Reconsidering Frank Knight's Risk, Uncertainty, and Profit.

• Author: Emmett, Ross B.

In 1921, Houghton and Mifflin finally published the second-place essay from the 1917 Hart, Schaffiter, and Marx economics dissertation competition. The publisher must have been exasperated with the author, Frank H. Knight, and his two supervisors, J. M Clark and A. A. Young, all of whom claimed that "minor corrections" had taken four years. In fact, Knight's presentation of the theory of perfect competition was revised, the material on uncertainty' and entrepreneurial judgment was expanded, and a much longer discussion of the relevance of the book's themes to the social control of economic processes was added to the final chapter. Even the manuscript's title was changed, from "Cost, Value, and Profit" to Risk, Uncertainty, and Profit. (1) When Knight submitted the essay to the competition, he was still at Cornell University, reading economic theory as a postdoctoral scholar with Herbert Davenport. When Risk, Uncertainty, and Profit (Knight 1921b) was finally published, he was a tenured associate professor of economics at the University of Iowa, with a key criticism of Alfred Marshall's price theory already published (Knight 1921a). In between, he had spent two years as an instructor of statistics for the Economics Department at the University of Chicago.

At the time of its publication, Risk, Uncertainty, and Profit was met with little by way of fanfare. Wesley Mitchell provided a short review in the American Economic Review, saying that although he did not share an affinity for Knight's type of economic theory, the distinction between risk and uncertainty "is not less valid to the realistic economist than to the pure theorist" (1922, 275). G. P. Watkins published a longer review in the Quarterly Journal of Economics that was critical of several key aspects of Knight's distinction between risk and uncertainty, especially in terms of its explanation of business profit. By the time Watkins's review was published, the same journal had already published the first of Knight's two Harvard lectures on ethics and economics (Knight 1922, 1923), and Knight had begun writing his first textbook on economics for students at the University of Iowa, part of which became The Economic Organization (Knight 1933a). Knight continued to publish some articles in economic theory (for example, Knight 1924), but the themes of Risk, Uncertainty, and Profit began to recede from his work. In a letter to Jacob Viner in 1925, he acknowledged that he wasn't a very good theorist and thought any contributions he might make would be in the history of economic thought and the study of institutionalism (see Emmett 2006, 109). He was hired to teach those subjects when he returned to Chicago in the late 1920s. At the time of his move, he was finishing a translation of Max Weber's General Economic History (Weber 1927).

Not exactly the story of an economics classic that you were expecting to read, right? To cap off what seems like a lackluster history, at the end of his career Knight described Risk, Uncertainty, and Profit as "a Jugendarbeit ... a 'masterpiece' in the old sense, by which an apprentice qualified for admission to the guild" (1957, lii). Once Knight passed admission, he took his professorial career away from its starting point. If it weren't for his dispute with the Austrians (especially F. A. Hayek) over capital theory in the 1930s, he might not have published any more work in economic theory. That said, he did continue to work on an economics textbook until the mid-1940s. Other than The Economic Organization, none of the drafts of that text were ever published.

However, perhaps unbeknownst to Knight, his "masterpiece" was finally about to start its own life on a foreign shore. Lionel Robbins took over the teaching of the undergraduate year-long "Principles of Economic Analysis" course at the London School of Economics and Political Science (LSE) in the 1929-30 academic year. By 1933, Robbins had realized that his course was increasingly built around Knight's book (Robbins 2018, xvii) and began to identify it as a key text for his students, along with Philip Wicksteed's Common Sense of Political Economy (1910), Alfred Marshall's Principles of Economics ([1890] 1920), A. C. Pigou's Economics of Welfare (1920),and Edwin Caiman's Review of Economic Theory (1929). But in the spring of 1933, Robbins discovered that Houghton Mifflin's supply of remaining copies of Risk was insufficient for the number of students in his course and that the publisher was not interested in republishing it. A number of letters crossed the Atlantic between Robbins, Knight, and the Hart, Schaffner and Marx essay committee (which owned the copyright), with the result that the committee gave Robbins permission to reprint the book as part of the LSE's Series of Reprints of Scarce Tracts in Economics and Political Science. Robbins asked Knight to write a new preface to the work, perhaps to update his thinking about economics (see Knight 1933c). At about the same time, in Chicago Knight found himself increasingly called upon to teach price theory during Viner's absences. His students began reading Risk, Uncertainty, and Profit as well as The Economic Organization (Knight 1933a) in order to understand what he was teaching. Thus it was that a classic was born at the LSE and the University of Chicago in the early 1930s.

What did students at Chicago and the LSE find in Risk, Uncertainty...