Nobel Prize Winner Hints of Austrian School-Type Thinking About Uncertainty

The Salt Lake City Tribune reports:

Lars Peter Hansen is an economic model-builder, but he’s just as interested in the unknown and uncertain spaces in the construction.

"Models … at the end of the day they’re wrong. They’re simplification, they’re abstraction," he said. "You need to know if they’re wrong in important ways or interesting ways."...

Hansen is in the business of studying, explaining and predicting how the complex global system of buying and selling works, but he knows his models have limitations — and that’s where things get interesting.

"Financial markets may look very cautious some days and very bold other days," said Hansen. "What controls those? I think it’s a very fascinating problem."

The perfect model that would explain precisely how, say, a revolution in Ukraine would affect natural gas prices in the U.S. isn’t exactly the goal, he said. Because even with a flawless academic explanation, playing things out in the real world inevitably makes them messier.

"We have to stick people inside our models, and people add uncertainty," he said.

Instead of trying to eliminate the unknown, he said, we should acknowledge it. After the financial crisis hit, for example, many said the massive, complex problem needed an equally intricate solution.

Hansen disagrees, especially because it wasn’t immediately clear exactly what went wrong.

"It may well be that complicated problems … with limited understanding require more simple approaches, ones that are more transparent and easily understood," he said. "This notion of uncertainty and of limited knowledge should play much more of a central role in policy than it does now."

As for the financial crisis, Austrian Business Cycle Theory has done a good job of explaining that, which Hansen doesn't seem to get, but his comments on uncertainty sound almost Misesian-lite.

From The Quotable Mises:

In the universe there is never and nowhere stability and immobility. Change and transformation are essential features of life. Each state of affairs is transient; each age is an age of transition. In human life there is never calm and repose. Life is a process, not a perseverance in a status quo.
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It is certainly true that the necessity of adjusting oneself again and again to changing conditions is onerous. But change is the essence of life. In an unhampered market economy the absence of security, i.e., the absence of protection for vested interests, is the principle that makes for a steady improvement in material well-being.
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It is only the passionate pro-socialist zeal of mathematical pseudo-economists that transforms a purely analytical tool of logical economics into an utopian image of the good and most desirable state of affairs. 

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What a man can say about the future is always merely speculative anticipation.
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Keynes did not add any new idea to the body of inflationist fallacies, a thousand times refuted by economists… He merely knew how to cloak the plea for inflation and credit expansion in the sophisticated terminology of mathematical economics.

And Hans Hermann Hoppe reminds us in 15 Great Austrian Economists:

 Like Menger, Böhm-Bawerk, and Mises before him, Rothbard adheres firmly to epistemological and methodological individualism. Only individuals act; consequently, all social phenomena must be explained—logically reconstructed—as the result of purposeful individual actions. Every “holistic” or “organicist” explanation must be categorically rejected as an unscientific pseudo-explanation. Likewise, every mechanistic explanation of social phenomena must be discarded as unscientific. Humans act under conditions of uncertainty. The idea of a social mechanic and equilibrium is useful only insofar as it enables us to grasp what actions are not, and in what respect they are fundamentally different and categorically distinct from the operations of machines and automatons.