That economic decisions are made without certain knowledge of the consequences is pretty self-evident. But, although many economists were aware of this elementary fact, there was no systematic analysis of economic uncertainty until about 1950.
Interpretation
Economic decisions often occur without complete information about their outcomes.
Kenneth Arrow highlights the inherent uncertainty in economic decision-making. Despite the obvious nature of this uncertainty, it was not until the mid-20th century that economists began to systematically analyze its effects, suggesting a gap in the understanding of economic theory during earlier periods.
In practice
During a keynote speech on financial literacy, one might quote Arrow to emphasize the importance of understanding risk in investments.
The rich do not have to invest enough in the poorest countries to make them rich; they need to invest enough so that these countries can get their foot on the economic ladder . . . Economic development works. It can be successful. It tends to build on itself. But it must get started.
President Bush announced his new economic plan. The centerpiece was a proposed repeal of the dividend tax on stocks, a boon that could be worth millions of dollars to average Americans. Well, average stock-owning Americans. Technically, Americans who own a significant amount of shares in dividend-dealing companies. Well, rich people, that's what I'm trying to say. They're going to do really well with this.
This long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people.
The 'boom-bust' cycle is generated by monetary intervention in the market, specifically bank credit expansion to business.
If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.
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