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Patrick Gunning is correct that Risk, Uncertainty and Profit is
about the entrepreneur, but for Knight, entrepreneurs only exist in
an environment in which there is uncertainty; that is, only in a world
in which perfect knowledge is absent. Also, Knight's theory of
entrepreneurship is overshadowed by a sense of tragedy: just as
the possibility of economic knowledge is undermined by the lack of
perfect knowledge, so too the entrepreneur's flair for finding profit
opportunities is undermined by the creation of a corporate
organization (see my 1999 HOPE article).
A brief reader's guide and several quotes from Risk, Uncertainty
and Profit (Knight, 1921; all pages refer to the Univ. of Chicago
Press paperback edition of 1971, but I think the pages are the
same as in the original). I know that stringing quotes together is
not proof of anything, but it does give you something of the flavor of
the attention Knight gave to perfect knowledge and uncertainty in
the book.
"The makers and users of economic analysis have in general still
to be made to see that deductions from theory are necessary, not
because literally true -- that in the strict sense they are useful
_because not_ literally true -- but only if they bear a certain relation
to literal truth and if all who work with them constantly bear in mind
what that relation is." (chapter 1, page 15)
"In the course of the argument it will become increasingly evident
that the prime essential to that perfect competition which would
secure in fact those results to which actual competition only
'tends,' is the absence of Uncertainty (in the true, unmeasurable
sense). Other presuppositions are mostly included in or
subordinate to this, that men must _know what they are doing_,
and not merely guess more or less accurately." (chapter 1, page
20).
Chapters 3 and 4 take up perfect competition, not departing from
Marshall much, except to emphasize the role of knowledge in the
theory. Chapter 5 then shows that it is possible to incorporate
change into the theory of perfect competition without problems, as
long as people know what the change will be: "in every case the
necessary and sufficient condition . . . is that the change can be
anticipated over the period of time to which producers' calculations
relate." (chapter 5, p. 172). Chapter 6 has the other prerequisites
which I mentioned in my earlier message (not chapter 7).
Chapter 7 opens with: "Chief among the simplifications of reality
prerequisite to the achievement of perfect competition is . . . the
assumption of practical omniscience on the part of every member
of the competitive system." (chapter 7, p. 197). After showing that
it is not possible for this assumption to be correct because of
uncertainty, Knight concludes the chapter by saying: "It is this
_true uncertainty_ which by preventing the theoretically perfect
outworking of the tendencies of competition gives the characteristic
form of 'enterprise' to economic organization as a whole and
accounts for the peculiar income of the entrepreneur." (chapter 7,
p. 232).
Chapter 8 distinguishes between risk and uncertainty: risk can be
assimilated to perfect competition because the probabilities of
outcomes can be known and hence insured; uncertainty is
completely unknowable. Chapters 9 to 12 explore industrial
organization in a world of uncertainty.
Ross Emmett
Augustana University College
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