Scientific Approach on 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

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.