Risk, Uncertainty and Profit (Dover
Books on History, Political and Social
Science) by Frank H. Knight
Before Knight There Was Schumpeter And Keynes
This revolutionary work taught the world how to systematically distinguish
between risk — randomness with knowable probabilities — and
uncertainty — randomness with unknowable probabilities — in order to
accurately and properly ascertain a ventures potential profitability. Knights
methodology served as the foundation of the Chicago School of
Economics.
Personal Review: Risk, Uncertainty and Profit (Dover Books on
History, Political and Social Science) by Frank H. Knight
Even though the recent research in microeconomic theory has paid
attention (somewhat reluctant in my opinion) to the topic of the

"uncertainty", i.e. the Knightian uncertainty, it has not been successfully
incorporated in the main theoretical framework, yet. The one of the
evidences may be that we still cite D. Ellsberg's paper in QJE as the one of
the most important work in this field: it is like citing Keynes' "General
Theory" in every microeconomic paper as in 1950s and 1960s.
The book is pleasant to read: it is full of insights, usually forgotten by now,
including the complemental tendency of the theoretical and empirical
works in economics. The most important accomplishment is that he argued
that the exisence of the "uncertainty", the event whose probablity cannot
be estimated priori or from empirical data, explains the instablity of the
perfect competition, the (lucklustre) justification for the monopoly and the
oligopoly, and the superiority of the private property system (capitalism). It
is noticable that many phenomenons metioned in the book can be still
applicable now, and the last part implies the author's thought regarding to
the path of the capitalism, which is explored in more depth in Schumpeter's
work despite the differences in two economists' predictions.
Knight is one of the economist who lived in the transition of classical into
neoclassical economics. The book predicts the emergence of more
mathematical economists, but cannot escape from the influence of the
former. The same thing can be said of the works of Schumpeter, Viner,
and Veblen. Despite being one of the most famous economists, he and
Schumpeter has no student who followed their lines of works: is it because
their imaginative ways in conducting the reserach, or because of the trends
in economics which trapped their students? (Stigler was a student of
Knight, but which interest do their works share, except for their interests in
history of economic thoughts?)
It is worth reading because it reminds of what economics is or should be
about, not because it prescribes the solution which could not be found in
the modern economic works. We are witnessing the transition of several
countries into the private economics with the mixed results. It should be
noted that Hayek's work is the starting point in this field, the transition
economics or the comparative economics, but Knight's work is more
appropriate, pratical, and dynamical.
Thus, if you are uncomfortable with the current economics, want to
explore more idiosyncratic works in economics and think about the big
picture in the path of the society, or are tempted to diverge from the
dullness of the business books in your bookshelf, then this may what you
have been looking for. Unless you are struck with the optimism that cannot
be easily found in the present.
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