Radical Uncertainty, Dynamic Competition and a Model of the Business Cycle: The Implications of a Measure and an Explanation of What Is Supposed Non-Measurable and Non-Explainable

  •  Angelo Fusari    


The influence of radical uncertainty and expectations on economic behaviour is indisputable, whether on
entrepreneurship, innovation, investment, or the behaviour that contributes to the business cycle. It is rather
surprising, therefore, to see widespread ambiguities in accounts of this crucial aspect of business life and, indeed,
human existence. In particular, the frequent assumption ex hypothesis that radical uncertainty is non-measurable
and non-explainable constitutes a major misunderstanding that obstructs the analysis of economic growth and
development and, more generally, the study of economic dynamics.
This essay first of all underlines the conceptual difference between uncertainty and expectations. It then
establishes the possibility and delineates a method of measuring true or radical uncertainty by means of the
monthly EU business tendency surveys. This method allows the derivation from these surveys of both more and
better information than they at present provide, and also some indicators that are relevant mainly in an
evolutionary perspective. In order to obtain a deeper understanding of such procedures, some applications have
been carried out. A model of dynamic competition and the business cycle centred on the relation between
innovation and uncertainty is then specified and tested using a FIML estimator.

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