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The world economy is more complicated than any of us can understand and getting more so by the day.

And this is stated every time an economist talks about the economy in media or to politicians.
This is what Marc Lavoie (a prominent Postkeynesian and hence outside the mainstream) has to say about this issue
Let us first tackle the question of the nihilistic component of fundamental uncertainty. As already pointed out, it must be admitted that those authors who have emphasized the importance of uncertainty have generally overestimated its destructive consequences for economic analysis. Two destructive paths have been pursued: one underlying the presumed irrationality of the agents; and the other the instability of the economic capitalist system. The reader should be convinced by now that ontological and epistemological uncertainty does not of necessity breed irrational behaviour. In fact, can be argued on the contrary that, both in the Treatise on Probability and The General Theory, Keynes is striving to define a realistic and practical theory of procedural rationality based on the limitations of human knowledge and capabilities. When deprived of knowledge, reason cannot be based on simple probabilities and must turn to alternative strategies based on conventions and other procedures. In this context 'Keynes may be viewedas basing the whole of economic theory on a single, broad, non-Neoclassical conception of agent rationality' (O'Donnell, 1989, p.272)

The second path towards nihilistic conclusions follows some of Keynes' arguments. It has been assumed that uncertainty leads to instability since long-term decisions depend on flimsy foundations, subject to sudden changes (1973, xiv, p.114). This has meant to some that a proper theory set in historical time, where these violent changes in opinions would have to be recorded, is beyond the reach of economics. Sticking to Keynes for the moment, it is well known that he also considered uncertainty to be a stabilizing influence on the economy, since a variety of opinions and the confidence with which they are held ensures mitigated aggregate reactions to news (Keynes, 1936, p.172). The position taken here is that the presence of fundamental uncertainty, combined with a rationality based on procedures, generates regular patterns, except in exceptional crises (bifurcations and the like).


The implications of all this are that models based on rules of thumb, such as mark-ups, target-return pricing, normal financial ratios, standard rates of utilization, propensities to consume, lexicographic rules and so are perfectly legitimate since they rely on a type of rationality that is appropriate to the usual economic environment. In a world of uncertainty and of limited computational abilities, the economic agent cannot but adopt, except in the simplest of problems, a rationality that is of the procedural type. The models based on rules of thumb are not ad hoc constructions as the mainstream would like them to be because they are not derived from some axiomatic optimizing formalization. Rather, they reflect the rationality of reasonable agents. As such, they have macroeconomic foundations that are more solid, from a realist point of view, than those of the standard mainstream models. Indeed, when one thinks about it, what is more ad hoc: to assume that economic agents follow some rules of thumb and are satisfied once they reach some threshold; or to assume that agents are omniscient, omnipotent and maximize some utility function that contains no conflicting goals, while at the macro level the representative agent acts as both a consumer and a producer? Heterodox economists must feel at ease in dismissing such accusations; it is orthodox theory that makes use of ad hoc methods (Amable et al., 1997). Making use of ecological rationality is perfectly legitimate because this is how people truly behave.

(Post-Keynesian Economics: New Foundations, 2014)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Jan 1st, 2015 at 10:22:56 AM EST
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