Tuesday, 29 December 2009

Taking a Risk With Uncertainty

Assessment of risk and response to risk are the stuff of which economic behaviour is made. Traditionally an important distinction is made between risk and uncertainty. Risk is a type uncertainty for which we can have a probability distribution - life expectancy, fire, car accidents, and is, therefore, insurable.  There is, too,  pure uncertainty - uncertainty of which probabilities are unknown, thus is not insurable and leads to agents acting on the basis of arbitrary, heterogeneous, and ill-founded expectations.  In economics it is uncertainty of the latter kind that is the prime mover in economic decision-taking.

Sovereign default is technically insurable by the purchase  of credit default swaps but there is no certainty that credit default swaps will be honoured by bust guarantors; we are, therefore, in a no man's land between risk and uncertainty.  Greece, for instance, is a country on the cusp of assessment of risk as opposed to pure uncertainty, just as  sovereign default is on the cusp of insurable uncertainty  and pure uncertainty.

Terrifyingly, so is the United Kingdom.  Numbers can be found elsewhere, but that is where we are.

The United Kingdom is under authoritarian, big state, high tax, redistributive, governance.    Politically the UK is under a leadership that is so devoid of any sense of responsibility (at times reality might be a more appropriate word) that it is deliberately importing the economics of uncertainty and risk into political process.

Knowing that any general election will oust Labour rule comprehensively,  how close to sovereign default can the economy be brought so that political process is rendered wholly subject to economic diktat, and is interrupted?

There is 'must' be interrupted, which is the Brown junta's intention. And there is 'will' be interrupted, which is the bitter end of scorched-earthism when this appalling balancing act along the cliff-top of disaster, motivated by necessity born of Brown's economic incompetence, motivated by desire to leave nothing should power be wrested from him, and motivated by intention to create compelling circumstances for continuity in office, results in an economic fall, a political fall, or both.

Traditional economic analysis leaves little room for discontinuities, structural breaks, and regime changes: but Brown's junta will embrace war and politico-economic collapse before it cedes political power within our country's stable historical and political practice.


Sackerson said...

Merry Christmas, HG. Are you implying that Brown would bring us to a crisis so great that he could declare a national emergency and defer a General Election?

hatfield girl said...

And a Happy New Year to you, S.

What's with the 'would'? Brown is doing it.

I was pleased with the little conjecture of the risk/uncertainty no man's land - it startled a lunching theoretical economist.

The next day I wondered if Brown - a notoriously dilettante economist, as well as not being very bright - might actually now be doing on purpose what in the first stages of this crisis he did by accident out of ignorance and ineptitude. And, with the kind of thinking he probably admires, requiring an authoritarian political superstructure in order to respond to the deteriorating economic base.

hatfield girl said...

S, o/t, what has happened to Raedwald?

Sackerson said...

Couldn't say, sorry; perhaps james or Wolfie can tell you?