Working Paper

Endogenising Uncertainty

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Uncertainty is an unavoidable feature of economic life, although we may cope with it sometimes by ignoring it. Institutions, conventions and behaviour are all conditioned by uncertainty, and they in turn condition uncertainty in a reflexive manner.

For policy-making to be effective it therefore needs to draw on theory which fully encompasses uncertainty. But the predominant approach in economics treats uncertainty (if at all) as an exogenous factor arising in times of crisis, without any basis in the underlying theoretical framework. Policy drawing on this approach can actually contribute to the conditions for increased uncertainty in the economy. Rather, by using a different theoretical approach which builds uncertainty into its foundations, policy can be designed to address the sources of uncertainty or ameliorate its consequences. Further, endogenising uncertainty makes it less of a threat; indeed, accompanied by reasonable optimistic expectations, it is the basis of innovation in the economy and in theory.