QUESTION: What’s your view of Frank Knight’s view of threat versus uncertainty?
HL
ANSWER: Frank Knight, an influential economist and founding father of the Chicago College from which Milton Friedman emerged. He’s recognized for his work on threat and uncertainty, and he articulated a key distinction between the 2 ideas in his 1921 e-book “Risk, Uncertainty, and Profit”. The broadly cited quote is:
“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term ‘risk,’ as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different.”
Knight argued that threat refers to conditions the place outcomes are unknown however chances might be calculated (e.g., playing or insurance coverage), making it measurable and manageable. However, uncertainty describes situations the place chances can’t be decided on account of a scarcity of historic information or predictable patterns (e.g., unprecedented market shifts). This distinction underpins his idea of revenue, the place entrepreneurs bear uncertainty (not mere threat) as a supply of potential financial reward.
This framework stays foundational in economics and decision-making idea, emphasizing the position of unquantifiable unknowns in shaping entrepreneurial habits and market dynamics. I, being a dealer slightly than an instructional, nonetheless, disagree insofar as nothing is actually UNCERTAIN. The issue with classical economists is that they haven’t explored historical historical past, assuming the information is inconsistent or nonexistent. Then this view is compounded by the concept the financial system is random, and we are able to handle it, which was first offered by Karl Marx.
I’ve mentioned many occasions that after I was in class, in economics class, they mentioned it was random, and this authorities can easy out the booms and busts below Keynesian Economics to forestall one other Nice Melancholy. Then I went to Physics class and was informed that NOTHING is random. I concluded that somebody was mendacity, and it was the economists. They refused to research the enterprise cycle and presumed they might handle it.
Anybody who had precise expertise disagreed with the traditional economists. Arthur Burns was the Fed Chairman when Bretton Woods broke. He concluded that the enterprise cycle existed and at all times gained. Then there was Paul Volcker, the subsequent Fed Chairman. Paul additionally got here to the identical conclusion that the enterprise cycle existed regardless of the traditional financial theories.
I had a dialog with Paul Vocker, who informed me my Financial Confidence Mannequin was right and agreed that the enterprise cycle was about 8 years. This flies within the face of classical economists.
I knew that Roman cash have been attainable. I purchased my first one for $10 within the Nineteen Sixties. After they eliminated the silver from the coinage in 1865, I noticed the connection to the exact same occasion that marked the beginning of the Third Century Disaster.
Once I assembled the coinage to reply a gnawing query: How did Rome fall? Was it like a 747 coming in for a touchdown regularly, or was it abrupt? I found it fell from 50 %+ silver to 0.2% in simply 8 years.
I found no such factor as random walks down the road. That’s put out by individuals who can not see the cycles earlier than their eyes. Flip the financial system down, and politics will at all times flip, irrespective of who’s in energy. The EU is combating to remain alive, so they’re interfering in elections to defeat anybody who’s anti-EU. This can solely blow up of their faces. The financial system will at all times drive a response, and human nature has by no means modified in 6,000 years. Whoever is in energy will at all times reply equally to the identical outdated financial strain.
Learn Hammurabi’s Authorized Code. It’s wage and value controls in response to an financial disaster. Even the Bible outlawed socialism. Attacking the wealthy and sophistication warfare has been an issue since historical occasions and it has at all times resulted within the collapse of such economies. Nothing has modified – ever. So, the place is the UNCERTAINTY?
