Question

Keynes wrote in The General Theory: “If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory … amounts to little and sometimes to nothing”

Keynes was not talking about periods of turmoil and crisis when it might be expected that accurate information would be hard to come by; in his view, a state of “near ignorance” was the normal state of affairs.

Discuss Keynes’ concept of “uncertain” knowledge and what it may imply for our ability to measure risk and to invest, both in financial assets as well as in “real” businesses.

Answer 1

Keynes concept of uncertain knowledge states that there is a difference between risk and uncertainty. Risk is when there can be some form of insurance, whereas uncertainty cannot be insured against. Entrepreneurs are uncertain about the future response to their products, which is why profit is their reward. Uncertain knowledge gives rise to money, liquidity and finance being a central aspect in the economy. Uncertain knowledge gives rise to people not commiting their full investment which is why there is small percentage of unemployment.

In the case of risk measurement, all possible future events are known which is the opposite of uncertainty where future events are unknown. Thus risk can be measured through risk management, cost/benefit analysis, budget planning etc.

Investments will be sub-optimal in financial assets and real businesses. Which is why they won't commit to irreversible investments and opt for more liquid assets such as holding money over illiquid assets.