QUESTION: What’s your view of Frank Knight’s view of danger versus uncertainty?
HL
ANSWER: Frank Knight, 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 e-book “Danger, Uncertainty, and Revenue”. The broadly 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 ‘danger,’ as loosely utilized in on a regular basis speech and in financial dialogue, actually covers two issues which, functionally at the very least, of their causal relations to the phenomena of financial group, are categorically completely different.”
Knight argued that danger refers to conditions the place outcomes are unknown however chances will be calculated (e.g., playing or insurance coverage), making it measurable and manageable. Alternatively, uncertainty describes eventualities the place chances can’t be decided as a result of 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 danger) as a supply of potential financial reward.
This framework stays foundational in economics and decision-making idea, emphasizing the function of unquantifiable unknowns in shaping entrepreneurial habits and market dynamics. I, being a dealer fairly than an instructional, nevertheless, disagree insofar as nothing is actually UNCERTAIN. The issue with classical economists is that they haven’t explored historic historical past, assuming the information is inconsistent or nonexistent. Then this view is compounded by the concept the economic system is random, and we will handle it, which was first introduced by Karl Marx.
I’ve mentioned many occasions that after I was at school, in economics class, they mentioned it was random, and this authorities can easy out the booms and busts beneath Keynesian Economics to forestall one other Nice Despair. Then I went to Physics class and was advised that NOTHING is 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 received. Then there was Paul Volcker, the following 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 advised me my Financial Confidence Mannequin was appropriate 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 1865, I noticed the connection to the exact same occasion that marked the beginning of the 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 touchdown regularly, 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 the road. That’s put out by individuals who can’t see the cycles earlier than their eyes. Flip the economic 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. This may solely blow up of their faces. The economic 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 outdated financial stress.
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 occasions and it has at all times resulted within the collapse of such economies. Nothing has modified – ever. So, the place is the UNCERTAINTY?
