Risk, Uncertainty, and Profit

Author: Frank H. Knight (USA) / An Jia
Publisher:
Publish Date: 2006-02-01
Features: This book is a landmark work in the history of economics. George Stigler called it one of the two most influential books written before World War II that still have a significant impact today. In the hundred years of the 20th century, economic thought went through three overlapping and highly debated phases. The first phase was the "marginal revolution" stage, which was synthesized by Marshall and organized into neoclassical economic thought. The second phase was the "Keynesian revolution," a period of skepticism toward the laissez-faire principles of neoclassical economics. The third phase emerged in the late 1960s and is known as the "neoclassical counter-Keynesian revolution." This revolution actually had a long gestation period and many supporters, among whom the most important figure was the author of this book, Frank H. Knight. The book provides a standard exposition of neoclassical economics, where Knight focuses on explaining why perfect competition does not necessarily eliminate profits. His core point is the concept of "uncertainty" distinct from risk. According to Knight, risk refers to situations where the probability of outcomes can be determined and can be transferred through insurance; uncertainty, on the other hand, refers to situations where the objective probability is completely unknown. Knight believed that even in long-run equilibrium, entrepreneurs would earn profits as a reward for bearing uncertainty.