By Ian Scoones
Uncertainties are everywhere, whether emerging through climate change, financial volatility, conflict or war. All too often we don’t know what the future will hold. This presents a big challenge for conventional styles of economic development where predictive models, blueprint plans and standardised policies hold sway. What would an economics for development look like if uncertainties – where we don’t know the likelihood of future outcomes – are taken seriously? This is the focus of a new paper in World Development, where we argue for a major recasting of economic thinking and practice, reclaiming older approaches that put uncertainty centre-stage.
The hubristic assumptions of neoclassical economics: ignoring uncertainties
The problem with most standard economics approaches is that uncertainties are ignored. From the emergence of neoclassical economics in the late nineteenth century, an equilibrium-centred, quantitative approach was promoted by the likes of Leon Walras and later Arthur Pigou. The assumption was that a control economics supported by ‘blackboard proofs’ could emerge to guide welfare policy. In the 1950s, the influential Chicago economist Milton Friedman argued for a ‘positive economics’ based on precise economic models modelled on the physical sciences. These made heroic assumptions about human behaviour, suggesting for example that “we may treat people as if they assigned numerical probabilities to every conceivable event”. It was this style of neoclassical economics that became the basis for the training of economists for decades, with major – we would argue, deeply damaging – implications for how development policy was conceived and how policymaking played out.
In their blind faith in an overarching control economics, Friedman and his many followers unfortunately dismissed the arguments of his Chicago predecessor, Frank Knight, who famously highlighted the important distinction between risk – where probabilities of future outcomes could be assigned – and uncertainty, where they could not. With the rise of a particular brand of mathematically tractable, risk-based neoclassical economics this distinction was all but forgotten, as uncertainties were assumed to be reduced to calculable risk. As a result, economic policies became excessively reliant on often wildly unrealistic models as economists increasingly sought to exert authority over policy debates.
The financial crash as a wake-up call: the need to reclaim older perspectives
The financial crash of 2007-08 dramatically brought home how this hubristic faith in narrowly-defined models that assumed accurate, predictable knowledge about future outcomes was deeply flawed. Uncertainties inevitably arise in incredibly complex financial systems, and assuming the possibility of risk management proved dangerous and highly damaging. As Andy Haldane, then chief economist at the Bank of England put it, the crisis emerged from “an exaggerated sense of knowledge and control.” This conclusion was echoed by John Kay and Mervyn King who commented: “The inability of experts to anticipate the crisis was not simply the result of incompetence, or wilful blindness, but reflected much deeper problems in understanding risk and uncertainty.”
The grip of a particular version of neoclassical economics of control has not always been evident. Many well-regarded economists – from Friedrich von Hayek to John Maynard Keynes to Alfred Shackle – have commented on how important it is to take uncertainty seriously, and how confident predictions can be foolhardy. Referring to the prices of commodities or the outbreak of war, in 1937 Keynes famously observed: “about these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know . . .”. Coming from a very different political standpoint, Hayek noted in his Nobel lecture: “I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge that is likely to be false”. It was probably Shackle who tackled the epistemic challenge of economics and elaborated the importance of uncertainty most thoroughly, highlighting the vital task of negotiating the “the void of unknowledge”.
In the paper we argue that it is these kinds of insights that need to be reclaimed for a more robust and useful economics for an uncertain world. This applies as much to the management of global financial markets as it does to the day-to-day responses to climate variability in farming or pastoral settings in Africa, both cases that we explore in the paper. In order to embrace uncertainty where the future remains unknown, a more pragmatic economics is needed, grounded in complex realities rather than reified in abstract models.
We briefly review a range of developments across the broad discipline of economics that begin to do this. Ecological economics, for example, centres analysis on complex socio-ecological systems, while feminist economics highlights the social differences that influence economic dynamics. The experimentalist turn in economics usefully shifts attention from abstract modelling to empirical contexts, although in some versions reverts to a control paradigm by ignoring context and complexity and deriving idealised policy options through randomised control trials.
Embracing uncertainty: drawing on pragmatic approach of Albert Hirschman
Yet to grasp the implications of taking uncertainty seriously, the paper argues that we need to reclaim the ideas and principles expounded long ago by Albert Hirschman. Perhaps one of the greatest development economists of his era, Hirschman offered a grounded, pragmatic approach to development intervention and policy. Starting in the early 1960s, he drew on years of experience of observing development projects, particularly in Latin America. His work, however, was always on the margins of the discipline and, given the dominance of the narrow neoclassical paradigm, Hirschman’s extensive oeuvre is barely taught in development economics courses today. This, we argue, is a grave error. The basic principles of experimentation, learning, adaptation, flexibility and practical wisdom are relevant to all uncertain settings that are frequently encountered during development projects, as Hirschman showed.
Luckily, as the neoclassical paradigm comes under increasing critique, there are growing calls for a more uncertainty-focused approach to economic analysis. Brian Loasby, for example, argues that “the foundation for useful economic theory must be incomplete knowledge, or partial ignorance”, very much echoing the earlier arguments of Hayek, Keynes and Shackle. Meanwhile, in the realm of practical advice around policy, approaches such as ‘decision-making under deep uncertainty’ (DMDU) are becoming increasingly used, pushed by corporate consultancies rather than ivory-tower neoclassical theoreticians.
If there is one big lesson from the financial crash, then it is that uncertainties in complex systems must be taken seriously. A hubristic faith in control economics, whether neoclassical or experimentalist, will quickly unravel. Climate change, geopolitical turmoil and the restructuring of global markets and financial systems only add to the imperative to develop approaches where uncertainty is central. This, we argue, means reclaiming older ideas and refashioning them for contemporary challenges, while fundamentally rethinking how economics is taught and incorporated into both development practice and policymaking.
Ian Scoones is a professorial fellowat the Institute of Development Studies, University of Sussex and leads the European Research Council Advance Grant funded project, PASTRES (Pastoralism, uncertainty, resilience: global lessons from the margins, www.pastres.org).
Read the open access paper: DeMartino, G., Grabel, I. and Scoones, I., 2024. Economics for an uncertain world. World Development, 173, p.106426 (and for a comic-strip interpretation, see https://pastres.org/2023/09/15/uncertain-worlds-2-economics-banking-and-finance/).
Further reading: Scoones, I. (forthcoming, August 2024),Navigating Uncertainty: Radical Rethinking for a Turbulent World, Polity Books.
Note: This article gives the views of the author, not the position of the EADI Debating Development Blog or the European Association of Development Research and Training Institutes.