Meet the thinkers Assignment 6

An overview of Frank Knight

By David van der Maas: 1858459 & Vita Stokvis: 1817000

Short Biography and intellectual background Frank Heyneman Knight was an American economist, who lived from November 1885 to April 1972. Knight obtained his B. Sc. and M.A. at the University of Tennessee in 1913, and got his Ph. D. at the Cornell University in 1916. After his education, Knight fulfilled several academic positions at the latter university, as well as the University of Iowa and the University of Chicago (https://www.msu.edu/~emmettr/fhk/basicbio.htm). Knight is regarded as one of the founding fathers of the Chicago School of Economics (Emmett, 2001, in: Yu, 2004). Knight published multiple articles and books, with the most important one to be his first book Risk, Uncertainty and Profit, appeared in 1921. This book had a major impact in the literature, since it was cited almost 8200 times by other authors. Knights thoughts have been influenced by subjectivist philosophers William James and Hendri Bergson. He openly favoured the ideas of social scientist Max Weber. Knight was well known with the Austrian school and in general accepts the Austrian approach and is sympathetic to many Austrian positions (Yu, 2004). Although his work has been influenced by those and other thinkers, Knight cannot be considered an eclecticist. Knights work can be placed in the area of economic sociology or social economics. He examines much like Weber, the human interaction in a broader world context. This general mindset will be seen throughout his work Key notions Knight laid the principles of the social reality perspective. This is important to bear in mind, since he strongly rejects the neo-classical perspective on economics. He considers the neoclassical utilitarian formulation of human wants as ahistorical and asocial (Yu, 2004). The problem this formulation is carrying is the fact that it is utilizing the scientific method for describing human wants. Instead, human wants are social Knight argues (Knight, 1921) and no human interest is purely economic. At the centre of Knights thought is a human mind which consists in thinking, in deciding and in solving a problem (Yu, 2004). Consciousness plays an important role in this description, as it is able to give the organism knowledge about the future. Thanks to consciousness human agents are able to anticipate possible future situations. That way they can consider how the future would be if they do not act, and how to act if they want the future situation to be different. The forward looking character is a major feature of human consciousness. As

described they can see things coming and adapt to the future situation. In other words, the actions of a human agent can be readjusted as a reaction the image of the future situation as seen by the forward looking capabilities of the human agent. The farther we can see, the more adequately we can adjust our actions to get the desired future situations. This is of great importance to entrepreneurial actions. This perspective has significant implications in Knights theories of uncertainty and entrepreneurship (Yu, 2004). Another important acknowledgement Knight made was the phenomenon of partial knowledge. He pays attention to partial knowledge problems in human action. As people live in a world of uncertainty and change they live only by knowing some things about the future. Problems arise from the fact that we know so little. Actions are neither based on entire ignorance, nor on complete or perfect information but on partial knowledge. Our rational conduct strives to minimize uncertainties involved in adapting means to ends (Yu, 2004). Theoretical implementation Knight brought contributions to the entrepreneurial field in terms of profit and uncertainty. Let us first explain Knights view on the entrepreneur. Knight (1942) defines an entrepreneur as the owner, who normally hires productive services from others for a fixed compensation, uses them to make a product and sells the product for what he can get. His first and primary function, in a progressive society, is that of leadership or economic pioneering; it is to initiate useful changes or innovations (p. 127). Further, a typical Knightian entrepreneur is conceptualized as a bearer of uncertainty (McMullen & Shepherd, 2006). It is important to distinguish entrepreneurs from managers. In general, entrepreneurship is the more dynamic activity, connected with the main or more important changes. In contrast, management is closer to the routine activities that can be classed as labour. (Knight, 1942). The problem-solving activity of the entrepreneur begins with a correct conception of what the problem is, and the second step is a correct decision of the procedure to be followed in solving it. Perhaps the most important type of decision and use of judgement by the entrepreneur is the selection of agents as managers, and delegation of power to them. Here, the judgement is that of estimating the capacity of another human being o make decisions. This brings uncertainty, and so entrepreneurs who do this are willing to bear uncertainty.

As mentioned, profit was an important focus of the entrepreneurial process by Knight. He defined profit as the income of the owner of a business or productive enterprise, through the operations of that business or enterprise. The entrepreneurs net income, also stated as residual income, is that what remains out of the gross income of the business, after paying hired labour and deduction of costs of materials and products bought from others (Knight, 1942). Profit is also connected with uncertainty. Besides the amount of uncertainty, one must also consider the willingness to bear uncertainty. Knightian uncertainty, uncertainty in the context of action, acts as a sense of doubt that (1) produces hesitation by disturbing routine actions, (2) promotes indecision by increasing continued competition among alternatives, and (3) encourages delay by making prospective options less appealing (McMullen & Shepherd, 2006). An entrepreneur cannot waist time over this uncertainty, and must be able to bear it. So Knight sees entrepreneurial action not as the outcome of less perceived uncertainty, but as higher willingness to bear uncertainty. Profit is also the reward for those who are willing to bear uncertainty. This is because unlike risk, uncertainty is inestimable and therefore also uninsurable (McMullen & Shepherd, 2006). Thus, entrepreneurs are distinguishable from non entrepreneurs in their willingness to bear uncertainty. Competition is always imperfect. This is because leading an enterprise is a matter of human judgment and activity, of problem solving, and therefore is subject to error at every step (in contrast with mechanical process proceeding). Knight (1942) even states that profit would be absent under conditions of perfect competition. The tendency of the competitive processes of buying and selling, and the control of production is to assign the whole product to the productive agencies, which create it, leaving nothing for entrepreneurship as a distinct function. This means that under the condition of ideal equilibrium (stationary or moving) the function of the entrepreneurship itself is entirely absent from the economy. The primary interest of historians in the field of entrepreneurship is presumably the study of the relationship between entrepreneurship and economic activity. . Accordingly, the entrepreneur is conceptualized in terms of what he or she does, that is, innovates, coordinates etc. This behavior is then said to influence the system by moving it toward or away from some ideal state, such as equilibrium or efficiency (Knight, 1942; McMullen & Shepherd, 2006). Knights theory offers a less comprehensive explanation of why the economy functions effectively and why firms

emerge than either Schumpeters or Kirzners, who are also main authors on the topic of entrepreneurship. In other ways, Knight may have an advantage over Schumpeter and Kirzner. By not discussing the economy explicitly, Knight is able to focus more clearly on the individuals decision-making process. According to Knight (1942), innovations generate temporary gain. This is because innovation is being imitated and is spreading through the economy as standard practice. The innovation itself may have various forms, and usually involves some change in the character of products, combined with some improvement in methods of production. Though the function of the entrepreneur must be distinguished from those of the inventor and of the research scientist. Furthermore, any established business, especially in a progressive society, is affected by various changes in conditions, some due to innovations or attempted innovations by other entrepreneurs, and some which simply occur in consequence of natural or social processes. Consequently, any business that is to remain successful, or even continue to exist, must be constantly adapting itself and attempting to predict such changes. Business operations are affected by unpredictable possibilities, which no one would think of or trying to predict, and to which no real adaption can be made or is attempted. It is necessary to simply take their consequences for good or ill. In this regard, the entrepreneur is simply a specialist in risk-taking or uncertainty bearing (Knight, 1942). Conclusion It is clearly visible that Knight favors a disposition towards economics wherein the human factor has been accounted for. Due to these human aspects, Knight argues that concerning economics it is not adequate for theoretical economics to utilize the same scientific methods as natural sciences to define itself. Where natural sciences are able to establish rules and general statements through deduction which could hold true under different but ideal circumstances, those ideal circumstances defined by theoretical economics would deviate from real life. They would deviate too much to be meaningful for realistic reasoning. A main problem is the fact that unlike theoretical physics, theoretical economics have no clear definition of their own nature and limits (Knight, 1921). What corrections need to be made? There are two extremes Knight argues. On one hand, there are the mathematic economists and pure theorists who deduct from a very small set of

universal laws. On the other hand, there is a tendency to repudiate abstract and deduction altogether and insist upon an objective descriptive science. Knight states that we must argue deductively as long as possible always collating conclusions with observed facts at every stage. Where the data is too complex, induction needs to be applied and empirical laws formulated to be connected deductively with the general principles of human behavior (Knight, 1921)

Reference list The Frank H. Knight Page. Basic Biographical Information. Retrieved September 3, 2011, from: https://www.msu.edu/~emmettr/fhk/basicbio.htm Knight, F.H. (1942). Profit and Entrepreneurial Functions. The Journal of Economic History, Vol. 2, 126-132. McMullen, J. S., & Shepherd, D. A. (2006). Entrepreneurial action and the role of uncertainty in the theory of the entrepreneur. The Academy of Management Review ARCHIVE, 31(1): 132152. Yu, T.F-L. (2004). Frank H. Knight's Thought Revisited: Subjectivism, Interpretation and Social Economics. International Journal of Social Economics, 31(7-8), 655-66. Knight, F.H. (1921). Risk, Uncertainty, and Profit. New York: Houghton Mifflin.