QUESTION: What’s your view of Frank Knight’s view of danger versus uncertainty?
HL
ANSWER: Frank Knight was an influential economist and founding father of the Chicago College from which Milton Friedman emerged. He’s identified for his work on danger 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 ‘danger,’ as loosely utilized in on a regular basis speech and in financial dialogue, actually covers two issues which, functionally not less than, of their causal relations to the phenomena of financial group, are categorically totally different.”
Knight argued that danger refers to conditions the place outcomes are unknown however chances might be calculated (e.g., playing or insurance coverage), making it measurable and manageable. Then again, uncertainty describes situations the place chances can’t be decided attributable to a scarcity of historic knowledge or predictable patterns (e.g., unprecedented market shifts). This distinction underpins his principle of revenue, the place entrepreneurs bear uncertainty (not mere danger) as a supply of potential financial reward.
This framework stays foundational in economics and decision-making principle, emphasizing the function of unquantifiable unknowns in shaping entrepreneurial habits and market dynamics. Being a dealer fairly than an educational, I disagree insofar as nothing is really UNCERTAIN. The issue with classical economists is that they haven’t explored historic historical past, assuming the information is inconsistent or nonexistent. This view is compounded by the concept the financial system is random, and we will handle it, which was first introduced by Karl Marx and furthered by John Maynard Keynes.
I’ve stated many instances that after I was at school, in economics class, they stated the financial system was random. Thus, below Keynesian economics, the federal government can clean out the booms and busts to forestall one other Nice Despair. Then I went to Physics class and was advised that NOTHING was random. I concluded that somebody was mendacity, and it was the economists. They refused to analyze 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 subsequent 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 advised me my Financial Confidence Mannequin was right 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 Sixties. Once they eliminated the silver from the coinage in 1965, I noticed the connection to the exact same occasion that marked the beginning of the Roman third Century Disaster.
After I assembled the coinage to reply a gnawing query: How did Rome fall? Was it like a 747 coming in for a gradual touchdown, 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 Wall Road. That’s put out by individuals who can not see the cycles earlier than their eyes. Flip the financial system down, and politics will at all times flip, regardless of who’s in energy. The EU is preventing to remain alive, so they’re interfering in elections to defeat anybody who’s anti-EU – i.e., Romania. This can solely blow up of their faces. The financial system will at all times power 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 strain. They may NEVER give up energy and not using a struggle. Typically they ship within the troops, and they’re going to slaughter protesters like within the Nika Revolt. If the navy stands down, the federal government falls, as in Russia in 1991.
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 historic instances, and it has at all times resulted within the collapse of such economies. Nothing has modified – ever. So, the place is the UNCERTAINTY? The overthrow of a authorities or a separation of a authorities is way extra frequent, and the basis trigger is at all times the enterprise cycle and the refusal of economists and politicians to understand that if they don’t respect the enterprise cycle, they’ll go down with it.
