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Uncertainty and long-period expectations

In Chapter 12 of GT, when Keynes evokes the role of confidence in the decision to undertake an investment, it is precisely the 'weight of the argument' that he has in mind (GT, pp. 148-49). Thus, when probabilities cannot be compared and it is impossible to formulate a rational belief, it is the weight of the argument which becomes the determining factor, that is, which allows the evaluation of investment alternatives that produces a final decision to act. The subjectivity that resides in the evaluation of different individuals may then become dominant, since it is individual experience that will determine the weight that will be assigned to new information. As Kregel points out (1987, p. 526), it is only at this point that the idea of 'animal sprits' enters into the decision-making framework of GT. Animal spirits will be the final determinant of the moment at which the weight of the argument attached to a proposition is sufficient to make it dominant over all other possible propositions. They thus represent, in Keynes's words, the 'spontaneous urge to action rather than inaction'.9 It is important to note at this point that Keynes insists that this 'spontaneous urge to action' does not depend on 'waves of irrational psychology' (GT, p. 162), but rather that this type of decision is securely founded in 'rational spirits' (Kregel, 1987, p. 526), by 'our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive or whim or sentiment or chance' (GT, p. 163).

The importance of uncertainty in long-period expectations thus depends on the 'weight' of the type that we have just considered. However, when this weight is very weak, or even non-existent, no calculation, or use, of the concepts of logical probability is possible. At this point, and only in these conditions, is it possible to say that the probability is 'non-measurable'. Far from being rare, Keynes considered this the most likely case whenever expectations were formed over the long period.10 This point of view appears very clearly in TP, which contains successive warnings against what Keynes calls 'numerical expression' (TP, pp. 21-22). In particular, he points out that

[i]t has been assumed hitherto as a matter of course that probability is, in the full and literal sense of the word, measurable. I shall have to limit, not extend, the popular doctrine ... The calculus of probability has received far more attention than its logic, and mathematicians, under no compulsion to deal with the whole of the subject, have naturally confined their attention to those special cases ... where algebraical representation is possible.

(TP, pp. 21-22)

Keynes thus considered that the possibility of obtaining a '"numerical" (cardinal) measure of the degree of probability as only occasionally possible': 'A rule can be given for numerical measurement when the conclusion is one of a number of equiprobable, exclusive, and exhaustive alternatives, but not otherwise' (TP, p. 122).

Now, in the majority of situations concerning decisions with long- period consequences, this is far from realized. It then becomes very difficult to endogenize the process of expectations formation and, as Keynes notes, 'the state of long term expectation [...] cannot be inferred from the given factors' (Keynes, 1973b [1934], p. 480) so that these decisions must be considered as being taken outside the 'realm of the formally exact' (Keynes, 1973d (1936), p. 2). In such conditions, Keynes suggests that the optimal behaviour to be adopted by decision makers is to fall back on their common sense as reflected in 'the actual observation of markets and business psychology' (GT, p. 149) rather than on the calculus of probability. Thus, entrepreneurs will first consider their past experience, and may presume that 'the most recently realised results will continue, except in so far as there are definite reasons for expecting a change' (GT, p. 51.) This initial response comes to the same thing as adopting an extrapolative behaviour that gives the present and the recent past an equivalent role to that which they play in the short period.

In the second place, conscious of the lack of information and of the reliability of their individual judgements, entrepreneurs will 'fall back on the judgement of the rest of the world which is perhaps better informed' in such a way that behaviour permanently conforms to that of the majority or the average and '[t]he psychology of a society of individuals each of whom is endeavouring to copy the others leads to what we may strictly term a conventional judgement' (Keynes, 1973e [1937], p. 114). It is against this background that Keynes's remark that 'in practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention' (GT, p. 152) should be interpreted.

Finally, entrepreneurs may admit that the 'existing state of opinion' as expressed by the evaluation of the market is the only one that should be considered the 'correct summing up of future prospects' for investment (Keynes, 1973e [1937], p. 114). But included in this market evaluation will be 'all sorts of considerations ... which are in no way relevant to the prospective yield' (GT, p. 152). In fact, in these conditions the calculations of agents count for less than their 'nerves and hysteria, and even digestions and reactions to the weather' (GT, p. 162).

It thus becomes easier to understand why long-run expectations, and thus the marginal efficiency of capital, can be considered as being subject to sudden, sometimes violent, changes, marked by waves of optimism and pessimism. From this perspective, the conventional methods of calculation are 'compatible with a considerable measure of continuity and stability in our affairs, so long as we can rely on the maintenance of the convention' (Keynes, GT, p. 152). Long-period expectations are as a result volatile, but not violently unstable. However, the appearance of new fears and new hopes 'will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of evaluation' (Keynes, 1973e [1937], p. 115). Thus, even in the most extreme conditions of uncertainty, Keynes rejects purely random decision-making. That his approach to decision making in the long-period has been termed 'irrational' is due to the failure to recognize that the traditional definition of 'rationality' does not apply in such conditions and must be reformulated.

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