Uncertainty and general equilibrium: an evaluation of Professor Knight’s contributions to economics

Abstract

Abstract One hundred years ago Frank Hyneman Knight made a distinction between risk and uncertainty. The distinction, and the theories of profit and entrepreneurship that followed from it, are widely considered his most important contributions to economic theory. In this paper, we ask why they have not had more impact on economic theory and whether they are indeed his most important contributions. The distinction between risk and uncertainty has been of limited use; in making it, Knight overlooked all forms of partial information. The uncertainty theory of profit in turn has been superseded by theories of imperfect competition based on oligopoly and monopolistic competition. Rather than these innovations, Knight’s real contribution to economics was promoting the model of perfect competition.