Friday, 19 December 2014

Knightian Uncertainty, Class Domination & Market Democracy

Knightian uncertainty is risk that can't be measured. Ellsberg's paradox highlights our 'ambiguity aversion' towards Knightian Uncertainty.
If Markets capture all relevant information, and human beings evolved on a Darwin's, not Deuteronomy's fitness landscape,  it follows that Commerce will be characterised by hedging effects (i.e. comonotonicity is violated) and so no straightforward Choquet Expected Utility model can gain purchase.
Class domination in a Market Democracy can arise if inequalities in Income generate differences in asset endowments (including Human and 'Social' Capital) such that further Income inequality is generated.
Clearly, assuming Technology is ratcheted such that the production possibility frontier can't collapse, for this to occur, a class of assets (or hybdrid derivatives of a 'Parrando' type) must exist which always yield positive returns. If this is not the case then it is nonsense to speak of 'Class' because agents within it are both risk-taking and receiving rents simultaneously and there is no guarantee that this isn't a zero, or negative sum, game. In other words, there is bound to be intense intra-class conflict between gross renters and gross risk-takers. Thus, Trade Unions gain a rent for old members (under last-in-first-out) by putting more risk on new or non members. This generates a conflict. New members lose less if the T.U is radical and, short term, this can seduce old members who hope for increased rents. Middle to Long term, however, such a compact isn't stable and will rend apart Class cohesion. The same point may be made about any interest group- even those for whom price wage and service provision discrimination is easy by reason of a physical or costly-to-circumvent barrier between markets, because the dynamic and allocative dead-weight loss grows exponentially such that at the margin intra-class conflict increases.
There is a long established strain in Economics which assumes that there is always a riskless positive real reward for 'thrift'. Perhaps Providence has indeed arranged matters so. But in that case Darwin was wrong. If that's what you believe, come out and say so on Fox News. If not, you are obliged to accept that Knightian uncertainty is ubiquitous and therefore no riskless positive return assets can be assumed to exist nor is there any Coasian workaround for the Market (because hedging effects arise) 'internalizing' the Choquet integral.

Thus, though Class Domination under Market Democracy may or may not arise, we have no a priori way of parsing the question unless it is posited that 'ambiguity aversion' is an artifact and no Knightian Uncertainty actually obtains.
However, this is to throw the baby out with the bathwater because, absent Knightian Uncertainty, Market Democracy wouldn't be desirable. (If all Risk is measurable, the market solution is easily dominated and, instead of Democracy, we'd just have a once and for all Social Contract. This holds trivially if resources are used up in the functioning of the Market and /or the Democratic process.)
Thus Market Democracy can't 'sanction' anything including 'class domination'  because it is the Knightian future fitness landscape itself  which decides what outcome obtains. (All assets are hedges which could be wiped out. There is no way to both have a Market and also devise a Choquet type workaround. Factor in cognitive bias and being rich today could well be a recipe for being the poorest of the poor tomorrow.)

Now, we can still have a debate on this topic but it will have to be couched in the language of evidential decision theory and, at the margin, will cash out as speculative General Systems bullshit. It can't have any prescriptive or regulative role.

Ultimately as Alan Kirman points out, 'representative agent models' are worthless because no Social or Biological process can be modeled in that way provided we evolved by Natural Selection.

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