Prof John Kay of the London School of Economics delivered a paper to the Galapagos meeting of the Mont Pelerin Society on the issue of risk versus uncertainty. Risk refers to events that might happen and where the probability is subject to calculation, whereas uncertainty covers events that might occur but are not susceptible to this treatment. Prof Kay covered the history of a dispute between the side (led by Keynes) that asserted there was an important difference between the two, versus the opponents who recognised no such distinction. Historically the “no difference” school prevailed, but recent events have led to renewed interest in the other viewpoint. Hayek took the view that there are what Donald Rumsfeld called “unknown unknowns.” It comes easier to an Austrian economist to suppose that there are events that can neither be predicted not have their probability quantified. The world is a messy old place that stubbornly refuses to be put into boxes and be classified mathematically. Even without the unpredictability that human beings bring to it, nature can serve giant helpings of the unforeseen.
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