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 Faculty from which Milton Friedman emerged. He’s identified for his work on threat and uncertainty, and he articulated a key distinction between the 2 ideas in his 1921 ebook “Danger, Uncertainty, and Revenue”. The broadly cited quote is:
“Uncertainty have to be taken in a way radically distinct from the acquainted notion of Danger, from which it has by no means been correctly separated. The time period ‘threat,’ as loosely utilized in on a regular basis speech and in financial dialogue, actually covers two issues which, functionally a minimum of, of their causal relations to the phenomena of financial group, are categorically completely different.”
Knight argued that threat refers to conditions the place outcomes are unknown however possibilities will be calculated (e.g., playing or insurance coverage), making it measurable and manageable. Then again, uncertainty describes eventualities the place possibilities can’t be decided resulting from an absence of historic information or predictable patterns (e.g., unprecedented market shifts). This distinction underpins his concept 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 concept, emphasizing the position of unquantifiable unknowns in shaping entrepreneurial habits and market dynamics. I, being a dealer somewhat than a tutorial, nonetheless, disagree insofar as nothing is actually UNCERTAIN. The issue with classical economists is that they haven’t explored historical historical past, assuming the info is inconsistent or nonexistent. Then this view is compounded by the concept that the economic system is random, and we will handle it, which was first offered by Karl Marx.
I’ve mentioned many instances that after I was in class, in economics class, they mentioned it was random, and this authorities can clean out the booms and busts beneath Keynesian Economics to stop one other Nice Melancholy. Then I went to Physics class and was instructed 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 may 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 received. Then there was Paul Volcker, the following 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 instructed me my Financial Confidence Mannequin was appropriate 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. Once 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 progressively, 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’t see the cycles earlier than their eyes. Flip the economic system down, and politics will at all times flip, regardless 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 may solely blow up of their faces. The economic system will at all times pressure 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 previous financial stress.
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 instances and it has at all times resulted within the collapse of such economies. Nothing has modified – ever. So, the place is the UNCERTAINTY?
