Adam Smith's Definition of Uncertainty and His Application of His Uncertainty Concept in Part I, Chapter XI of the Wealth of Nations

Abstract

Adam Smith was the first economist, philosopher or mathematician in history to give a clear and specific definition of what the term “uncertainty” meant and to apply it consistently in his analysis of decision making in the Wealth of Nations. The term uncertainty for Smith, as it was for Keynes with his weight of the evidence variable, w, refers to epistemological uncertainty and has nothing whatsoever to do with the ontological uncertainty claims made by the Post Keynesian and Institutionalist schools of economics. Smith also was the first to recognize that uncertainty comes in different degrees or gradations. This paper covers Smith’s application of his uncertainty concept in Part I, chapter XI. This material has not been examined since Smith wrote his Wealth of Nations in 1776. Smith’s approach to decision theory leads directly to the use of probabilistic interval estimates and an emphasis on the lower bound.