That economic decisions are made without certain knowledge of the consequences is pretty self-evident. But, although many economists were aware of this elementary fact, there was no systematic analysis of economic uncertainty until about 1950.
Interpretation
Economic decisions often occur without complete information about their outcomes.
Kenneth Arrow highlights the inherent uncertainty in economic decision-making. Despite the obvious nature of this uncertainty, it was not until the mid-20th century that economists began to systematically analyze its effects, suggesting a gap in the understanding of economic theory during earlier periods.
In practice
During a keynote speech on financial literacy, one might quote Arrow to emphasize the importance of understanding risk in investments.
When a business or an individual spends more than it makes, it goes bankrupt. When government does it, it sends you the bill. And when government does it for 40 years, the bill comes in two ways: higher taxes and inflation. Make no mistake about it, inflation is a tax and not by accident.
Economics taught in most of the elite universities are practically useless in my context. My country is dominated by drug economy and a mafia. Textbook economics does not work in my context, and I have very few recommendations from anybody as to how to put together a legal economy.
I get heartfelt thanks from all kinds of people. Today I heard from a waitress in Georgia who has lost her job and is trying to figure out how her local bank can change the terms on her credit card, and I heard from a physicist at a major research university who wants to explain a better theory of financial stress tests.
If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely.
Higher taxes never reduce the deficit. Governments spend whatever they take in and then whatever they can get away with.
Customers often value a good more when its price goes up. One reason may be its signaling value. An expensive handcrafted mechanical watch may tell time no more accurately than a cheap quartz model; but, because few people can afford one, buying it signals that the owner is rich.
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