I would like to compliment and complement Salzano's excellent reference   
to Knight. The essence of Knight's view is that in order to best   
comprehend the inner workings of the economic system, one should adopt   
what Knight somewhat inaccurately calls "the producer's point of view."   
What he is really referring to is the /entrepreneur point of view/,   
which he had explored so well in his /Risk, Uncertainty and Profit/.   
That this is so is evidenced by his use of the term "entrepreneur" in   
this passage.  
  
The reason he gives for believing that the economic system is best   
comprehended from this point of view is based on the idea that the goal   
of economics (as distinguished from ethics or some broader interest) is   
to understand entrepreneurs' (producers') adjustments to changes in   
consumer valuations and to other changes. This point of view was   
prevalent at the time due mainly to the work of one of his teachers,   
Davenport (/Economics of Enterprise/ 1914). In short, one understands   
the economic system if he approaches it from the entrepreneur point of   
view. And this is most directly accomplished by building images of the   
system in which subjective sacrifices are separated from the   
calculations and plans of entrepreneurship that are made in terms in   
money opportunity costs.  
  
This reversal of axes goes to the heart of the distinction between   
economics as a study of entrepreneurial adjustments (and innovation --   
see below) and economics as an experimental science that employs   
mathematical models. The mathematics of demand and supply is equivalent   
regardless of how the axes are depicted; but only one procedure helps   
one target the distinctly human element. And it is this distinctly human   
element that enables human beings to make progress in the satisfaction   
of wants which is far beyond that of the non-human animals.  
  
  
Knight deals with innovation in his capital theory (see "Diminishing   
Returns from Investment" (1944)). The key to understanding his capital   
theory, which has caused massive confusion among "Knightian scholars,"   
is this same notion -- that the goal of economics is to isolate   
entrepreneurship and to study its calculation and planning. In capital   
theory, Knight targets the inherent unpredictability (in terms of   
numbers) of entrepreneurial inventiveness and its effects. At the same   
time, he notes that its substantial contribution to economic growth is   
factually undeniable and that the contribution is partly due to its   
external effects. The external effects are largely in the form of   
diffusion of technology, although Knight does not think of technology in   
the formal sense of changes in quantifiable methods of production.  
  
Unlike the passage quoted by Salzano, Knight habitually presents his   
capital theory by using the term "producer," but not "entrepreneur." The   
exception is his 1944 paper. This terminological choice is undoubtedly   
responsible for the massive confusion. The idea of innovation is present   
in his earlier articles on capital and interest. However, his choice of   
terminology has led scholars to either disregard them or dismiss them.  
  
Pat Gunning