UNCERTAINTY, PROFIT AND ENTREPRENEURIAL ACTION: FRANK KNIGHT’S CONTRIBUTION RECONSIDERED

Abstract

Frank H. Knight held two different concepts of “uncertainty” in Risk, Uncertainty and Profit (1921). The first is based on the possibility of insuring against an outcome. This interpretation can be found in the existing literature on Knight’s work. The second refers to all instances where individuals have subjective expectations about the future. This second meaning forms the basis of Knight’s (1921) theory of profit and entrepreneurial action (Knight I). Knight I is limited; it provides no explanation of the incentive for entrepreneurial action. Knight’s neglected later theory of profit (1942) (Knight II) highlights the deficiencies of Knight I by offering a clear incentive for entrepreneurial action. The differences between the two theories of profit reflect the impact of incorporating historical time into economic analysis.