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The Absorption of Uncertainty and Exiting from the Pandemic

The Absorption of Uncertainty and Exiting from the Pandemic Economy Near Us (XXX)

The individuals (and, to some extent, the groups) make decisions based on their perception regarding the future, rather than on a rigorous calculus based on accurate models of rationality (such a conclusion has long been reached by the researchers, and, very curiously, even by some economists!). The perceptions are, in fact, an inextricable mix between information, experience and expectations. And, of course, all of the three ingredients are tinged with uncertainty. Uncertainty is very different from risk – while we can assign to the risk some probability distributions in order to “know” it at least probabilistically, this cannot be done with uncertainty – an obvious clarification given by Frank Knight almost a century ago. Even more, the question of uncertainty in the decision process arises when the public decision-making is involved because:

  1. a) the information asymmetry between the decision makers and the decision targets is much larger than within the organization;
  2. b) the part of the decisions which affect the targets but not the makers is much larger than within the organization (so, the honesty of such decisions is under question much more often).

Consequently, in a quite necessary way, the uncertainty the people face in the case of public decisions is considerable. Herein occurs the so-called uncertainty absorption – that is, the “disappearing” of the uncertainty which was behind the (equal) alternatives among which the decision maker made a choice. Uncertainty absorption is a concept that has emerged in decision theory – it was introduced by March, J.G. and Simon, H. in the 1958 book Organizations, New York: Willey – and says that, when a decision is made, it is communicated without the uncertainty that hovered in the decision-making process, so that uncertainty is absorbed in the communicated decision. We have, here, in fact, a sort of opacity which the targets of those decisions face (for example, such opacity must be well “played” by the deciders in non-imperative public policies, like the monetary one, but, unfortunately, it occurs also in the imperative public policies, like the fiscal one). 

Facing (an exit from) the pandemic 

The hesitations and half-measures applied in facing the pandemic (including the cumbersome gathering of EU institutions to urgently design a unitary and robust plan of early and adequate intervention) has already led, probably, to the first signals of an economic crisis (arisen, by now, especially in the real economy). In order to both counter these first symptoms and exit from their vicinity, the government has to make the right decisions. Particularly regarding the fiscal-budgetary policy, in the short term (and even the medium one) it is not possible (nor relevant) to make predictions or prognoses on the effects of the measures already taken or to be taken. So, the decisions made (or to be made) will necessarily embed the uncertainty not only for the ordinary people but for the deciders themselves as well. Is such a governmental behavior legitimate in a free and democratic society? The question is important and extremely difficult to answer. My opinion is the following:

  • the relationship between liberty and safety/security is (and always was) like walking on a tightrope, because, by the social contract, the state (government) is bound to ensure both the freedom and rights and the safety of its citizens (and of its residents as well) (mentioning that the basic provisions on freedom and democracy are stipulated, from the beginning, in the Constitution);
  • while the freedom is permanently in effect, the democracy is discontinuously objectified (for example, by ordinary political elections or, if the case, by exceptional political referenda);
  • so, in most cases, the public decision regarding the balance between freedom and safety of individuals is made without explicit consultations of society, based on the Constitution, good faith, and good competence;
  • once we have presumed the three conditions of the implicit democratic decision making, there is legitimacy to adopt a public policy that changes the balance between freedom and safety (at a minimum, it must be necessary, temporary and guaranteed reversible).

The problem which is put here is: how transparently and therefore for how long should the public debates last until such a decision is made? The truth is that here we have a political choice. The so-called paradox of decision is also well known: a decision (that is, a choice) can be made if and only if the alternatives on the table are non-ordered hierarchically on any criterion (else, the choice is not a genuine choice, but simply a calculus, that is, a necessary result which does not imply the choice). It is obvious that if we are talking about a decision, no decision can be justified, because such a possibility would reject the decision from its own territory of decisions. The right conclusion is that the government has to make decisions without having the very possibility to justify them within a free and democratic society. Of course, the topic is a little more complicated, because, if it is desired to transparently explain to people the justification of the decision, then the alternatives must be ranked, but the ranking implies a criterion to rank – that criterion is chosen without an existing hierarchy of the available criteria, and so on, by regression to infinite, which leads us to conclude that, at the last instance, a genuine decision is always made…politically.

Coming back to our issue, the fiscal-budgetary policy to be applied in order to not enter or, after the case, to exit from an economic crisis of the real sector of economic production, must be courageous, firm, quick, and adequate in size. Of course, according to their political responsibility, the opposition parties will criticize such decisions, and such a criticism is beneficial both for the government and for the people. Theoretically, the critics in case present some arguments “in mirror” for not making those decisions but, as shown before, neither the justification nor dis-justification are possible in a genuine decision-making process. 

Tentative conclusion 

A number of questions arise now in the area of the present discussion on the decision making peculiarities related to a free and democratic society, especially regarding the fiscal-budgetary policy which will be used to blunt the pandemic’s impact. I believe that:

  • the incapacity, unavailability, unwillingness, (understandable) aversion to risk and uncertainty, and other bottlenecks which the private sector faces, must be completely, adequately, and urgently taken over by the government (at least in the short term and, partially, as a decreasing echo, in the medium one);
  • the costs implied by this positioning of government (especially through the fiscal-budgetary policy) must be assessed as inevitable, necessary, and mandatory under the sanction of waiver of social responsibility obligations, assumed as such based on the social contract; of course, the conventional (and, particularly, the structural) deficit of the consolidated general budget will increase; the public debt (both internal and external) will increase, bringing on the rising costs of paying it in the future, and so on; but, to not do this right now (or even do it too late or do it too modestly) is much worse;
  • when exiting from a pitfall, the energy required is larger than when moving at a steady pace, but, without such an increased effort, the costs increases proportionally with the delay;
  • once again, the decisions targeting the impact of the pandemic are, inherently, political ones and must be put under the aegis of the social responsibility of the government for its citizens. In such a case, no efficiency calculus is permitted, but only the efficacy one. So, the costs are, somewhat, of smaller relevance if the decisions in case are taken competently and courageously. The interest of the future generations is to restore the economic machine – any costs implied by such a restoration will be recovered through the act, while avoiding the decision means that the cost is saved but also the future benefits are foregone. Again, we have arrived at the political nature of the decisions.

 

 
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OEconomica No. 1, 2016