No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 230 outcome is simply not possible to predict. From a biblical perspective, we know that man proposes, but God disposes! For example, consider the warning in James 4:13-14: “ 13 Come now, you who say, ‘Today or tomorrow we will go to such and such a city, and spend a year there and engage in business and make a profit.’ 14 Yet you do not know what your life will be like tomorrow. You are just a vapor that appears for a little while and then vanishes away.” Consider, also, the guidance in Proverbs 16:9: “ 9 The mind of man plans his way, But the LORD directs his steps.” We don’t know what a sovereign and providential God is going to ordain. This is true even if we are walking completely in God’s will; God is often a God of surprise! Who would have thought Sarah would have a son? Or that David could slay a giant? Or that the Christ would come into the world as a helpless babe? While there is much reason to disagree with economist John Maynard Keynes’ macroeconomic theory, Keynes did have some very useful insights. Speaking of uncertainty, Keynes sai d 1 : “By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealth-owners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know ” (emphasis added). Mr. Keynes rightly distinguishes between those activities that have some reasonable mathematical basis for assigning a probability of occurrence and those outcomes that do not. Those outcomes that might have an assigned probability of occurring may be considered as risk , while those that are truly unknown are considered as uncertain . While you may not have had a class on statistics, a simple example should help clarify. Consider a fair coin (one that is not weighted—i.e., that heads or tails is equally likely). If you flip the coin, you only have two Risk: a future event that can be assigned a probability of occurrence. Risky events can be prepared for, or “hedged.” Uncertainty: a future event for which a probability of occurrence cannot be known, or that knowledge of the event itself cannot be known. Those outcomes that might have an assigned probability of occurring may be considered as risk, while those that are truly unknown are considered as uncertain.