The Origin of Profit

Once again, the concepts of uncertainty and risk underlying modern economic theory have their origins in Frank H. Knight’s classical book Risk, Uncertainty and Profit (1921). Knight was the first to clearly distinguish between risk and uncertainty as two distinct types of imperfect knowledge about the future, which have different implications for the functioning of the market mechanism. Yet, in economics it is commonly revered to Knight as the one who distinguishes between measurable risk and immeasurable uncertainty in terms of probabilities. This representation of Knight’s concepts leaves out important aspects of Knight’s thoughts about risk and uncertainty. I do not want to remove the distinction between the two concepts, yet, I want to show that the difference goes far beyond the availability of numerical probabilities. Furthermore, Knight’s theory of uncertainty questions the economic theory of the individual and gives much more freedom to the individual, than neoclassical economic theory would allow before. It is therefore the aim of this chapter to show that the classical interpretation of Knight’s distinction between risk and uncertainty is too narrow. I will argue that the distinction is not about the availability of probabilities but about the limits of human knowledge.