Risk and Uncertainty, 1900-26

The aim of this chapter is to consider the treatment of risk and uncertainty (in so far as it can be separated from the theories of money and the trade cycle) within the Marshallian research programme. As was outlined in the previous chapter, subjective uncertainty is incompatible with a substantively rational theory. Marshall, as we have seen, attempted to completely objectify uncertainty in microeconomic contexts. This conforms more closely with the present day idea of risk, and it has been suggested that the Classical economists attempted to describe a world without uncertainty but with risk.1 The same criticisms can be made of the early Cambridge theories. However the type of uncertainty envisaged in the macroeconomic context does not necessarily fit into this category. Therefore we must consider the development of the theory, in particular the strengthening of these more subjective elements of the analysis. This development leads to a more adaptive view of economic behaviour and the possibility that the invisible hand may at times lose its grip. These developments can be seen alongside the increasing tide of criticism of Marshallian microeconomic analysis roughly starting with the Empty Boxes debate in 1922 and continuing with the later attacks on the law of returns and the theory of wages.2 Looking forward, some commentators have linked Keynes’s Treatise on Probability (1921i) with the concept of uncertainty claimed to underlie the General Theory (for example Weintraub, 1975).