Uncertainty, Profit, and the Limits of Markets

• Author: Roni Hirsch
• DOI: http://doi.org/10.1177/10659129211035829
• Published date: 01 December 2022
• Date: 01 December 2022
• Subject Matter: Articles

https://doi.org/10.1177/10659129211035829

Political Research Quarterly

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DOI: 10.1177/10659129211035829

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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

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35829PRQXXX10.1177/10659129211035829Political Research QuarterlyHirsch

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1Van Leer Jeruslaem Institute and the Hebrew University, Jerusalem,

Israel

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

Abstract

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.

Keywords

inequality, risk and uncertainty, markets and justice, Frank Knight, financialization, theories of the firm

2022, Vol. 75(4) 982–993

Article