Reflecting on 'Risk, Uncertainty and Profit' on the book's 100th anniversary

ASU's Center for the Study of Economic Liberty hosts symposium on what political theorists could learn from author Frank Knight

portrait of author Frank Knight

American economist Frank Knight published “Risk, Uncertainty and Profit” in 1921. In it, he argues that the most important difference between the actual world of competition and the economist’s model was that individuals in economic models were granted knowledge of events and prices far beyond what individuals in the actual world of competition could ever possess.


The actual world of economic competition does not match the model of perfect competition that is the starting point for most economic analysis. Today, that is hardly a brash statement. Yet, one hundred years ago, when Frank Knight wrote the now-famous “Risk, Uncertainty and Profit,” it was rather novel.

In celebration of the 100th anniversary of the classic book, Arizona State University’s Center for the Study of Economic Liberty, led by center Director and Professor Ross Emmett, is hosting a symposium Friday, Jan. 29. Five invited participants will discuss their contributed essays drawing on their work on the political economy of risk and uncertainty, or what political theorists could learn from Knight.

In “Risk, Uncertainty and Profit,” Knight argues that the most important difference between the actual world of competition and the economist’s model was that individuals in economic models were granted knowledge of events and prices far beyond what individuals in the actual world of competition could ever possess. In actual markets, competition was imperfect because participants could not know what the model of perfect competition required them to know. Other factors were also important, but uncertainty, for Knight, was the most important reason why competition in the real world was imperfect.

His goal was to nudge economic theory toward a focus on imperfect competition. But first, he believed he had to clarify what role perfect competition played in economic theory, and why imperfect knowledge was the most important limitation that economists’ faced in applying the insights of economic theory to the real economic world.

One hundred years ago, in 1921, Knight published his first attempt at a clarification — “Risk, Uncertainty and Profit.” The publication was a revised version of his dissertation on the theory of profit, titled “A Theory of Business Profit,” which had won second place in the general category of the Hart, Schaffner and Marx economic essay competition in 1916. Second place was good enough to get him a contract for publication with Houghton Mifflin, who expected publication quickly and was a bit annoyed when Knight took five years to complete his “minor revisions.”

No wonder. The title was changed, to the now-famous “Risk, Uncertainty and Profit,” and the chapters were reorganized into three sections and expanded from 10 to 12. The final two chapters were entirely new material, none of which appeared in the dissertation. Knight’s supervisors — John Maurice Clark and Allyn Abbott Young — attested to the publisher that little had been changed, but they must have known better. In the end, the book was a success. It has never been out of press, despite the original publisher’s unwillingness to reprint or republish it themselves.

In 1933, Lionel Robbins arranged for the London School of Economics (LSE) to reprint the book so that his students would have access to it. While he was alive, Knight provided a sequence of prefaces to the LSE reprints that updated students on changes in his own economic ideas. Following World War II and the rapid expansion of higher education in America, both Harper & Row and “Gus” Kelley (eventually Kelley Reprints of Economic Classics) arranged for republication in the American market. Fifty years after the publication of Knight’s classic, his employer, the University of Chicago, arranged for a new republication of the work, with a preface by Knight’s student George Stigler.

Two main appropriations of Knight’s work have sustained its success. The first is of course the notion of uncertainty, which was quickly picked up and attached to entrepreneurial action. More recent popular works, such as Nassim Taleb’s “The Black Swan” and “Radical Uncertainty: Decision-Making Beyond the Numbers” by John Kay and Mervyn King, reflect this appropriation of Knight, even while disagreeing with him on some things. In the Austrian tradition, Knight’s notion found resonance with the emphasis on entrepreneurial judgment and Hayek’s knowledge problem — that we must make use of knowledge without ever having it completely integrated with the rest of our knowledge. Economic planning, in particular, feels afoul of this problem, because the knowledge needed to plan was dispersed across individuals in “bits of incomplete and frequently contradictory knowledge,” Hayek claimed in quite a Knightian fashion. And a new approach to management theory puts uncertainty to use: Nicolai Foss and Peter Klein’s “Organizing Entrepreneurial Judgment.”

The second appropriation of Knight’s work actually took place in economics classrooms, when the second section of “Risk, Uncertainty and Profit” was used frequently as a means of teaching price theory — the theory of perfect competition — to graduate students. At the LSE, in classes at the University of Chicago and elsewhere, students encountered Knight’s evolving understanding of economic theory.

Indeed, it is remarkable that we end up celebrating today a book whose core ideas its author moved beyond through his continued grappling with the implications of imperfect competition. After his adoption of the historical methodology of Max Weber in the late 1920s, Knight moved to an economic theory that sought relevance to underlying issues in the competitive world, without requiring it to predict the outcomes of individual decisions, or even policy decisions.

One of Knight’s last economics essays, published in 1944, was titled “Realism and Relevance in the Theory of Demand.” Another implication of the Weberian outlook was his turn toward thinking about how competition functioned in different social and political institutional contexts — fascism, socialism, communism and democracy. In that context, he authored a lecture whose title is best captured by the journalistic version he published shortly after the 1932 election: “Can We Vote Ourselves Out of the Fix We’re In?”

The “Risk, Uncertainty and Profit” 100th Anniversary Symposium is free and open to the public. Online registration is required.

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