10. Uncertainty and Probability

In this chapter, the author explores how probability theory has been used in modern mainstream economic theory. It is argued that probability theory cannot be validly used in economic theory because of the uncertain nature of knowledge in historical time. The author raises a key distinction between the idea of ‘probability’ and the idea of ‘possibility’ which seems to have confused many economists. The underlying assumptions behind econometrics, which have come to dominate empirical economics, are examined in detail and shown to be mostly reliant on an invalid conception of the material that economist deals with. An alternative methodological framework for both economic theory and applied economics is then laid out, drawing on the work of Wynne Godley. Finally, Bayesian theory is critically examined.