QUESTION: What’s your view of Frank Knight’s view of threat versus uncertainty?
HL
ANSWER: Frank Knight was an influential economist and founding father of the Chicago College from which Milton Friedman emerged. He’s recognized 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 extensively cited quote is:
“Uncertainty should 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 no less than, of their causal relations to the phenomena of financial group, are categorically totally different.”
Knight argued that threat refers to conditions the place outcomes are unknown however chances may be calculated (e.g., playing or insurance coverage), making it measurable and manageable. Alternatively, uncertainty describes eventualities the place chances can’t be decided attributable to an absence of historic knowledge or predictable patterns (e.g., unprecedented market shifts). This distinction underpins his idea 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 idea, emphasizing the position of unquantifiable unknowns in shaping entrepreneurial habits and market dynamics. Being a dealer quite than an educational, I 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. This view is compounded by the concept that 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 mentioned many occasions that after I was at school, in economics class, they mentioned the financial system was random. Thus, beneath Keynesian economics, the federal government can easy out the booms and busts to stop one other Nice Melancholy. Then I went to Physics class and was informed 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 basic economists. Arthur Burns was the Fed Chairman when Bretton Woods broke. He concluded that the enterprise cycle existed and at all times gained. 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 basic financial theories.
I had a dialog with Paul Vocker, who informed 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 had been attainable. I purchased my first one for $10 within the Sixties. After 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.
Once 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 combating to remain alive, so they’re interfering in elections to defeat anybody who’s anti-EU – i.e., Romania. It will 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 stress. They are going to NEVER give up energy with no combat. Generally they ship within the troops, and they’ll slaughter protesters like within the Nika Revolt. If the army 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 historical occasions, 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 foundation trigger is at all times the enterprise cycle and the refusal of economists and politicians to grasp that if they don’t respect the enterprise cycle, they’ll go down with it.
