"What sense does it make to assume perfect knowledge in a world where every morning's newspaper is opened in fear and scanned with foreboding?" --- G. L. S. Shackle
What gives uncertainty its meaning in economics? In speaking of uncertainty, Shackle continues on: "What can uncertainty mean, except either that it is determined in too complex and elusive a fashion for us to penetrate, or else indeed that it is the upshot of something spontaneous and originative, or 'random', at the very source of history."
Austrians seem to err on the side of complexity and elusiveness. Mises, addressing the same question as Shackle 10 years earlier, wrote: "Human knowledge is conditioned by the power of the human mind and by the extent of the sphere in which objects evoke human sensations. Perhaps there are in the universe things that our senses cannot perceive and relations that our minds cannot comprehend."
For Shackle, uncertainty is the "upshot of something spontaneous and originative," namely, human action and expectations. For Mises and the Austrians, however, uncertainty exists because the social world is complicated, and, to put it somewhat differently, human knowledge is limited. As our knowledge of the world increases, uncertainty should be reduced, according to the Austrians.
This is what divides the Austrians and Post Keynesians, political differences aside. Post Keynesians argue that an uncertain world requires the creation of certain "conventions" in order to permit scope for positive action. Observed reality is thus everywhere and always unstable, and the slightest change in the "news" will reveal quickly just how tenuous our knowledge claims really are.
Austrians take a different approach to the problem of uncertainty. Austrians respond to these "nihilistic" implications of radical uncertainty by invoking the "entrepreneurial element" and the system of order that is generated as a result of the observed tendencies to coordination. In this way Austrians point to existing bodies of knowledge as evidence of the frivolity of radical uncertainty. But it remains a fact that knowledge (conventions), however discovered, always emanates from a position of uncertainty, and must necessarily remain precarious and unpredictable.
It is obvious from experience that all economic activity is perennially subject to waves of optimism and pessimism owing to the conventional nature of the relevant data. We observe systemic market instability in capitalist economies because of the tendency to assume greater confidence in periods of perceived tranquility (on this, see Hyman Minsky). Knowledge (K) and market stability (MS) are thus inversely related, i.e. K = 1, MS = 0; K = 0, MS = 1; o < K < 1, 0 < MS < 1, which is to say that it is misleading to suggest that the process of knowledge acquisition a la Hayek produces a tendency towards equilibrium by causing expectations to become more and more correct. Knowledge is merely a convention that is used to deceive people into acting; without it we would be thrown into a state of paralysis. We would not act. But it is wrong to mistake these knoweldge conventions as resting on secure foundations that await entrepreneurial discovery. The Austrians have it entirely backwards. The only real discovery is the discovery that entrepreneurs must continually deceive themselves into acting if the economy is to avoid collapse.