Risk, Uncertainty and Profit [Hardcover]

Frank H. Knight (Author)

Book Description

Publication Date: November 1, 2006

A timeless classic of economic theory that remains fascinating and pertinent today, this is Frank Knight's famous explanation of why perfect competition cannot eliminate profits, the important differences between "risk" and "uncertainty," and the vital role of the entrepreneur in profitmaking. Based on Knight's PhD dissertation, this 1921 work, balancing theory with fact to come to stunning insights, is a distinct pleasure to read. FRANK H. KNIGHT (1885-1972) is considered by some the greatest American scholar of economics of the 20th century. An economics professor at the University of Chicago from 1927 until 1955, he was one of the founders of the Chicago school of economics, which influenced Milton Friedman and George Stigler.

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--This text refers to the Paperback edition.

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A timeless classic of economic theory that remains fascinating and pertinent today, this is Frank Knight's famous explanation of why perfect competition cannot eliminate profits, the important differences between "risk" and "uncertainty," and the vital role of the entrepreneur in profitmaking. Based on Knight's PhD dissertation, this 1921 work, balancing theory with fact to come to stunning insights, is a distinct pleasure to read. --This text refers to the Paperback edition.

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Product Details

• Hardcover: 400 pages
• Publisher: Cosimo Classics (November 1, 2006)
• Language: English
• ISBN-10: 1602060053
• ISBN-13: 978-1602060050
• Product Dimensions: 8.6 x 5.6 x 1.3 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars  See all reviews (6 customer reviews)
• Amazon Best Sellers Rank: #970,261 in Books (See Top 100 in Books)

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48 of 50 people found the following review helpful:

5.0 out of 5 stars Model of how economic problems should be analyzed, March 8, 2001

By 

Greg Nyquist (Eureka, California USA) - See all my reviews
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This review is from: Risk, Uncertainty and Profit (Midway Reprint) (Paperback)

This is the best work of economic theory I have ever read. There is no work in economics that evinces better judgment on the main issues or that does a better job of balancing theory with a sense for the facts. Knight begins by defending theoretical (that is, deductive) economics. Unlike the economic rationalists, however, Knight does not believe that theoretical economics can lead to precise results. The application of the "analytic method" must always be "incomplete," he argues. Theoretical economics thus can only deal with "tendencies," that is, "with what 'would' happen under simplified conditions never realized, but always more or less closely approached in practice." This methodology Knight describes as "the method of successive approximations." Knight also warns of the dangers of rationalism and the necessity of constantly checking one's results against the facts. "When the number of factors taken into account in deduction becomes large, the process rapidly becomes unmanageable and errors creep in... It is better to stop dealing with elements separately before they get too numerous and deal with the final stages of the approximation by applying corrections empirically determined."

Armed with the method, Knight proceeds to tackle several important problems in economics, especially dealing with the theoretical construct of "perfect competition." By always keeping his head firmly within the empirically real, Knight is able to bring a great deal of sound judgment to a number of issues. Knight had a keen sense of human nature and how human beings behave in the real world of fact. He knew that most economists had made men out to be far more rational than they really were. Businesses, he argued, did not merely seek to meet the needs of the consumers; no, they sought to create new needs through innovation, advertising, and even a sort of manipulative hypnotism. In this, Knight argued, we find both progress and abuse, civilization and fraud. Knight also brings a good deal of sense to the problem of interest, demonstrating the psychological inadequacy of all time-preference theories of interest. But Knight's most important contribution consists in his analysis of the difference between risk and uncertainty. Risk, Knight argues, is a measurable probability that something could happen, like the probability that an individual will be struck by lightening or hit by a car. Uncertainty is a kind of immeasurable risk--e.g., predicting short term flucations in exchange rates. Knight's analysis is crucial to understanding economic reality. Knight's distinction between risk and uncertainty, for instance, explains why the rise of derivative securities in financial markets is so dangerous. Derivatives attempt to insure uncertainty, which is immeasurable, as if it were risk (which is measurable).

20 of 20 people found the following review helpful:

1.0 out of 5 stars Great Book--Terrible "Reprint", February 3, 2009

By 

Social Scientist (Boston, MA) - See all my reviews

This review is from: Risk, Uncertainty And Profit (Hardcover)

Knight's work is a classic. Unfortunately, the Kessinger "reprint" listed here is actually a terrible photocopy of someone's desk copy of the old Houghton Mifflin printing. The print is dark and unclear and there are underlinings and marks on the text throughout this book from someone--I am not kidding when I say it is actually a photocopy. I am not sure how this is even legal, or why this product is sold on Amazon. Shame on them. I am returning my copy and going with another version. I suggest you do too.

16 of 17 people found the following review helpful:

5.0 out of 5 stars Before Knight there was Schumpeter and Keynes, November 23, 2004

By 

Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
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This review is from: Risk, Uncertainty and Profit (Paperback)

Knight's Risk,Uncertainty and Profit(RUP) is a classic work ,especially with respect to Knight's analysis of the distinction between risk and uncertainty and the role each plays in the decision making calculus of the entreprenuer or the firm.For instance,Knight recognized that the negative impact of uncertainty could be reduced for those firms that were able to increase their size and get larger and larger over time.Advertising would allow firms to deal with the uncertainty of consumer responses to the introduction of new products over time ,as well as to changes in consumer preferences.Knight was the first to clearly recognize that economic profit is the return to the successful entreprenuer or owner of the firm to compensate them for the bearing of uncertainty.Knight's analysis of the connection between uncertainty and economic profit corrected the errors of Ricardo and Marx,who regarded economic profit as an unearned surplus .Keynes's integration of expected economic profit into the specification of his aggregate supply function,Z,where Z =P+wN(P equals expected economic profit),can be traced back to Knight's earlier discussions.It is strange that economists still are having trouble specifying Keynes's Z function nearly 70 years after the publication of the General Theory in 1936.However,Knight's theoretical analysis of uncertainty at both the micro and macro level is not as impressive as Schumpeter's analysis of uncertainty in his Theory of Economic Development(1912)or of the path breaking analysis of John Maynard Keynes in chapters 6 and 26 of the A Treatise on Probability(1921).In this latter book,Keynes operationalized a quantitative method of dealing with uncertainty(insufficient weight of the evidence,w)by means of his conventional coefficient of risk and weight,c.This coefficient allows a decision maker to incorporate uncertainty and nonadditive probabilities into a technical analysis of decision making.The only author who comes close to Keynes is D.Ellsberg with his practically identical index to measure ambiguity called rho.There are still some unanswered questions that can be asked in this area of economic thought.Why didn't Knight cite the earlier work of Joseph Schumpeter on the risk versus uncertainty distinction?Further,why didn't Keynes cite both Knight and Schumpeter in his chapters 12 ,17 and 22,where he discussed the issue of the effect of uncertainty on investment in new capital goods and on stock market speculation?