do not have all of the pieces of the puzzle. One can only conclude that ,for Hayek, the problem is not information that is not available or lacking which is the problem, but bringing together all of the dispersed pieces of available knowledge which ,if concentrated ,would be complete. Market prices do this. Therefore, the problem of uncertainty is solved by the markets ability to concentrate the dispersed knowledge in the form of price vectors which only alert and savvy entrepreneurs are able to decipher as long as market prices are not interfered with by government. Hayek s position creates a giant abyss/chasm between himself and Keynes, Schumpeter and Knight:

In the light of our analysis of the meaning of a state of equilibrium it should be easy to say what is the real content of the assertion that a tendency toward equilibrium exists. It can hardly mean anything but that, under certain conditions, the knowledge and intentions of the different members of society are supposed to come more and more into agreement or, to put the same thing in less general and less exact but more concrete terms, that the expectations of the people and particularly of the entrepreneurs will become more and more correct. (Hayek,p.41) This statement by Hayek is expressed in Keyness analysis by the statement that, eventually, the process of concentration of knowledge by market prices will result in a w=1.There is no uncertainty in this case. Hayeks 1937 view of uncertainty is completely different from Keyness. We will examine in our next section whether Hayek changes his position in any appreciable manner in 1945.

Section 3.Hayeks view on knowledge and uncertainty-1945

Did Hayeks views on knowledge change in 1945 from their earlier expression in 1937 ? Did Hayek ever link his view of the problem of dispersed, incomplete, individual knowledge in economic decision making versus his position in 1937 that market prices concentrate knowledge for society as a whole ? Did Hayek attempt to move toward the Schumpeter, Keynes and Knight view that uncertainty meant flimsy, tiny, little, vague, uncertain, unreliable, ambiguous or unclear knowledge that was unavailable, lacking or missing ?. The answer is no. Hayek reaffirms in his 1945 article his view that the problem of the use of economic knowledge is not that it is missing ,lacking or not available. The problem is that the knowledge is dispersed among many decision makers. Again, free market prices will concentrate the knowledge so that alert or savvy entrepreneurs can use it efficiently to always move the economy toward equilibrium inter temporally. Market prices are the solution to uncertainty. Uncertainty cant exist in the form understood by Schumpeter, Keynes, and Knight because then it would be impossible for market prices to concentrate the unavailable, missing or lack of information needed for possible equilibrium: Consider Hayeks 1945 article on The Use of Knowledge in Society : If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic.(Hayek,p.519) . . . The reason for this is that the "data" from which the economic calculus starts are never for the whole society "given" to a single mind which could work out the implications and can never be so given. The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.(Hayek,p.519) . . The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process, and the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy-or of designing an efficient economic system (Hayek,p.520) . . . This, in turn, depends on whether we are more likely to succeeding putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many

different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to dovetail their plans with those of others.(Hayek,p.521) . . . The answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge: those more likely to be at the disposal of particular individuals and those which we should with greater confidence expect to find in the possession of an authority made up of suitably chosen experts.(Hayek,p.521) . . . Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active co-operation(Hayek,pp.521-522) . . . This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. (Hayek,p.524) . . We need decentralization because only thus can we insure that the knowledge of the particular circumstances of time and place will be promptly used. But the "man on the spot" cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.(pp.524-525) . . . Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to co-ordinate the separate actions of different people in the same way as subjective values help the individual to co-ordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance.(Hayek,p.526) . . .

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change(Hayek,p.527) . . . The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it. Through it not only a division of labor but also a co-ordinated utilization of resources based on an equally divided knowledge has become possible. (Hayek,p.528)

. . . The practical problem, however, arises precisely because these facts are never so given to a single
mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.(Hayek,p.529)

. . .

instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.(Hayek,p.530) Hayek has not changed any of his views from the time of the publication of the 1937 article to the time of the publication of the 1945 article. Uncertainty ,or synonyms for uncertainty, appear nowhere in his presentation. His view is still that all of the available evidence is dispersed among many decision makers. Market prices concentrate this information in such a manner that knowledgeable entrepreneurs are able to efficiently use this concentrated knowledge to constantly move an economy toward an optimal allocation of resources inter temporally. This concentration of knowledge by price vectors ,discernable to alert entrepreneurs, solves the problem of uncertainty in the same way that Milton Friedmans assumption that all changes in all market prices are distributed normally(log normally) so that the mean, a measure of concentration and central tendency, and the standard deviation, a measure of dispersion, could be used by decision makers to eliminate all uncertainties in the area of decision making ,eliminates the problem of uncertainty.

Section 4. Summary of Hayeks view

Hayek was well aware of how Keynes, Schumpeter and Knight used the term uncertainty in relation to knowledge when he wrote his articles in 1937 and 1945 , respectively. He does not refer to any such word or alternative word, such as vagueness ,unclearness or ambiguity, in his 1937 and 1945 articles on knowledge because the existence of uncertainty in the sense of Keynes, Schumpeter and Knight is completely different from the situation where all of the information is available, but dispersed among the different economic decision makers. Knowledge is missing for Keynes, Knight and Schumpeter, not just dispersed. Technological advance, innovation and discovery generates/creates knowledge that was missing. Businessmen and women know for certain that they do not know where, when and how technological innovations will either hurt or help their firms. The weight of evidence is greater than 0 but not by much when it comes to new kinds of capital goods that follow upon the waves of technological breakthroughs .This has nothing to do with knowledge that is dispersed. This has to do with knowledge that is missing, small ,tiny, little and flimsy. The market prices of capital goods can t concentrate what is not there. The existing market prices cannot concentrate knowledge about the new technological breakthroughs that will occur in the near or distant future. It is well known that GLS Shackle was one of four graduate students who broke with Hayek intellectually to follow Keynes after the publication of the General Theory in 1936. What was the primary reason for Shackles intellectual break with Hayek ? Shackle was very clear .Shackle realized that Hayeks discussion of uncertainty excluded by definition the existence of knowledge that would be unavailable to the entrepreneur. Hayeks capital theory, upon which he founded his business cycle theory, concentrated only on time preference and excluded uncertainty as defined by Keynes, Knight and Schumpeter. Hayeks theories were based on an abstraction from uncertainty.(Shackle,1988,p.176).Hayeks theories of capital and the business cycle does not use the term uncertainty to mean unavailable information .Hayek uses the term that all knowledge is highly dispersed. Hayeks Austrian theories claimed that market prices, if not interfered with by government, concentrate the dispersed pieces of knowledge so that a special class of humans, successful entrepreneurs, can correctly analyze the concentrated price signals and always move a market economy toward an optimal allocation of resources inter temporally .Market prices so concentrated eliminate any and all uncertainties. Hayek explicitly denied that statistical evidence could be used ,in general, in the social sciences because much unique information content would be lost, with respect to specific time and place knowledge, in the process of using statistical data. Hayek is correct. Keynes arrived at a very similar conclusion at the end of chapter 26 of the TP. Information is lost in the statistical computations. The problem for Hayek is that market prices ignore such unique information also. The weight of the evidence is < 1.Information is lost or ignored in the process of concentrating the bits of dispersed knowledge into market prices just as it is lost or ignored in statistical computations of averages. One Austrian has realized this-Stefan Schmitz.

5.Schmitts Critique of Hayekian and Austrian Economics

Let us start with certain points made by Austrian economist Stefan W Schmitz in his 2004 article in the journal , Review of Austrian Economics : "Furthermore, problems of dispersed knowledge in society are hardly mentioned in ACT(insert-Austrian Capital Theory).That seems to imply that complete information is assumed throughout any capital theoretic argument in Austrian economics...neither uncertainty nor incomplete knowledge receive much attention in the arguments. The decomposition has to be based on two dimensions: time and uncertainty...Over the past 100 years, ACT has centered solely on the time dimension..."(Schmitz,2004,p.72). "The following sections stress the importance of uncertainty in the Austrian School of Economics and attempt to introduce the dimension of uncertainty into ACT by systematically relating uncertainty to the structure of goods". (Schmitz,p.72) Schmitz points out that in his Principles book Menger assigns four essential functions to entrepreneurial activities but that " ... he excludes risk(or uncertainty) bearing from that list".(p.73).Schmitz argues that "..another explanation (insert-for excluding uncertainty from the list of essential entrepreneurial functions) is that Austrians implicitly assume perfect information in ACT. Due to the fact that the importance of information, knowledge and its dispersion in society are stressed by Menger and Hayek,this argument does not seem particularly appealing "(pp.73-74).

Schmitz states that Hayek ,on p.330 of the Pure Theory of Capital(1941) ,does briefly talk about the relationship between the stock of capital, correct entrepreneurial forecasts of future profits and uncertainty. However,"... Hayek (1941),does not pay attention to the relationship between uncertainty and the structure of capital." (p.74)Furthermore, "...also Kirzner (1996-insert "Essays on Capital and Interest ")fails to develop the systematic relationship between uncertainty and the order of goods". (p.74)

Schmitz's conclusion explains why J M Keynes rejected Austrian Business Cycle theory ,which rests precariously on Austrian Capital Theory : "The complete neglect of the structural relation between uncertainty and the order of goods as well as the dispersion of knowledge in ACT is inconsistent with the emphasis on these concepts which characterize the Austrian School of Economics".(p.81).

In other words, Austrian use of the term about uncertainty actually means dispersed knowledge .Unfortunately, they are incapable of analyzing and/or evaluating the relationships specified verbally in a technical , formal ,logical, or mathematical, analytic manner, in order to show how uncertainty impacts the stock of capital goods over time. Now Keynes had already discovered the answer in 1908.Practically all decision makers are averse to uncertainty even if they are risk takers. There is no role here for Kirzner's alert or knowledgeable Austrian entrepreneurs because such alert entrepreneurs are especially uncertainty averse because they know that they do not know. They are all unwilling to commit resources in the face of ignorance(no knowledge) or uncertainty(little knowledge)Market prices do not concentrate the uncertainties of the present and/ot future. They will do so only under conditions of Keynesian nonlinear risk Unfortunately, Schmitz was ignorant of J M Keynes's nonlinear, non additive, inexact,

interval estimate, upper-lower bound, Boolean approach to probability and decision making that Keynes published in 1921 as the A Treatise on Probability(TP;1921).The exact same material is contained in Keyness December,1908 Cambridge Fellowship thesis. Keynes's conventional coefficient, c, of risk and weight is a very simplified decision rule that incorporates in another way the material covered by Keynes in Parts II and III of the TP.I will append a summary of Keynes's c coefficient below .It was first available as a Cambridge Fellowship Thesis in 1908 when Hayek was nine years old. Parts II and III of both books are identical. Keynes's theory of decision making under risk, uncertainty and ignorance is presented in technical language that Austrians are not able to follow in Parts II and III of the TP. The case based approach of Gilboa and Schmiedler , based on memory-resemblance -similarity concepts, is practically identical to Keynes's analysis except for their mistaken view that the resemblance functions need to give precise numerical answers. Schmitz suggests the non additive, capacities approach of Gilboa and Schmiedler as a foundation upon which Austrians could incorporate uncertainty into Austrian Capital Theory and Business Cycle Theory. However, it has already been proven that the capacities approach is just a form of Boole's 1854 approach. Schmitz could have suggested Shackle's potential surprise, non additive analysis. However, Shackle was completely unaware that Keynes had already successfully mastered such a non additive approach when Shackle was eight years old. Keynes's capital theory is simply an application of his general theory of decision making to the decision to obtain and use long run capital goods to make short run consumption goods. Keynes correctly rejected Hayek's capital theory and his business cycle theory because Hayek failed to incorporate an analysis of uncertainty into either of his theories. Of course, Hayek, like Menger before him and Kirzner after him, did talk about uncertainty and did realize that risk and uncertainty were different. However, he never incorporated uncertainty into any of his theories. On the other hand, the General Theory is built on the A Treatise on Probability and the A Treatise on Probability is built on Boole's The Laws of Thought(1854,LT).This means that the Austrians face the insurmountable task of trying to demonstrate that Boole's approach to logic, which itself generalized the work of Francis Bacon and John Stuart Mill, is incorrect. Austrians do not have the technical training in mathematics and logic to even start reading LT, much less criticize it. This would explain the fact that no Austrian has attempted to implement Schmitz's suggestions..Any attempt by an Austrian to work with non additivity/nonlinearity leads directly to Keyness work in the TP and the GT. This was partially recognized by Shackle, although Shackle failed to read beyond chapters 3 and 4 of the TP. Shackle would have soon discovered that there was no real need for his own non-probabilistic approach because Keynes had already developed a non additive approach in Parts II and III of the TP.

6.J M Keyness non- linear, non -additive approach to uncertainty and risk

Keynes's 1921 A Treatise on Probability (TP) analysis of decision making can be found in sections 6-8 of chapter 26 and chapters 15,17,20 and 22 of the TP. We will concentrate on the conventional coefficient of risk and weight in chapter 26,as opposed to the interval estimate, upper-lower bound approach of the other chapters, because of the greater explanatory power exhibited by the conventional coefficient. The technical details can be found on p.315 and in footnote 2 on p.315 .Keynes presented a very precise analysis demonstrating that an analysis of uncertainty introduced non additivity and non linearity into the formal representation of decision making. The subjectivist, Bayesian approach regards decision making as another name for the application of the purely mathematical laws of the probability calculus that require additivity and linearity. The Subjectivist approach makes the crucial error of conflating probability theory with decision theory. Keynes realized that ,due to the impact of a lack of weight of the evidence (confidence)on decision makers ,as well as because of the optimism-pessimism of the decision maker, decision theory would have to be able to take into account the importance of non linearity and non additivity. The concept of expected value or expected utility is crucial to the Ramsey-De Finetti-Savage-Friedman approach. Keynes demonstrated that expected value or expected utility can ,at best, only be a special case of a much more general theory . The Ramsey-De Finetti-Savage-Friedman approach is the mathematical translation of Jeremy Bentham's original Benthamite Utilitarian approach. Bentham's approach was that the whole can never be anything more than the sum of the individual ,atomic parts. However, this requires the assumptions of additivity and linearity. Bentham assumed also that all decision makers can calculate the odds all the time. Keynes showed that this was not the case because this requires a w=1. Keynes's demonstration ,taken from chapter 26 of his A Treatise on Probability(1921;TP),of the special case nature of any expected value(utility) approach ,based on the purely mathematical laws of the probability calculus, shows this to be a very special case that rarely, if ever, occurs in the real world. This is why public policy based on utilitarianism fails . Bentham claimed that all individuals have the capability to calculate the odds and outcomes and act on the expected utility (the probability times the utility of the outcome) in a rational(optimizing) way. This is where the rationality postulate comes from. This can be expressed by the following maximization problem ,where p is the probability of success, q is the probability of failure, and A is the outcome: Maximize p A. The modern version of this is to Maximize pU(A),where p is a subjective probability that is additive, linear, precise and exact and U(A) is a Von Neumann-Morgenstern Utility function. The goal is to Maximize p U(A).

The modern name for Benthamite Utilitarianism in neoclassical economics is SEU theory(Subjective Expected Utility). Therefore, a microeconomic foundation based on Utility Maximization is just Benthamite Utilitarianism updated with modern mathematical probability techniques. Modern macroeconomics is all disguised SEU theory.

Keynes rejected Benthamite Utilitarianism as a very special case that would only hold under the special assumptions of the subjectivist, Bayesian model-that all probabilities were additive, linear, precise, single number answers that obeyed the purely mathematical laws of the probability calculus. Keynes specifies his conventional coefficient of risk and weight, c, model in chapter 26 of the TP on p.314 and footnote 2 on p.314,as a counter weight to the Benthamite Utilitarian approach of Ramsey. Essentially, Keynes's generalized model is given by

c=2pw/(1+q)(1+w), where w is Keynes's weight of the evidence variable that measures the completeness of the relevant, available evidence upon which the probabilities p and q are calculated.(Benthamite Utilitarians always assume that the value of w is always 1.)w is an index defined on the unit interval between 0 and 1,p is the probability of success ,and q is the probability of failure .p+q sum to 1 if they are additive .This requires that w=1.Keynes's c coefficient can be rewritten as c=p [1/(1+q)][2w/(1+w)]. Now multiply the above by A or U(A).One obtains c A =p[1/(1+q) ][2w/(1+w)] A or c U(A)= p[1/(1+q)][2w/(1+w)]U(A). The goal is to Maximize c U(A) as opposed to the special Ramsey-Savage case of Maximize p U(A). If w = 1 and all probability preferences are linear, then one obtains Ramsey's special result ,which was

Max p U(A).

Austrian discussions of risk and uncertainty lead to the same conclusion. Full employment will arise under either condition. This means that there is no difference between risk and uncertainty for Austrians .S. Schmidt deserves a good deal of credit for trying to deal with this gigantic lacuna in Austrian thought.

Section 7.Hayeks Pretence of Knowledge paper in 1975

In his Nobel Memorial Topic of 1974, Hayek returned to the topic of his 1937 and 1945 papers one more time concerning the dispersed nature of knowledge available to an economic decision maker.

However , he added a new twist :

This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable.(Hayek,1975,p.434) . . . The reason for this state of affairs is the fact, to which I have already briefly referred, that the social sciences, like much of biology but unlike most fields of the physical sciences, have to deal with structures of essential complexity, i.e., with structures whose characteristic properties can be exhibited only by models made up of relatively large numbers of variables. Competition, for instance, is a process which will produce certain results only if it proceeds among a fairly large number of acting persons.(Hayek,1975,p.436) . . . Organized complexity here means that the character of the structures showing it depends not only on the properties of the individual elements of which they are composed, and the relative frequency with which they occur, but also on the manner in which the individual elements are connected with each other. In the explanation of the working of such structures we can for this reason not replace the information about the individual elements by statistical information, but require full information about each element if from our theory we are to derive specific predictions about individual events.(Hayek,p.436) Hayek s argument is very close to Herbert Simons distinction between procedural rationality and substantive rationality .Simon argued that decision makers were faced with very complex situations that contained too many variables to analyze given the time and cost constraints involved. There was too much information/knowledge available for a rational decision making process to consider and analyze in order to arrive at an optimal decision. Instead of maximizing, decision makers would choose to satisfice .They would substitute short cuts ,rules of thumb and heuristics in such complex situations. Hayek does not cite Simon .In any case ,his new position, which is not stated in the earlier 1937 and 1945 articles ,is combined with his earlier emphasis on the dispersion of knowledge : This is particularly true of our theories accounting for the determination of the systems of relative prices and wages that will form themselves on a well-functioning market. Into the determination of

these prices and wages there will enter the effects of particular information possessed by every one of the participants in the market process a sum of facts which in their totality cannot be known to the scientific observer, or to any other single brain. It is indeed the source of the superiority of the market order, and the reason why, when it is not suppressed by the powers of government, it regularly displaces other types of order, that in the resulting allocation of resources more of the knowledge of particular facts will be utilized which exists only dispersed among uncounted persons, than any one person can possess. (Hayek,p. 437)

. . . Hayek s conclusion is that the Free market is able to solve this problem: We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.(Hayek,p.440)

Hayek has simply combined Simons perspective with his earlier perspective that the set of all knowledge is complete for the set of all individual decision makers. Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole ,the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals ,understood only by savvy, knowledgeable entrepreneurs, eliminates any uncertainty.

Keynes, Knight and Schumpeter deny Hayeks claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital ,important information is missing .Pieces from the puzzle are missing and will not turn up in the future. It doesnt help to fall back on the average opinion of the market in the hopes that the market will be better informed. One can ,of course, realize that, like Keynes in chapter 12 of the GT, one can create a convention that the market as a whole is better informed

Section 8.Conclusions Hayek knew exactly what Keynes, Knight and Schumpeter meant by uncertainty when he wrote his 1937,1945 and 1975 articles on knowledge. Keynes, Knight and Schumpeter meant that important ,relevant information, data, and knowledge was unavailable ,lacking or missing at the time that a decision had to be made about a future investment decision dealing with the provision of long run. durable. physical capital. Decision making involving irreversible and irrevocable investments in fixed capital formation in plant and equipment ,subject to the constant threat of technological innovation, advance, change and obsolescence ,was carried out under conditions where the totality of available knowledge was known to be incomplete for all decision makers. Uncertainty was not a condition where the available knowledge was incomplete and dispersed for the individual decision maker, but complete for all decision makers considered as a whole. Hayeks position ,that the needed information and knowledge available for all decision makers as a whole is complete, but that this complete amount of knowledge is dispersed widely among the set of all relevant decision makers, directly conflicts with the views of Keynes, Knight and Schumpeter. Hayekian uncertainty bears an uncanny resemblance to Milton Friedmans view that the time series data on changing prices is distributed normally. This essentially allows the entrepreneur to take advantage of profitable opportunities .Hayek, while rejecting the position that the normal probability distribution can be applied in economics , makes a very similar claim to that made by Friedman when he claims that knowledge about market prices is concentrated by price vectors in a form that allows savvy, knowledgeable entrepreneurs to take advantage of profitable opportunities. This perspective ,of course, has nothing to do with uncertainty. Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist.

In conclusion, nowhere in any of Hayeks three articles on Knowledge in Economics in 1937 ,1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there .

REFERENCES

Schmitz,Stefan,2004.Uncertaimty in the Austrian Theory of Capital.The Review of Austrian Economics, 17:1,,pp.67-85.

Hayek, F.A.1975.The Pretence of Knowledge .Swedish Journal of Economics,77(4),pp433-442 (Reprinted in August, 1989. American Economic Review American Economic Association, vol. 79(6), pp. 3- 7)

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