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THE WRITING AND RECEPTION OF RISK, UNCERTAINTY AND PROFIT

ROSS B. EMMETT1

May 2, 2020

Risk, Uncertainty and Profit was published in 1921, but started as the doctoral thesis “A
Theory of Business Profit,” defended in 1916. The first half of the paper examines the
changes in organization and argument that Knight undertook between completing the
thesis defense and the book’s publication five years later. The reorganization helped
Knight focus attention on uncertainty as the most important aspect of economic life
standing between the worlds of perfect and imperfect competition, and to explore more
of its implications for both price theory and entrepreneurial judgment.
The second half of the paper carries the story forward by examining the
reception Risk, Uncertainty and Profit received from 1921 until Knight’s retirement in
the early 1950s. The study of its reception uses a database of citations of Knight’s book
in economics journals found through a JSTOR search. While Knight’s book is
remembered today mostly for its introduction of uncertainty, in the economics literature
the book’s treatment of basic price theory is more frequently cited, especially in the
leading economics journals of the interwar period. The citation data indicates that the
role of Risk, Uncertainty and Profit in economics education at the London School of
Economics and the University of Chicago extended and expanded the book’s impact.

Frank H. Knight’s Risk, Uncertainty and Profit, (1921b) was published by Houghton

Mifflin under the company’s agreement with the organizers of the Hart, Schaffner and Marx

(HSM) Company’s annual economics essay competition.2 The book was a revised version of the

essay “Cost, Value and Profit,”3 which was awarded second place in the HSM competition’s

general category in 1917.4 First place in the category was awarded to Edmund E. Lincoln, for his

1 The author is Professor of Economic Thought, School of Civic and Economic Thought and Leadership, and
Director of the Center for the Study of Economic Liberty, Arizona State University. The author would like to thank
Pedro Garcia Duarte for the idea of, and assistance with, the JSTOR search used as the foundation for Part III; and
Mehrdad Esfahani for assistance with the charts.
2 Risk, Uncertainty and Profit was the 31st prize essay published in the HSM series.
3 No copy of “Cost, Value and Profit,” survives, a fact that figures only slightly here.
4 The HSM company sold its brand and went out of business several decades ago. Efforts to locate the company’s
correspondence and records from the period of Knight’s award have failed, perhaps in part because a major fire

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1917 Harvard University dissertation, “The Results of Municipal Electric Lighting in

Massachusetts.” Lincoln’s essay was submitted in timely fashion after the award, published

within a year (Lincoln 1918), and reviewed four times (Matherly 1919; Anderson 1919; King

1919; Truchy 1920). A JSTOR search revealed that his dissertation has not been cited in the

economics literature since 1920. 5

“Cost, Value and Profit” was a revised version of Knight’s doctoral dissertation at

Cornell University in 1916, entitled “A Theory of Business Profit” (Knight 1916, hereafter

TBP). Knight successfully defended the dissertation in early June. The chair of his thesis

committee, Allyn A. Young, completed the official form, and the other two members of the

dissertation committee, Walter F. Willcox (economics) and Frank Thilly (philosophy), added

their signatures.6 On June 8th, Knight wrote the Dean of the Graduate School, James E.

Creighton, asking for permission to have his doctorate conferred before the thesis was

published.7 In the letter, he promised that “the thesis will be properly published and all

requirements complied with inside of two years.”8 Creighton approved the request, and the

doctorate was conferred on June 21, 1916 at Cornell’s annual spring commencement. Little did

any of the parties involved expect that it would be five years before Knight fulfilled his promise.

destroyed the main plant and office in Chicago in the postwar era. Harvard University’s library does hold some
correspondence related to the prize because Harvard professor Edwin Gay chaired the HSM prize committee.
5 Lincoln stayed at Harvard as an economics instructor for several years before joining the International Telephone
& Telegraph Co. in New York City. He worked with IT&T as an executive until becoming an economist at Du Pont,
where he remained until his retirement in 1953 (Collier 2017).
6 See the form in Frank Knight’s student file, Cornell University Archives. Allyn Young wrote in his clear cursive
handwriting. However, a little flourish Young added to the final “t” in the word “profit” on the form led to an error
in the title of Knight’s thesis on the commencement program. The title was identified on the program as “A Thesis
in Business Profits” (Cornell University 1917, 221). That error was replicated in the University’s publication of
advanced degree recipients in its official publications thereafter.
7 At the time, Cornell required successful doctoral students to deposit multiple copies of their dissertation with the
Cornell University Library before their degree could be conferred. Typesetting costs for a scholar with a family may
have spurred Knight’s submission to the HSM essay competition.
8 Letter from Frank Knight to Dean Creighton, June 8, 1916, Frank Knight Student File, Cornell University. A
curious side note is the fact that Creighton was the philosophy professor who is said to have kicked Knight out of
philosophy because he was too skeptical, leading him to pursue a doctorate in economics instead (Johnson 1952).

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Knight remained at Cornell for the 1916-1917 academic year as a post-doctoral fellow. In

the spring of 1917, Young was called to Washington to direct the Bureau of Statistical Research

for the War Trade Board, and subsequently moved permanently to Harvard. Knight departed

Ithaca that same summer, joining the University of Chicago as an instructor of statistics and

economics for two academic years (1917-1919).9 John Maurice Clark, who was the leading

theorist in Chicago’s department, agreed to assume primary oversight responsibility for Knight’s

ongoing revisions (Knight 1921a, ix). In the fall of 1919, Knight started as an assistant professor

at the University of Iowa. By the summer of 1920, three years after the HSM award, the

publisher was undoubtedly concerned about completion. One of the winners from two years prior

to Knight’s entry had taken three years to get his manuscript published (Nourse 1918), but

Knight was clearly going to exceed that mark. During 1920, Knight and Young exchanged a

final round of letters regarding revisions, which Young commented upon as late as January

1921.10 Sometime in late 1920 or the first couple months of 1921, Knight submitted the

completed manuscript to Houghton Mifflin, and the publisher proceeded with publication of

Risk, Uncertainty and Profit (hereafter RUP) that summer.11

If Houghton Mifflin had hesitations about the revisions to RUP, they had a point. The

first part of this paper traces the key changes in the structure of the manuscript and its argument

between the completion of TBP in 1916 and the publication of RUP in 1921. While the topic

stayed the same, the argument was reorganized, the presentation of price theory completely

9 Knight was a substitute for Jacob Viner, who joined his Harvard University thesis supervisor Frank Taussig in
Washington, DC, working with the U.S. Tariff Commission. He returned to Chicago two years later, at the same
time Knight moved to Iowa. Viner completed his dissertation in 1922 and was made full professor at Chicago in
1925 (Arthur I. Bloomfield 1992).
10 See typescript with Young’s notes in the Frank H. Knight Papers, Box 31, Folders 2-3, Special Collections
Research Center, University of Chicago Library.
11 The earliest library accession date found is August 1, 1921, on the copy available in the US Library of Congress
(https://archive.org/details/riskuncertaintyp00knig/page/n7/mode/2up). A summer publication date is also supported
by the date of the first review, cited later in the paper, which was released a little less than a year later.

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rewritten, and the discussion of uncertainty moved, expanded and extended – enough so that the

word was added to the title. TBP was a good thesis written by a bright student who had a knack

for sorting out theoretical inconsistencies. RUP was a brilliant treatment of neoclassical price

theory that clarified and extended its treatment of profit and, in the process, tested economists’

willingness to engage both the question of the entrepreneur and the limits of their discipline’s

capacity for scientific explanation. If that was not enough, RUP also provided an early

exploration of the economic consequences of the separation of ownership and management, and

considered the notion that salaried managers might not be assumed to have either their owners’

or the social interest as their own.

Knight’s mentors may well have “shaded the truth” when telling the publisher the extent

of the revisions, given that RUP was a major advancement on TBP. Or perhaps HSM simply

thought the essay would disappear once published, as many of their HSM essays had. They

fulfilled their obligation to the HSM essay competition and left it at that.

Twelve years later, in 1933, Lionel Robbins contacted Houghton Mifflin about reprinting

RUP. Robbins’ “Principles of Economics” course was organized around Knight’s book (Robbins

2018), and copies were getting scarce. The publisher told Robbins that they were not interested,

and, since he had asked, they would allow him to reprint the book as part of the LSE Scarce

Tracts in Economics and Political Science series (Knight 1933b). Robbins then asked Knight to

write a new preface to join the reprint (Knight 1933a). Between 1933 and 1960, the LSE reprint

series maintained RUP, and Knight provided occasional prefaces to update students on his

evolving ideas (Knight 1940; 1948; 1957a). Two U.S.-based publishers also began reprinting

RUP as American university student populations expanded in the post-war boom (Knight 1957b;

1965), and RUP was translated into Spanish, Japanese and Italian (Knight 1947b; 1959; 1960b).

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The University of Chicago, Knight’s own institution, waited until the 50-year mark to initiate its

own reprint (Knight 1971).12

Part I of this paper highlights the changes made to the book’s organization, as well as

three key changes in the argument that Knight made between TBP and RUP. The first is a

fundamental change in the underlying approach to price theory that he adopted for RUP. The

second is a clarification of the relationship between entrepreneur, salaried manager, and the firm.

And the third is an extension of the treatment of uncertainty relative to the roles of entrepreneur

and salaried manager, considering their contribution to not only the firm’s profitability but

society’s welfare as a whole.

Part II of the paper focuses on RUP’s reception between 1921 and 1950. These dates map

closely onto the pluralistic interwar period in economics (Morgan and Rutherford 1998) and also

to Knight’s own career. After almost a decade at the University of Iowa, he was recruited back to

the University of Chicago. He retired from the economics department at the University of

Chicago in 1951, after serving as the American Economic Association’s president in 1950, but

remained as the Morton D. Hull Distinguished Service Professor until his death in 1972. As we

will see in Part II, RUP actually has a significant jump in citations starting in the mid-1930s.

Thus, RUP remained a central text for the discipline through at least the end of Knight’s career.

PART I: Structural and Theoretical Changes from TBP to RUP

The Initial Structure: TBP

The text and organization of TBP suggest that it was written in haste, with a far smaller literature

base than Knight used in RUP. The sense of haste is present in the revisiting the author makes to

12Emmett (under review) examines all the LSE reprint prefaces to see how Knight informed students about the
changes in his economic theory from the 1930s to the 1950s.

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earlier statements in order to modify their import, and the poorer organizational structure. The

first chapter provides a brief methodological statement, with only Walter Bagehot (1880) and

John Stuart Mackenzie (1895) cited.13 The methodological comments are followed by a cursory

history of the treatment of profit that draws primarily upon five sources, all in German (von

Mangoldt 1855; Pierstorff 1875; Mataja 1884; Gross 1884; Porte 1901).14 But as he drew the

first chapter of TBP to a close, Knight identifies the economist whose work is the

methodological and theoretical focus of his attention – J. B. Clark and his Distribution of Wealth

(Clark 1899): “Professor Clark’s work is taken as the basis and starting point of the present

study. Some criticism of it will be found necessary, leading to disagreement on some rather

essential points, but with its general aim and with many of its conclusions our own are in accord”

(Clark 1899; Knight 1916, 4-5).

Not surprisingly, chapters 2-5 (see Table 1) of TBP provide an amended version of

Clark’s value and distribution theory, skillfully played to set up the case for a revised price

theory that considered uncertainty, and hence the role of the entrepreneur, to be at the center of

any theory of competitive markets. “The great handicap of all writers on profit down to the Clark

School has been the lack of a sound basis in general theory reducing the distributive mechanism

to a unified theory in which profit could find its natural place…. The basis for any satisfactory

study of profit must be very broadly laid in general distributive theory …” (Knight 1916, 25).

13 The latter may have been a nod to his philosophy professor James Creighton, who was a philosophical idealist in
the English Hegelian tradition of Bernard Bosanquet. Needless to say, Mackenzie’s social philosophy stands apart
from Bagehot’s.
14 TBP and RUP both show the evidence of Knight’s education in foreign languages prior to arriving at Cornell. In
the process of completing his undergraduate education in the natural sciences at the University of Tennessee during
the two years prior to his enrollment at Cornell in 1913, Knight also obtained a M.A. in German, writing a thesis on
the 1912 Nobel laureate in literature, Gerhart Hauptmann (Knight 1913) and continued coursework in French that
had begun at Milligan College (see Emmett 2015). Chapter 2 of TBP also includes contributions to profit theory in
English and French, as well as some other German theorists.

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Central to that “satisfactory study” was Knight’s argument that change underlay all profit

theories, and hence that isolating price theory from change was his first task. Those familiar with

RUP’s treatment of the necessary (and minor) conditions for perfect competition will not find as

long a laundry list as can be found in RUP (chapter 6) or in “The Ethics of Competition” (Knight

1923), but the foundation is laid here, as he seeks to isolate price theory from both risk and

“dynamism” in order to lay the foundation that would emerge as he brought uncertainty into

consideration.

The two middle chapters in TBP, chapter 6 and 7, introduce and examine uncertainty as a

means to reconcile the risk/dynamic divide in profit theory, and simultaneously, the divide

between wages and interest, on one side, and profit on the other. Prior to Knight’s work, it was

common for risk theories of profit to understand profit as similar to the return on a capital asset

whose risks are known, except the risks were less well-known. Dynamic theories of profit argued

that the return of the business owner/entrepreneur came from their willingness to accept the

vicissitudes of business success and economic fluctuations. In chapter 6, Knight argued that a

better way to consider the risk/uncertainty divide was to recognize that change was common to

both approaches. In Knight’s TBP framework, interest became the return to known/knowable

changes arising from productive property. Profit became the return to unknown/unknowable

changes that arise from the way in which productive property is deployed. While this may sound

like the distinction made in RUP, it is slightly more complicated there.

One of the consequences of Knight’s framework in TBP was a division between the two

sides of the owner/manager that previous theories of profit had not made (chapter 7). Interest,

Knight says, is “the result of the separation of the entrepreneur element from the ownership of

productive property” (Knight 1916, 316). Salaried managers were responsible for operations that

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produce revenue in a known manner (in most ways, then, they are not different from laborers).

The owners of the firm’s productive assets that produced known returns earned interest.

Entrepreneurs, in whom the “directive function” is concentrated, alone were the bearers of

uncertainty. Thus, in TBP, uncertainty is introduced in the middle of the presentation of

neoclassical price theory. It is introduced by the basic discussion of imputation and its

limitations, most of which focus on the absence of change. The introduction of uncertainty is

then followed by the final three chapters, where a reformulation of Clark’s considerations of the

theories of wages, rents, interest and profit are set within the context of a firm facing uncertainty,

and hence creating profit or loss. Discussion of the role of entrepreneur/owners occurs for the

most part in the final chapter, and only a little attention is paid to the question of their social role.

The Re-organized Structure and Improved Argument of RUP

RUP both re-organizes and expands upon almost every part of TBP (see Table 1). RUP’s chapter

1 is both a statement of the methodology underlying neoclassical theory, and an introduction to

uncertainty in the context of that methodology. The methodology of RUP is built upon a Millian

foundation, engaging both “On the Definition of Political Economy; and on the Method of

Investigation Proper to It,” from his Essays on Unsettled Questions (Mill 1874), and his System

of Logic (1882). J. N. Keynes (1891) and J. E. Cairnes (1888) are mentioned as useful extensions

of Mill into the neoclassical era. Naturally, these sources provide Knight with a stronger

methodological framework than the Bagehot and Mackenzie sources he had used five years

earlier. Indeed, before he gets around to talking about Clark, he has also given special mention in

both methodological and theoretical terms, to the work of Vilfredo Pareto, Philip Wicksteed, and

Joseph Schumpeter. Alfred Marshall he dismisses with the comments that he is “almost anti-

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theoretical,” and that what he gains in concreteness is “offset by obscurity, vagueness, and [the]

unsystematic character of the discussion” (Knight 1921b, 15). Yet Marshall is put to good use in

the theory chapters, no matter how unsystematic he may have been. And, of course, like TBP,

RUP continues to interact with J. B. Clark’s Distribution of Wealth, although significantly less

than in TBP. Early in RUP, Knight says that, while Clark’s abstractions are clearer than

Marshall’s, they are not the choices Knight would have made, and furthermore, do not represent

classical economic theory well (Knight 1921b, 15-16).15

Knight’s survey of previous theories of profit occupies chapter 2 of RUP. What had been

the second half of the first chapter in TBP, built primarily around five sources, now becomes a

second, and long, chapter with forty different sources in 4 languages written by 30 different

authors (another 14 economists’ names are mentioned with citations provided). He clearly spent

his post-doc year at Cornell in 1916-1917, and probably beyond, reading widely in the extant

literature on distribution theory and especially theories of risk and profit.

The biggest change in organization between TBP and RUP, however, is the consolidation

of Knight’s price theoretic material into “Part Two – Perfect Competition.” Table 1 reminds us

that, in TBP, Knight inserted the discussion of uncertainty at the halfway mark, with some basic

price theory before it, and then an expanded analysis of wages, rent and interest afterwards. The

discussion of entrepreneurship in the final chapter wraps up the analysis well, yet awkwardly

because it is separated by several chapters from the earlier introduction of uncertainty. RUP’s

Part Two organization is more intuitive, and of course, has become familiar to most readers.

15 It is interesting to speculate about the change from Clark to Mill, Marshall, and Wicksteed. When he switched
from philosophy to economics at Cornell in 1914, Alvin S. Johnson took it upon himself to tutor Knight and guide
his reading. Johnson had been a student of Clark’s and is identified by Knight as part of the “Clark School.” When
Johnson left, Allyn Young arrived, and quickly established a rapport with Knight that lasted until Young’s untimely
death in December 1928. Young would have encouraged Knight to read more of Mill’s work, as well as Marshall
and Wicksteed.

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Over the course of four chapters, he built the price theoretic foundation for distribution theory,

with change and progress absent. Much that became familiar to students at Chicago and the LSE

are in these chapters, including the “Knightian curve” (p. 98-102) and the list of “minor

prerequisites for perfect competition” in chapter 6.

Years after RUP, Knight remarked at an American Marketing Association meeting at the

University of Chicago at which he had been invited to speak, that he knew

… no way to discuss imperfect competition except by contrasting it with perfect

competition. And to discuss this contrast (which is the only way of defining either
term) really does launch me on an apologia pro vita mea, and “pro” economic
theory as such. This line of endeavor has been both my vocation and my leading
avocation – my favorite “indoor game” – as a graduate student, as instructor and
as professor – since the time when I enrolled in Alvin Johnson’s seminar in
economic theory at Cornell in the Fall of 1913…. (Knight 1939, 361)

Because “risk and uncertainty” are in the title of Part Three of RUP, as well as in the book’s title,

those are the words that most of us probably see when we turn to the third, and final, part of

Knight’s book. But Part Three’s title actually begins with the important words “Imperfect

Competition….” With change, progress and uncertainty present, competition is necessarily

imperfect. How does the entrepreneur approach such a competitive environment? How does the

salaried manager approach their tasks in an imperfectly competitive world? And how does the

economist approach imperfect competition as a theoretician? 16

16 Edward Chamberlin, Knight’s former student at the University of Iowa, took up the challenge his professor had
set out in a footnote to chapter 6 of RUP: “In view of the fact that practically every business is a partial monopoly, it
is remarkable that the theoretical treatment of economics has related so exclusively to complete monopoly and
perfect competition.” The title of Chamberlin’s treatment – monopolistic competition – seems to be inspired by this
footnote, yet Knight himself continued to use the term “imperfect competition” which Joan Robinson used as the
title for her treatment of the subject (Chamberlin 1933; Robinson 1933).

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These are not questions economists have usually addressed, and the tendency in

interpreting the last part of RUP has been to simplify the analysis. Stephen Long and Larry

Singell (1987) provide the definitive Chicago School take on the third of those questions – how

the economist should approach uncertainty. In order to operationalize the difference between risk

and uncertainty, they argue that economic theory can take insurable situations as characterizing

risk, and uninsurable situations as uncertain. Since almost everything nowadays can be insured,

uncertainty disappears. Knight himself does not settle for such a reductionist analysis.

How does he approach in RUP the three questions asked above? For the first question, he

immediately problematizes “the entrepreneur.” Who is this entrepreneur? Traditional theory

tended to identify entrepreneurs with sole proprietors. TBP had already separated the owner from

the operator/manager, so Knight carried that argument forward. Is the owner actually involved in

the running of the business? Modern stock markets make the company owner simply a

shareholder, with no immediate involvement in corporate directing. But the stockholder bears the

benefit or cost of the decisions or judgments made under uncertainty by salaried directors and

managers. Perhaps, then, the salaried manager is the entrepreneur, making the judgments

necessary for the firm to operate in the uncertain world of imperfect competition. Is it the

uncertainty of returns that makes the shareholder the entrepreneur, or is it the necessity of

managers to make judgments in uncertain moments that makes them the entrepreneur? Both

options appear plausible on a reading of chapters 10 and 11 of RUP (and see Foss and Klein

2012).

But Knight problematizes uncertainty even further in chapters 11 and 12, the final two

chapters. Perhaps both owners and directors face the most crucial judgment, each at their own

level. The most crucial judgment is the choice of the people who will make decisions or

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judgments on behalf of their superiors in the context of imperfect competition. And here, the

critical question is the capacity of a director, or even a manager, to make judgments regarding

the person(s) who will make decisions in their stead on behalf of the company (Emmett 2011).

But Knight is not finished, for the uncertainty that the firm faces, and necessity of

judgments to be made in that context, also applies to the context of society itself. Knight does not

develop a full theory of public choice or of the impact of uncertainty on democratic discussion,

but in chapter 12, he hints at arguments he will continue to think about throughout his career (see

Knight 1947a; 1960a), and lays the foundation for a theory of public choice. Can a democracy

facing the same uncertain world its economic organizations face trust the judgments made by its

leaders and bureaucracy? In such an environment, will business owners and managers see

themselves as acting on behalf of society? Will bureaucrats do the same? Knight expresses the

same doubts regarding a positive answer to those questions at the conclusion of RUP as he does

in his later work.

The structural changes from TBP to RUP, then, provide both a sounder organization and

a greater theoretical understanding of the problem of risk, uncertainty and profit. The core of the

book remains price theory and the organization into three sections with “Perfect Competition” in

the middle makes that clear. The importance of uncertainty for approaching the real world’s

“imperfect competition” is also central, even if no clear answers regarding entrepreneurial

judgment are provided. And new material on what perfect competition demands theoretically as

well as the social impact of owners, entrepreneurs, and managers is added. The breadth of

Knight’s appreciation for both philosophical and theoretical problems in economics is

impressive, and work together to create a logically organized and intellectually broad

engagement with price theory, entrepreneurship, and judgment under uncertainty.

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PART II: THE RECEPTION OF RISK, UNCERTAINTY AND PROFIT, 1921 - 1950

Risk, Uncertainty and Profit garnered two book reviews, both within a year of

publication.17 Wesley Mitchell, writing for the American Economic Review, weighed in first.

Knight’s “chief contribution … is a distinction between ‘risk’ and ‘uncertainty’” (Mitchell 1922,

274). Economic theory studies free enterprise, a form of economic organization in which profits

and losses tend to be eliminated. Using Knight’s own words, Mitchell reminds the reader that “in

actual society, cost and value only ‘tend’ to equality; … they are usually separated by a margin

of ‘profit,’ positive or negative” (Knight 1921b, 19). Knight’s claim, then, is that understanding

uncertainty is the first, and certainly most important theoretical step, to take in separating the

world of economic theory from the real world of competition. Once that acknowledgement is

made, Mitchell can then re-assure the reader that

… Anyone acquainted with the exposition of economic theory from Jevons and
Clark to Wicksteed and Schumpeter can forecast the course of the discussion
which follows…. As chapter succeeds chapter, the sophisticated reader gains a
pleasant sense of traversing familiar country with a guide who has found new by-
paths and who selects a novel pausing-point from which to survey each of the
well-known landscapes. And Professor Knight has the merit, common among
‘pure theorists,’ of always knowing where he is and telling where he is going
next.
Whether this characterization will excite or deaden interest depends upon
the make-up of the reader…. Anyone who wishes to see what can still be
accomplished in economics along the conventional lines of pure theory will
scarcely find a better or pleasanter sample to study. (Mitchell 1922, 275)

17Part II is based on a JSTOR search for articles published between 1921 and 1950. Using JSTOR’s Advanced
Search function, the following selections were made: a) Search term: “Risk, Uncertainty and Profit”; b) Access type:
All content; c) Narrow by: “Articles” and “Reviews”; d) Language: “All Languages”; e) From: “1921 to 1950”;
Journal Filter: “Economics (184 titles)”. The search returned 137 items, of which 11 were not relevant. That left a
pool of 126 articles and reviews with substantive mentions of RUP between 1921 and 1950.

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Mitchell, not a fan of “economics along the conventional lines,” was always good at damning

with faint praise. But his review hints at what became the twofold aspect of the reception of

Knight’s book. On the one hand, there is the exposition of price theory as an exercise in

abstraction to isolate the central features of competitive society, following the lead set by the

likes of Clark and Wicksteed. Knight’s treatment of price theory became a touchstone for many

during the interwar and postwar periods. On the other hand, Knight’s exposition of abstract

theory is followed by a deep dive into the question of uncertainty. The theme was not entirely

new, but Knight’s exposition was novel and complicated. He leaped far beyond the normal use

of the method of successive approximation first advocated by Mill by making the biggest leap at

the beginning, arguing that, since perfect knowledge was the first prerequisite of perfect

competition, surely it should be the first prerequisite relaxed in the move to study imperfect

competition. And as he led the reader into the complex morass of issues in a world of

uncertainty, he introduced new notions to classical theory; themes like the separation of owners

from managers, the judgment employed by owners in the selection of managers, and the question

of whether entrepreneurs, salaried managers and bureaucrats could be seen as functionaries of

society. None of this was in TBP, and some of the themes have only begun to be elaborated upon

recently (Emmett 2011; Foss and Klein 2012).

Reviewer 2 lived up to his assigned role. While George P. Watkins (1922) could not

match Mitchell’s prose style, he more than made up for it in criticizing minutiae and protesting

the book’s analytical approach. Before diving into Knight’s theory, Watkins criticized the lack of

section headings, and suggested that the book’s short index, and four-page table of contents did

not make up for better identification of the structure of the argument in each chapter. More

substantially, he sought within the book a short summary of the overall argument he could quote

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in the review, but found none. When he gets down to providing one, Watkins does a reasonably

good job, and even praises Knight for providing a theory of profit which clearly separates the

problem of a salaried manager from that of the entrepreneur as a stockholder, a point often

overlooked in the literature, and also problematized later in RUP.18 The majority of the review

then turns to criticism of Knight’s theory of utility, found early in the book. Knight’s denial of

“super-marginal utility” makes it, Watkins claims, “rather disconcerting to have to argue about

the proposition that, in Adam Smith’s words, value in use may often exceed value in exchange”

(1922, 687). The review concluded with one last combination of praise and criticism, suggesting

that Knight’s take on the meaning of risk and uncertainty “shows a breadth of conception which

cannot be expected of the mere economist,” yet concludes by saying that it does not make up for

the “scholastic quirks [that] mar other parts of the book” (1922, 690).

The two 1922 reviews were followed by two years of silence. But then James Angell in

“Consumer’s Demand” (1925, 585) included a citation of chapters 4 and 5 of RUP, regarding

“the general relation of social standards to economic activity.” And four months later Jacob

Viner, claimed that his friend

“has probed these problems to their epistemological depths with a zeal, and with a
capacity, for the subtleties of metaphysical inquiry each of which is surely
unsurpassed among contemporary economists. His writings cannot be disregarded
by anyone who wishes to cope seriously with the problem of the nature of the
fundamental concepts of economics as a welfare discipline.” (Viner 1925, 641)

From this auspicious beginning in 1925, Knight’s treatise received a small but steady stream of

citations in the economics journals until 1933, totaling 20 articles. There were never more than 3

per year (see Chart 1), and none of the articles citing Knight prior to the mid-1930s provide

18 Here Watkins’ reading of Knight improved on Mitchell’s, which missed this key point.

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 16

sustained treatments of his work. They simply acknowledge briefly Knight’s contribution to a

specific aspect of price theory or the notion of uncertainty. Until 1930, only two articles

mentioning RUP were published outside the United States; both were authored by the Italian

scholar Federico Chessa (1927; 1928) who surveyed theories of risk and “conjecture” (la

congiuntura) in economic theory. Most of the others were published in two of the top 5

economics journals of the time (see chart 2 19): the Quarterly Journal of Economics (QJE) and

the American Economic Review (AER). Viner’s 1925 Journal of Political Economy article has

been quoted above, landing him another top 5 citation.20

While the total citations remained the same (at 3) during the years from 1930 to 1933,

and continued to be balanced evenly over time between mentions of uncertainty and those

engaging some aspect of his treatment of price theory, the location of publication radically

changed. Eight of the 12 articles citing RUP between 1930 and 1933 were published in England,

with a ninth published in Italy. Only 3 were published in the United States. With the exception of

one 1933 citation in the newly established Review of Economic Studies, all of the English

citations in this four-year period were in either The Economic Journal, the most important

economics journal in the world in the 1930s (edited by J. M. Keynes), or Economica, the

competitor founded at the London School of Economics in the same year that RUP was

published (see chart 2). Two of the American citations were published in the AER (Davies 1931;

Stocking 1931), while one was published in the Journal of Farm Economics (Schultz 1932).

The shift in place of publication is also a harbinger of shifting theoretical attention, as

economists assimilated Knight’s price theory insights while referring less to his notion of

19
20The only other pre-1930 citation in an American economics journal was the mention of Knightian uncertainty by
Samuel H. Nerlove (1929) in the University of Chicago’s Journal of Business.

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 17

uncertainty. J. R. Hicks, for example, employed Knight’s consideration of economic statics in

marginal productivity theory in his criticism of the “Lausanne system” (Hicks 1932). Similarly,

T. W. Schultz, Knight’s future friend and department chair, felt it necessary to defend his

adoption of secular increasing returns in agriculture by invoking Knight’s authority:

“Knight has shown [it] is of no consideration to economics if we assume that men

know what they are doing …. If we assume divisibility of the factors of
production no entrepreneur who is motivated by economic desires would stop his
production before attaining the highest average physical output nor would he go
beyond the highest total output.” (Schultz 1932, 642)

Starting in 1934, RUP’s citation counts doubled (on average) until the 1950s. Since this is the

period of the Great Depression and the Second World War, one might infer that increased

citations occur because of Knight’s recognition of uncertainty, no doubt an increased concern

during hard times and in times of war. But that is not the case. Between 1934 and 1950 citations

referring to price theory in RUP exceeded those referring to uncertainty by more than half (64 to

41). In only two years, 1943 and 1945, were there no citations focused on price theory in RUP.

But there were no citations of uncertainty either in 1945, and in 1943, the 6 mentioning

uncertainty did so exclusively in terms of entrepreneurial activity. In all other years, citations to

Knight’s price theory exceed (often doubling) those to uncertainty.

The 1930s are often thought as Keynes’ decade, with the crescendo of studies from

scholars around him reaching its high point following the publication of the General Theory (J.

M. Keynes 1936). But during that same decade, two factors led to a significant increase in RUP

citations, despite the twenty or more years since its publication. The first was Knight’s role in the

1930s in teaching price theory to Chicago economics graduate students. Some may find it

surprising that Knight was not hired at Chicago in 1928 to teach economic theory, but the

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 18

department featured Viner in that role, and Knight was asked to assume the task of teaching

history of economic thought and institutional economics upon his return in 1928. But in the next

few years, Viner began to consult more often in Washington, DC and elsewhere, and hence

Knight began to share the price theory teaching load. Over the next decade, he realized that he

needed to revise his approach to capital theory (see especially, Knight 1935a; 1936b; 1936c), as

well as utility and cost theory (Knight 1936a). But while he honed his notes, and wrote several

drafts of new textbooks (never published), his Chicago students turned to the material of his that

was available.21 Neither Knight nor Viner assigned RUP, but student interest led many to seek it

out.22

Meanwhile, at the London School of Economics, Lionel Robbins’ “Principles of

Economics” course was built around RUP (Robbins 2018). A key decision made by Robbins in

1933 may also have helped not only to maintain RUP’s ongoing reputation in the discipline, but

to see its citation pattern dramatically shift upwards. In 1933, Risk, Uncertainty and Profit was

re-issued as part of the LSE Series of Reprints mentioned earlier (Knight 1933b). Upon Robbins’

request, Knight supplied a new preface for the 1933 reprint (Knight 1933a), and occasional new

notes or prefaces for later reprintings (Knight 1940; 1948; 1957a), intended to update students on

changes in his views.

From 1922 to 1933, as we have seen, total citations to RUP numbered 44 (yearly

average just below 4), a respectable showing considering the book’s narrow focus within

economic theory. But from 1934 to 1950, RUP’s total citations numbered 214, with a yearly

21 Along with the items just cited, Chicago students also had access to copies of The Economic Organization (Knight
1933c), and the essays collected by several of Knight’s students in The Ethics of Competition and Other Essays
(Knight 1935b).
22 The copy I was given by the family of one such student, Chicago-trained agricultural economist Glenn Johnson,
contains notes and comments by at least three others besides Johnson, suggesting that copies made their way
between students frequently. Held together by electrician’s tape, the volume also showed the wear and tear to be
expected of a book that had been well-used.

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 19

average of 12.6 citations, three times the average of the previous decade. At the LSE and the

University of Chicago, Risk, Uncertainty and Profit already held a key place in the training of

the next generation of market-oriented economists. The Second World War obviously led to a

decline in citations as academic work took a back seat, but as Knight’s career closed in 1950, the

citation count was the highest yearly total of the period surveyed.

Conclusion

In the final preface Knight wrote for the LSE Reprint edition of RUP, in 1957, he called his

famous book a Jugendarbeit – a work of one’s youth, something that an apprentice does to

qualify for admission to the guild (Knight 1957a, lii). The role RUP came to have in economic

education at both the LSE and the University of Chicago might lead one to expect that Knight

would have issued regular new editions of RUP. But that did not happen. Today, the modern

reader who buys a copy of RUP on Amazon may never know that Knight changed his mind on

utility and cost theory (Knight 1936a). They may never know that he rejected the version of

capital found in RUP and The Economic Organization (Knight 1933c), leading to an almost

decade-long controversy with his Austrian economic friends. And they may never have the

opportunity to read Knight’s criticism of Keynes’ General Theory (Knight 1937). RUP was, after

all, the foundation for a career, not its capstone. But, as Knight’s student George Stigler (1971,

ix) noted just before Knight’s death, RUP remains “part of the living legacy of general economic

theory.”

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 20

Table 1. Contents: “Theory of Business Profit” and Risk, Uncertainty and Profit

“Theory of Business Profit” Risk, Uncertainty and Profit

1 Introduction PART ONE -- INTRODUCTORY

The Dynamic and the Risk The Place of Profit and
2
Theories of Profit 1 Uncertainty in Economic
Cost and Value Under the Theory
3
Simplest Conditions Theories of Profit; Change
2
and Risk in Relation to Profit
4 The Principles of Imputation
PART TWO – P ERFECT COMPETITION
Limitations of the Imputation
5 The Theory of Choice and of
Process 3
Exchange
6 The Nature of Uncertainty Joint Production and
4
Economic Consequences of Capitalization
7
Uncertainty Change and Progress with
5
The Relations of Rent and Uncertainty Absent
8 Minor Prerequisites for
Profit I. Wages 6
The Relations of Rent and Perfect Competition
9 Profit II. Pure Rent and Time PART THREE – IMPERFECT COMPETITION
Value THROUGH RISK AND UNCERTAINTY
The Relations of Rent and The Meaning of Risk and
7
10 Profit III. Quasi-Rent and Uncertainty
Interest Structures and Methods for
8
Meeting Uncertainty
9 Enterprise and Profit
Enterprise and Profit
10 (continued) – The Salaried
Manager
Uncertainty and Social
11
Progress
Social Aspects of Uncertainty
12
and Profit

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 21

Chart 1: Citations of Risk, Uncertainty and Profit by Topic, 1922-1950

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 22

Chart 2: Citations of Risk, Uncertainty and Profit by Journals, 1922-1950

Note: The top five journals in economics in this historical timeframe were the Economic
Journal, (edited by J. M. Keynes from 1912-1944), the Quarterly Journal of Economics (edited
by Harvard University Economics Department faculty), the American Economic Review, and the
Journal of Political Economy (edited by Knight and Jacob Viner from 1928-1946). For our
purposes here, these four are joined by Economica, established in 1921 at the LSE. Today’s top
five replace the two English journals (The Economic Journal and Economica) with
Econometrica and Review of Economic Studies (both of which were founded in 1933 and rose to
prominence by the 1950s).

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 23

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