12 May 2021. According to the mainstream reception, the main assertion of the book is that, assuming the availability of perfect information and rational stakeholders, decisions can be made with different probable outcomes. Since all these rational stakeholders have the same information and act in the same way, there is no scope for entrepreneurial profits.
Teaching material for several generations of economics students
It is, however, a pity that the part of Knight's acclaimed book, which was emphasised in the reception, is his thought experiments on an economy without transaction costs, with perfect information, homogeneous goods and rational stakeholders. This has since become teaching material for several generations of economics students.
But Knight argues in his book that we actually live in a world strongly characterised by uncertainty. Uncertainty means that we are unable to state the probability of different alternative courses of action. In this world, profits are possible because uncertainty creates opportunities. According to Knight, neither researchers nor entrepreneurs should focus on calculating risks and probabilities when performing analyses.
Had some of those who studied under Knight focused on what he saw as the important and actual problem instead, namely uncertainty, perhaps not only the economy but also business management practices might have developed somewhat differently. But not least since the financial crisis of 2007/08 and the ongoing pandemic starting 2020, many economists have become increasingly interested in uncertainty rather than risk, although this process has taken 100 years.
Uncertainty and risk
As interest in uncertainty, i.e. a situation that cannot be translated into risk, increases, so does the relevance of what Knight wrote. The problem of uncertainty, rather than risk, is also central in other disciplines, for example, sociology. Making economics and business studies open to a broader view and providing students with a broader education is the key to improving decision making.
Uncertainty comes from a lack of knowledge. We can reduce uncertainty through research and by establishing stable institutions and rules. But the big problem is that we cannot predict the future, because we are making it as we analyse it.
What stories shape the future? How can we shape the future together? Focusing on uncertainty also means examining how the uncertainty is transformed. And not least, developing methods with which we can analyse uncertainty, reduce it and assess it. To do this, it is beneficial to analyse and know which forms of uncertainty we can reduce and which we cannot.
Prof. Dr. Patrik Aspers is chair of sociology at the University of St.Gallen.
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