Uncertainty, Profit, and the Limits of Markets

AuthorRoni Hirsch
Published date01 December 2022
Date01 December 2022
Subject MatterArticles
Political Research Quarterly
© 2021 University of Utah
Article reuse guidelines:
DOI: 10.1177/10659129211035829
The past decade, bookended by a major financial crisis
and global pandemic, has stirred much conversation
about uncertainty and our limited means to manage it.
This article draws on the 1920s work of Frank Knight to
argue three main things. First, that, alongside other func-
tions, markets play a direct role in mitigating economic
uncertainties. Second, that this role has been bracketed
and dangerously ignored by mainstream neoclassical
economic models and the normative theories that rely on
them. And third, that the institutions and agreements that
undergird market risk-management are not costless to
society. Even as the immense value of the credit, pay-
ment, and wage-labor systems is revealed through the
ravages of crisis, the regular price of maintaining these
systems remains hidden from view. This price, I will
argue, is the systemic drive toward social inequality and a
reductive view of human life—a price Knight’s critique
of neoclassical economics brings to the fore as an urgent
political question today.
In mainstream economics and much of the recent nor-
mative work on markets and justice, the market, in its
ideal form, is a decentralized mechanism for allocating
resources and income (Heath 2018; Satz 2012). An analy-
sis attuned to the challenges of uncertainty, however,
reveals a second historical role for markets: the allocation
of risk-exposure, responsibility, and authority. From the
early development of contracts as a means to secure future
obligations (O’Malley 2000) to present-day derivatives
exchanges (Ascher 2016; Mehrling 2005), markets have
been used to confront uncertainty and put a price on cer-
tain kinds of risk-taking. In so doing, they have unevenly
dispersed risk and its rewards, duties, and prerogatives.
Knight’s theory enters this picture with an additional
nuance: a distinction between risk and uncertainty that
has fundamentally altered the way we understand the dis-
tribution of risk. For Knight, uncertainty represents that
which is entirely unpredictable and incalculable about the
future while risk is an insurable future contingency. The
latter can be widely diffused and effectively handled with
the tools of probabilistic calculus and neoclassical eco-
nomics. The former, however, requires what Knight
called individual “uncertainty-bearers,” who gained a
measure of real authority and control and could lay claim
to substantial pecuniary compensation. While readers
have predominantly focused on the epistemological
35829PRQXXX10.1177/10659129211035829Political Research QuarterlyHirsch
1Van Leer Jeruslaem Institute and the Hebrew University, Jerusalem,
Corresponding Author:
Roni Hirsch, Van Leer Jerusalem Institute, Jabotinsky 43, Jerusalem
9214116, Israel.
Email: ronih@vanleer.org.il
Uncertainty, Profit, and the
Limits of Markets
Roni Hirsch1
The neoclassical market model is the overwhelming basis for contemporary views of markets as fair, efficient, or
both. But is it an appropriate starting point? The article draws on Frank Knight’s 1920s work on the economics of
uncertainty to show that the ideal of perfect competition conceals a tacit trade-off between equality and certainty.
Largely undetected, this trade-off continues to govern financialized capitalist democracies, evading normative and
political debate. By explaining how markets and firms resolve the problem of uncertainty, Knight shows that all
supposed market benefits, even allocative efficiency, are not costless to society. More specifically, Knight argued that
modern markets are premised on a tacit agreement between a handful of “daring” entrepreneurs and the “risk-averse”
public: the former agree to carry the uncertainties of business-life in return for a substantially larger share of its power
and rewards. Despite the highly static assumptions of neoclassicism, therefore, and its linked assumption of perfect
knowledge, uncertainty is far from absent in modern economics. It is built into firms and markets and manifests itself
as a steep social and material hierarchy.
inequality, risk and uncertainty, markets and justice, Frank Knight, financialization, theories of the firm
2022, Vol. 75(4) 982–993

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