Knightian Uncertainty

If Frank Knight is arguably the most famous economist few have heard of, it is because of Knightian uncertainty which established a major idea and reputation in the discipline of economics, but was not the beginning of other pioneering work, as he turned to teaching and essay-writing as a critic of other ideas and thinkers that were to remain more famous than himself. Knight put forward his ideas on uncertainty in his doctoral thesis and then turned it into his classic book Risk, Uncertainty and Profit (1921). As Jochen Runde quips “It is safe to say that Frank Knight is more widely quoted than read on his eponymous distinction between risk and uncertainty” (Runde 1998, p. 539). Knight is credited with drawing out the distinction between risk, as known chance, and uncertainty, as unmeasurable probability. The distinction is important to Knight because while risks can be calculated and insured against, it is uncertainty that paves the way for opportunities to create profit and the entrepreneurial enterprise. Risk, Uncertainty and Profit was to establish Knight in the pantheon of economists, but he never became a household name like his contemporary John Maynard Keynes or pupil Milton Friedman. Many have attempted to assess Knight in modern terms, either to make use of his work for today or to offer a modern-day insight into what he said at the time. Knight, as one author has said, is one “itch economists need to scratch” (Emmett 2009, p. 49). Knight’s thesis rewards study today, even scratching that itch, for economic reasons given the rise of an entire risk management industry in recent decades and the recessionary times that erupted in 2008, as well as for social reasons given the ever-increasing tendency to be risk-averse in our modern society; all of this in the context of globalization and protest over these past decades.