Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

RADICAL SUBJECTIVISMnot simply entail a major extension of formal exercises inconstrained maximisation. They indicate the attitude of moderneconomic theory towards the question of rational ignorance. Thetraditional formulation of the problem of decision underuncertainty is still dominant, above all because of the central roleassigned to utility-maximising individuals; but an increasingnumber of papers are devoted to alternative ways of formalisinguncertainty. The literature on incomplete contracts is a notableexample. The argument for signing an incomplete contractconceives fully rational agents who decide not to spend time indescribing states that in principle can be described (for instance,because they are not easily observed from outside by a judge, assuggested in Hart and Holmstrom 1987). In this instance agentsmay form beliefs that can be represented as probabilities over the setof unexplored states.It might be argued that there are different, and much moreconvincing, reasons for justifying an analysis of ignorance, asargued in the Austrian tradition. But it is difficult to understand whyone should not take stock of the effort of ‘erroneously’ justifiedanalyses. If the main analytical point is the one that concerns thepossibility of listing the future events, it is counterproductive todeny that there are many studies seriously confronting it.One possible objection to my point might be that it is difficult tosay which contributions can be labelled as part of the mainstreamand which not. Of course, Williamson is not a typical neoclassicalrepresentative. But his contribution draws on opportunisticbehaviour at least as much as other neoclassical work. If the crucialpoint is whether or not we are dealing with utility maximisers, allthe studies I have mentioned can be considered mainstream. It mightalso be argued that these studies do not constitute a coherent entity.For instance, Kreps’s formalisation holds only if the ‘surethingprinciple’ is assumed, while studies in non-additive probabilitytheory are based precisely on its denial, which emerges from theEllsberg paradox (for example, see Machina 1987 and Camerer andWeber 1992). But that does not change the substance of theargument: the question of how to formalise decision making underuncertainty is central in much of modern economic theory, and thesuggested solutions cannot be simply considered variations inconstrained optimisation. 5To sum up on this question of rational ignorance: my point is thatthe comparison between neoclassical theory and alternativeparadigms, such as the Austrian, should take into account the131