Sunlighting Knightian Uncertainty/ Commemorating McArthur (New Working Paper)

One hundred years after its publication, Frank Knight’s Risk Uncertainty and Profit remains in print. But although a select group calls it a classic, very few economists now even read the book, much less use it in their courses or research.

Knight himself carries considerable blame. The book’s thesis is true by definition – and therefore cannot be verified or falsified. More importantly Knight provides no direction for extension or modification and thus no help to scholars who must produce ‘normal’ research guided by a common paradigm. Knight himself made no further attempt to build on the thesis of his book, which was based on his PhD dissertation at Cornell and published when he was an assistant professor at Iowa. Rather, Knight would go on to become an eminence grise at the University of Chicago through his extensive writing on a range of topics which had little to do with uncertainty or profit and his leadership of a world-class economics department.

And the writing is truly terrible, possibly reflecting a “rural education” (as Angus Burgin put it).

I had never heard of Knight or his book in my graduate courses at Harvard’s business school and economics department.  Even Richard Caves’s wide ranging survey of Industrial Organization that I took in 1985 made no mention. Then, a couple of years or so after I joined Harvard Business School’s faculty to teach entrepreneurship in 1988, Dean John H. McArthur summoned me to a nearly three-hour lunch at his corner table in the faculty club. We talked about everything — except why we were having lunch. At the end he said something like: “perhaps you’d like to know why I asked you to lunch. Well I’ve been reading your stuff and I wanted to put a face to the writing, to know who this person was who was writing this stuff.”

A few days later a 1971 edition copy of Knight’s book arrived in interoffice mail with one of John’s classic handwritten notes, which went something along the following lines. “I think this will suit the way you think of the world.”

It more than suited. Knightian uncertainty and the ‘judgments’ and ‘opinions’ it impels became a lodestar for nearly all my research and writing. I included the terms wherever I could, sometimes in titles and often into the texts.  I even managed to sneak in Knightian uncertainty and judgment into an article on corporate governance published in the Journal of Financial Economics. The editor and referee didn’t want it, but I thought it was crucial, and they let it go — towards the end of the article.

I made Knightian uncertainty the organizing principle for my 2000 book on entrepreneurship. The book’s stories made it a success — as academic books go — but the conceptual framing was utterly ignored.

I decided to take a crack at just the conceptual part in a stand-alone article, where discretion (cowardice?) being the better part of valor, I excluded any mention of Knightian uncertainty. But even that I could not publish anywhere. In 2006, after securing a grant from the Kauffman Foundation, I managed to start, Capitalism and Society, which by a remarkable coincidence included it in its first issue. Bob Solow who wrote a commentary, also published in the same issue clearly saw the Knight connection. Regardless, that piece went nowhere.  (The journal flourished for about 12 years; what happened to it then is a sad story).

 Being stubborn, I am going to take one last crack at bringing Knight out of the shadows. This just published working paper sketches out where I am going with this. By the end of the summer, I hope to flesh out the argument, and perhaps, in another year, produce a university press monograph. If nothing else, this will serve as a tribute to John McArthur and Alfred Chandler (whose ideas I will include in the second part of my article and monograph). 

This is also the last thing I will put out under a Harvard Business School ‘label.’ The first, published 42 years ago, was a case study on the Republic of Ireland that I wrote for the late Bruce Scott (who coincidentally co-authored a book on France with John McArthur.)