Thanks, Ross. It seems to be my lot in life to raise questions about 
others' interpretation of text.

Part of my question was:

"You seem to be saying that Knight believed that whether an
entrepreneur makes profit or loss is due to luck, as opposed to being due to
their management prowess, for example. If that is what you mean, I am not
aware of any place where he expresses that view."

Ross B. Emmett wrote:
>I did not respond at the time because I needed to consult Knight again. Here
>is the crucial passage:
>
>Profit arises out of the inherent, absolute unpredictability of things, out
>of the sheer brute fact that the results of human activity cannot be
>anticipated. . . . The receipt of profit in a particular case may be argued
>to be the result of superior judgment. But it is judgment of judgment,
>especially one's own judgment, and in an individual case there is no way of
>telling good judgment from good luck, and a succession of cases sufficient
>to evaluate the judgment or determine its probable value transforms the
>profit into a wage. (Knight, 1921: 311)
>
>The passage suggests that both Pat and I could be right, depending upon what
>we are trying to explain. If we are looking at the profit that any
>particular entrepreneur makes, Pat is right: it could be the result of the
>entrepreneur's personal judgment. But Knight goes on to say that if the
>entrepreneur is successful in turning a profit in "a succession of cases"
>then that profit is really a "wage" -- a return to a productive factor, and
>not a profit. So over the long haul, or in the aggregate, my interpretation
>emerges: any profit that is not the result of better judgment is just good
>luck. And, as Knight says, the two are almost indistinguishable.

I love this passage because of its reference to the judgment of one's 
own judgment. I paraphrase. "If one judges her own business judgment 
to be correct, we call her income 'profit;' unless she become 
relatively certain how correct her judgment is, in which case, we 
call her income 'wages.'"

This is an interesting paragraph but I cannot agree that it supports 
the claim that Knight believed that profit is due to luck. Reading on 
down the page and onto the next, he writes:

"It is the margin of error in this most ultimate faculty of judging 
faculties whose exercise is the essence of responsible control, which 
constitutes the only true uncertainty in the workings of the 
competitive organization (as of any other organization). And it is 
uncertainty in this sense which explains profit in the proper use of 
the term, the sense toward which economic usage has been groping, 
that of a pure residual income, unimputable by the mechanism of 
competition to any agent concerned in its creation."

Knight's statement that profit is "unimputable by the mechanism of 
competition" is, in my view, quite some distance from the statement 
that profit is due to luck, particularly in light of Knight's other 
statement that "uncertainty in this sense...explains profit in the 
proper use of the term..." Profit, as I understand Knight, is a 
residual that can be attributed to a businessperson's (or producing 
entrepreneur's) dealing with uncertainty. And uncertainty, as he 
defines it, is not in the same category as luck. Both uncertainty and 
residual income are absent from perfect competition, of course.

There is a methodological issue here that concerns how to define 
profit in an intersubjectively meaningful way. It seems to me that 
Knight does the best he can in these passages without going into a 
deep discussion concerning the epistemology of the social sciences.

But perhaps there is another place where Knight deals with profit in 
greater detail.


Pat Gunning