I

ArticlesFrank H. Knight on
Uncertainty and Profit
Manager versus Entrepreneur

Yasuhiro Sakai

Shiga University / Professor Emeritus

M. Bronfenbrenner as"Prof. Sharp Tongue":Some Traces of F.H. Knight

Speaking of myself, I have known Prof. Martin Bronfenbrenner (1914-1997) for more thanfifty years, first as a student, later as a colleague,
and always as an intimate friend. Whenever I
met with him on university campuses, on city
streets or in private houses, he was fond of teasing me and even himself, and of course always
criticizing the academic and world affairs.
Long time ago, when I was a graduate student
at Kobe University, Japan, my fellow classmates
were fond of calling him "Prof. Sharp Tongue"
because he was so famous of being an eloquent
speaker with sharp tongue. Listening to his
ironic expressions and even cynical remarks, I
myself wondered if I could probably see sometraces of his own teachers at Chicago. Needless to say, Frank H. Knight was among thosegreat teachers.
Any kind of tradition, whether it is good orbad, is likely to be handed down from generation to generation. Although I myself havenever had an opportunity to personally speak
to Knight, I would like to say that I possibly
observed some traces of his unique way of
thinking in the words and deeds of Bronfenbrenner, one of his bright students at Chicago.
So when I happened to check the term "Frank
H. Knight, 1885-1971" at Google, Wikipedia, it
was really a happy surprise to find the following interesting sentence:1)
Knight failed to acquire any followers andfailed to build up a distinct "school of1) Speaking of myself, for the period 1968-75, I was firsta graduate student at the University of Rochester, andlater an assistant professor at the University of Pittsburgh, where I taught economic theory and mathematical economics for both undergraduate and graduate students. Since Knight passed away in 1970, I could possibly have met with him sometime in the period 19681970, but alas, I could not. I had instead the golden op-020

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thought" around himself. We can see sometraces of his perspective in the work of Kenneth E.
Boulding, Martin Bronfenbrenner, James
Buchanan and George J. Stigler, but they canhardly be called "Knightian" in any meaningful sense."
It should be noticed that the delicate expression "some traces of Knight's perspective" withthe word "some" emphasized in italics is carefully employed here. Presumably, it would bealmost "a mission impossible" to find all the
traces of his perspective in the work of other
scholars. It is my bold mission, however, totrace some, but not all, traces of the perspectiveof Knight in the work of Bronfenbrenner.
In historical perspective, Frank H. Knight
was Martin Bronfenbrenner's great teacher, andBronfenbrenner my great teacher. So it would
be no wonder that the dualistic view and critical eyes in the work of Knight had more or lesshanded down to Bronfenbrenner, and eventually even to me. I still recall that
Bronfenbrenner's personal letter to the late Dr.
Shigeo Minabe, my very close friend in the
United States and Japan, contained the following honorable ending with his own personal
signature:"Bronf Von Brenner", followed by the Japanese red stamp "Baka", meaning "Fool" inEnglish. Interestingly enough, this had dispelled all my doubts on the question of why heused to say that not a few Japanese professors
were not "full professors" but only "fool professors". According to his twisted usage of
expressions, "a fool professor" never meant "aportunities at both universities in which I talked with somany Chicago graduates including the late Sherwin
Rosen and the late Walter Oi. Dr. Robert Thaler, a Nobel laureate and now a distinguished professor at Chicago, was once one of my earnest classmates at Rochester.
2) Similar personal episodes of Bronfenbrenner were re-corded by Goodwin (1998). Bronfenbrenner arrived at

Frank H. Knight on Uncertainty and Profitfool" in its literary sense, but rather "a cool professor" or "a respected professor". It is because
Bronfenbrenner as a gentleman with such pride
was so self-effacing that he was preferred to becalled himself "a fool", alias " a highly respected
gentleman". In the same letter afore-mentioned, he kindly gave the following advice to
Minabe, "You should do as I say, but not as Ido." As the saying goes, saying is one thing, but
doing is another.2)
I remember how Bronfenbrenner managed to take care of his class at Kobe University
in 1965. The graduate course he taught us wasnamed "Income Distribution Theory." Thecourse was conducted in English, which was arather extraordinary practice in Japan in the
1960s. In order to make his teaching more accessible to Japanese students, he used to cometo the classroom one hour earlier than the regular schedule. Taking advantage of such extra
hour, he usually draw six or seven fancy-looking figures filling in a big blackboard. We
graduate students were astonished by his skillof making use of of so many colored chalks including red, yellow, blue, green, brown andwhite. This was the reason why Bronfenbrenner acquired another honorable nickname"Professor Rainbow" from attentive Japanese
students.
His income distribution lecture at Kobe
turned out to be so successful that its wholecontents together were put in a single academic
book entitled Income Distribution Theory in
1971, namely the year when I myself was an ambitious assistant professor at Pittsburgh, exactly
the birth place of Bronfenbrenner. According
to Harry G. Johnson who kindly wrote For-

Chicago in 1934 and stayed there until 1938. According
to Goodwin, Bronfenbrenner described Knight as a little man with a toothbrush mustache, a squeaky voice,and a quirk of wrinkling up the lower half of his face
while propounding defiance of the universe. When I
talked with Bronfenbrenner, I felt that he had strong defiance of the universe, especially harsh criticism of academism in the U.S. and Japan.

Yasuhiro Sakai

021

ward to this book, Bronfenbrenner (1971) was
a very brilliant book in the sense that this wasthen the only book available that ranged —and ranged authoritatively — over the whole
field of distribution theory. Bronfenbrenner
himself, however, seemed to have his own
unique opinion that clearly showed his distinguishing features. In fact, at the very opening
page, he strongly declared that "this book wasdedicated to [his] brilliant failures." Of course,
this book was not "the product of complete
failures" at all, but rather more objectively "theproduct of brilliant successes." But, alas, he was
not a straightforward person in any sense, but
strangely a bit self-effacing person. In fact, inwriting Preface, he appeared very modest as
usual, and even apologetic to the prospective
reader:This is an old-fashioned income distribution
book.... What makes the book old-fashioned
is, primarily, the content of "reformation andrestatement," which also makes it long.
(Bronfenbrenner, 1971, Preface, p. xiii)
In the light of economics history, any bookwhich is often called "a great book" must contain to a certain extent the old-fashioned partof reformation and restatement.
As Johnson (1971) noted, "knowledge ispainful to acquire and too easy to forget: andin a busy and bustling profession, it is too easy
to be fascinated by each new wave as it rolls inand to overlook the fact that the tide is ebbingout (or flowing in as the case may be) " (pageix) I am in general agreement with Johnson's
opinion that in the distribution book written
by Bronfenbrenner there must exist some newwaves that appear to be rather small but is like3) Bronfenbrenner(1971) used his own rhetoric to ex-press gratitude to his wife Teruko Okuaki Bronfenbrenner for her consistent support: "every married man's
wife improves his professional acumen, his scholarship,
his mathematics, his statistics, his English, or at least his
typing. Or it seems. Teruko Okuaki Bronfenbrenner,
however, is not singularly competent in any of those re-022

ly to grow larger as time goes by. At this point,
it is recalled that the great classic Risk, Uncertainty and Profit (1921) written by Knight, one
of Bronfenbrenner's teachers at Chicago, characteristically begins with the following very
modest Preface :There is little that is fundamentally new inthis book. It represents an attempt to state
the essential principles of the conventional
economic doctrine more accurately, and toshow their implications more clearly, thanhas previously been done. That is, its object
is refinement, not reconstruction. (Knight,
1921, Preface, p. ix)
Frank H. Knight seems to be a man in paradox. Paul A. Samuelson has once said that"there is certainly a classic. Time has not madeit obsolete." And George J. Stigler has convinced that "the volume is clearly one of thehalf-dozen classics in economic theory to appear in the U.S. in the first half-century." In thelight of those fine appraisals made by Samuelson and Stigler, it should be almost impossible
to agree with the modest man Knight's own ass e s s m e n t t h a t "t h e r e i s l i t t l e t h a t i s
fundamentally new in this book." This mustsound to us like "a bad joke."
We would like to point out here that Martin
Bronfenbrenner was no doubt a rhetorical successor of his master, Frank H. Knig ht.
According to my teacher's teacher Knight, his
uncertainty book (1921) represented the mere
restatement of the conventional economic doctrine in a more accurate and more clear fashion
than ever before. Strangely echoing such modest statement, my own teacher Bronfenbrennerargued that his distribution book (1971) was
spects.
My main reason for thanking her is that she has been abetter-than-average psychiatric nurse. Need I say more?"(Preface, page xiii) Shigeo Minabe constantly served as
Bronfenbrenner's research assistant at Kobe and otherplaces, thereby being called "a real gem" by Bronfenbrenner. It is recalled that Michiko Minabe, the wife of

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nothing more than the refinement and restatement of the old-fashioned economic theory.
Therefore, it would be safe to say that we clearly see some traces of the perspective of the great
Knight in the words and deeds of Bronfenbrenner.3)
So far, as introductory remarks, we have sheda new light to the relation between Bronfenbrenner and Knight. The contents of theremainder of this chapter are as follows. The
next session aims to argue that contrary toKnight's apparent modesty, there have been somany new ideas in his uncertainty book. The
point of discussion is how he has succeeded inseparating the two concepts, measurable risk
and non-measurable uncertainty. Then thethird section will deal with his unique idea forthe role of an entrepreneur distinct from amanager. He passionately will discuss that only
an entrepreneur, but not a manager, is entitledto acquire net profit as the reward for "uncertainty seeking." The last session will be kept for
final remarks.

II

Risk,
Uncertainty and Profit:
Knight's Theory of Trinity

2.1 How Uncertainty is
Radically Distinct from Risk

Knight's life work Risk, Uncertainty andProfit (1921) per se seemed to be a book in paradox. Although he modestly said that there
was little that was fundamentally new in thisbook, he nevertheless did not forget to add thefollowing prideful sentence:

Shige Minabe, has been an excellent professional nurse
in New Zealand, the United States and Japan.
4) Frank H. Knight's main work Risk, Uncertainty andProf it (1921) was a "Jugendarbeit" or a "masterpiece" inthe old sense, by which an apprentice qualified for admission to the gild in old days.

Frank H. Knight on Uncertainty and Profit

The particular technical contribution to thetheory of free enterprise which this essay
purports to make is a fuller and more careful
examination of the role of the entrepreneur
or enterpriser, the recognized "central figure"of the system, and of the forces which fix theremuneration of his special function.
(Knight, 1921, p. xi)
Knight certainly had the conviction that thisbook contributed a great deal to understanding
the working and performance of the free enterprise system and the critical role played by theentrepreneur as an adventurer. He has repeatedly stressed that uncertainty must be takenradically distinct from the more familiar notion of risk. The essential point is that "risk"
usually means a quantity susceptible of measurement while "uncertainly" is not so. In otherwords, whereas risk is measurable in the sensethat it can be described by a certain distribution function such as the normal distribution,
Pareto distribution and the like, uncertainty isneither measurable nor quantifiable.4)
He has written the following memorable remark:It is this "true" uncertainty, and not risk,
which forms the basis of a valid theory of
profit and accounts for the divergence between actual and theoretical competition.
(Knight, p. 20)
We are not quite sure of how and to what extent "actua l comp etition" differs from"theoretical competition." According to myslightly bold guessing, actual competition or
the competition as is seen in the real world isdefinitely much more aggressive and even deThis fist edition was reissued in 1933 during the Great
Depression, reprinted in 1948 after the Second World
War, and reprinted again in 1957 after the Korean War.
Thus Knight's masterpiece seems to be immortal, andwill survive well in the 21st century.

Yasuhiro Sakai

023

structive than theoretical competition or thecompetition imagined by the traditional theorists in their brains. In fact, Knight wisely
observed the following fact:
The writer [namely, Knight himself ] isstrongly of the opinion that business as awhole suffers a loss. The main facts in thepsychology of the case are familiar.... The behavior of men in lotteries and gambling
games is the most striking fact. Adam Smithpointed out the tendency of human nature
to exaggerate the value of a small chance winning. (Knight, 1921, p. 365)
From the viewpoint of "theoretical competition." it would be utterly unthinkable to findthat the whole business may suffer a loss: theamount of aggregate profit would gradually decrease as competition becomes harder andharder, and eventually reaches the terminal
point of zero profit, namely the theoreticallyideal state of perfect competition. The critical

Knight is in no mood to stop thinking at thisstage. He rather proceeds to go beyond, thereby carefully observing the reality of cut-throat
competition or the probability of the cruelform of "actual competition," in which the aggregate profit would possibly go under zeroprofit. As the great Adam Smith has observed,
human being has a tendency to overestimate
the small chance of winnings, thus unintentionally resulting in a loss as a whole. As
human history tells us, human being could
foolishly engage in such a large scale of war
that there would eventually no winners whatever, with the tragic result of total destruction.
Summing up, the trinity of "risk, uncertainty
and profit" constitutes the keystone of the
grand system of Frank H. Knight. Such structure may clearly be depicted in Fig. 1.
2.2 Three Types of Probability Situations
Knight argues that it is quite convenient toseparate the following three types of probabili-

Fig. 1 Risk, uncertainty and profit: Knight's trinity024

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ty situations. They are as follows: (1) a priori
probability, (2) statistical probability, and (3)estimates or judgments. Let us attempt to discuss what they are all about, and how theydiffer in characteristics.
2.2.1 A priori probability
This is really mathematical or purely theoretical probability. The most simple example forthis case is given by the probability of rolling
one dice for the number six, namely the fraction 1/6. Another good example is provided
by the probability pf rolling two dices for thesum of seven. Its answer must be 6/36 or 1/6
since there are mathematically six possiblecombinations (namely, 1+6, 2+5, 3+4, 4+3,
5+2, 6+1) out of thirty-six conceivable combinations (namely, 6×6 = 36). The whole pictureof combinations and probabilities may be depicted in Table 1.
We may arbitrarily increase the number ofrolling dices. For instance, if we roll three dic-es, then we easily obtain the following sequenceof fractions:
1/216, 3/216, 6/216, 10/216, 15/216,
21/216, 25/216. 27/216, 27/216, 25/216,
21/216, 15/216, 10/216, 6/216, 3/216,
1/216.
As is clearly seen, those theoretical probabilities together are expected to produce asymmetric distribution diagram. There may
exist, however, a variety of non-symmetrical
distribution diagrams, which are more commonly seen in daily life than symmetrical ones.
2.2.2 Statistical probability
This is neither mathematically nor theoretically determined, but merely empiricallyevaluated. Its evaluation is also done on thesolid basis.
One of the best examples is given by what we
may call life expectancy. Strictly speaking, life

Table 1 Rolling two dices: a statistical probability
The sum of
two numbers
2

Possible combinations of two
numbers
1+1

Number ofcombinations
1

Probability
1/36

3

2+1, 1+2

2

2/36

4

3+1, 2+2, 1+3

3

3/36

5

4+1, 3+2, 2+3, 1+4

4

4/36

6

5+1, 4+2, 3+3, 2+4, 1+5

5

5/36

7

6+1, 5+2, 4+3, 3+4, 2+5, 1+6

6

6/36

8

6+2, 5+3, 4+4, 3+5, 2+6

5

5/36

9

6+3, 5+4, 4+5, 3+6

4

4/36

10

6+4, 5+5, 4+6

3

3/36

11

6+5, 5+6

2

2/36

12

6+6

1

1/36

Frank H. Knight on Uncertainty and Profit

Yasuhiro Sakai025

expectancy is defined as the average number ofyears a person born in a certain country is expected to live if mortality rates at each age areassumed to remain steady in the future. Table2
indicates the life expectancy at birth for both
sexes, females and males in selected countries
in the world. As is seen in the table, it varies agreat deal from country to country. As of 2015,
Japan as a developed country has the highest
expectancy: on average, the Japanese female isexpected to live for 86.8 years, and the Japanesemale 80.5 years. Sierra Leone is a developing
country in which the life expectancy is consid-

erably low: only 50.1 years for both sexes, 50.8
years for male, and 49.3 years for male.
Another example of statistical probability isprovided by road traffic-related death rate. As
is seen in Table 3, there are large disparities inthis rate from country to country. As you cansee, the United Kingdom and Japan are among
the most safe countries. To take an example, inJapan in 2015, the road fatalities per 100 thousand persons is 4.7, implying that 47 persons
out of 1 million are destined to be killed by various traffic accidents.

Table 2 Life expectancy at birth: world selected list (2015)
Country

Both sexes

Female

Male

Japan

83.7

86.8

80.5

United Kingdom

81.2

83.0

79.4

United States

79.3

81.6

76.9

China

76.1

77.6

74.6

India

68.3

69.9

66.9

Nigeria

54.5

55.6

53.4

Sierra Leone

50.1

50.8

49.3

Source: The World Health Organization (WHO, 2015)

Table 3 Traffic-related death rate: Comparison of selected countries (2013)
CountryRoad fatalities per

Road fatalities per

100 thousand

100 thousand

Japan

4.7

6.5

United Kingdom

2.9

5.1

United States

10.6

12.9

China

18.8

104.5

India

16.6

130.1

Nigeria
Sierra Leone

20.5

615.4

not available

not available

Source: World Health Organization (WHO, 2013)026

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Both a priori probability and statistical probability have one important thing in common
because they both are related to measurable
risk in the sense that they can be described by
specific distribution functions. There is another sort of probability, however, which is notmeasurable at all. It is this third kind of probability that should be our next topic to pick up.
2.2.3 Estimates or judgments
In relation to estimates or judgments, Knight
has attracted our special attention to the distinction between measurable risk and nonmeasurable uncertainty in the following way:

The distinction here is that there is no solid
basis of any kind for classifying instances.
This form of probability is involved in thegreatest logical difficulties of all, and no satisfactory discussion of it can be given, but its
distinction from the other types must be emphasized and some of its complicatedrelations indicated. (Knight, 1921, p. 225)

batter may fail to hit hard enough. Although
the baseball game is played on some basis ofpitching or hitting statistics, the statistics used
is not so solid as the life expectancy or trafficrelated death rate afore-mentioned.
Knight is eager to make estimates/judgments
radically different from ordinary kinds of theoretical/empirical probabilities. At this point,
he has also written the following remark:The theoretical difference between the probability connected with an estimates and thatinvolved in such phenomenon as are dealt
with by insurance is of the greatest importance, and is clearly discernable in nearly any
instance of the exercise of judgment.
(Knight, 1921, p. 226)

Concerning the above sentence, the expression "no solid basis of any kind" is of thegreatest importance since it tells us the clear
distinction between theoretical and empiricalprobabilities on the one hand and estimatesand judgments on the other hand. Undoubte d l y, b o t h t h e o r e t i c a l a n d e m p i r i c a lprobabilities have solid scientific basis, thus
making no errors or no imperfections whatever. In contrast to those two cases, the thirdcase of "estimates or judgments are 'liable' toerr." (page 225) Human beings often makemistakes in every daily life. For example, every
baseball player is liable to err: an infield or outfield player may fail to catch a ball, whereas a

In reality, we observe a variety of insurance
including life insurance, traffic accident insurance and fire insurance. Life expectancy andtraffic accidents are subject to reliable information and solid calculation, so that they arealmost always insurable. According to Knight,
however, there are other kinds of probabilities
connected with human estimates and imperfect judgments, which are in no way subject toinsurance.
Joseph A. Schumpeter (1878-1950) is thegreat economist who was born in Austria andlater immigrated to the U.S., working for Harvard University until his death. He highly
appreciated Knight for making the solid distinction between measurable risk and nonmeasurable uncertainty. His massive book
History of Economic Analysis (1954) was posthumously came out in the publishing world. It
is really worthwhile to record his remark on
the work of Knight:

Frank H. Knight on Uncertainty and Profit

Yasuhiro Sakai

027

To Professor Knight we owe, in the firstplace, a very useful emphasis upon the distinction between insurable risks and noninsurable uncertainty; and, in the second
place, a profit theory that linked this non-insurable uncertainty on the one hand to rapid
economic change — which, barring extraeconomic disturbances, is the main source of
this uncertainty — and on the other to differences in business ability which are much
more obviously relevant to the explanationof profits and losses in condition of rapidchange than would be otherwise. He thereby
achieved a synthesis that is not open to themain objection against the ordinary type ofrisk theories.
(Knight, 1921, p. 894)
I myself stand squarely behind Schumpeter.
Knight's distinction between insurable risk andnon-insurable uncertainty is so important thatit has contributed a great deal to the history of
economic analysis. I would like to point out,
however, the historical fact that this distinction
has not been supported by all the economists.
For instance, Kenneth Joseph Arrow (1951)
when he was young expressed his doubts in astraightforward way:
In brief, Knight's uncertainties seem to havesurprisingly many of the properties of ordinary probabilities, and it is not clear how
much is gained by the distinction. (Arrow,
1951, p. 18)
I am not quite sure that Arrow in the 1970s
and afterward is academically what he was in
the 1950s. As the saying goes, time flies like anarrow. I believe, however, that he has somehow

028

outgrown from his younger days. In fact, evenafter his death in 2017, he is admired all over
the world as an outstanding economist in thetheory of risk and uncertainty.
2.3 Enterprise and Profit
2.3.1 The Effects of Uncertainty on the
Organization
We are now in a position to carefully consider the effects of uncertainty on the form oforganization of economic life. The best method seems to take up a society in which
uncertainty is absent, then introduce uncertainty, and ascertain what changes will takeplace in its structure.
With uncertainty entirely absent, every person possessing perfect knowledge of thesituation, there would be no occasion for resp onsib le mana g ement and c ontro l of
productive activity. The flow of raw materials
and productive services through productive
processes to the consumer would be entirely
automatic. It is true that there might be managers, superintendents and the like for the
purpose of coordinating the activities of indivi dua ls . Und er c ond i ti ons o f p er fe c tknowledge and full certainty, however, suchfunctionaries could be regarded as mere workers, performing purely routine functions,
without responsibility of any sort, on a levelwith persons engaged in just mechanical operations.
Now let us introduce uncertainty into thebusiness organization, and ascertain whatchanges will take place in its working and performance. Knight (1921) becomes a very
eloquent speaker at this stage:

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With the introduction of uncertainty — thefact of ignorance and necessity of acting upon opinion rather than knowledge — into
this Eden-like situation, its character is completely changed. With uncertainty absent,
man's energies are devoted altogether to doing things; and it is doubtful whether
intelligence itself would exist in such a situation ; in a world so built that perfectknowledge was theoretically possible, it
seems likely that all organic readjustments
would become mechanical, all organisms automata. With uncertainty present, doing
things, the actual execution of activity, becomes in a real sense a secondary part of life;
the primary problem or function is deciding
what to do and how to do it. (Knight, 1921,
p. 208)Knight skillfully compares the society without uncertainty and the one in the presence of
uncertainty. With uncertainty absent, people
are supposed to live the Eden-like situation inwhich persons are just doing the same things as
before and the organizations are mechanicallike automata. Knight doubts that even human
intelligence itself would cease to exist.5)
With uncertainty present, those situations
must change dramatically. While doing works
routinely becomes a secondary part of people'slife, deciding intentionally what to do and how
to do it would be thought of as the primary
problem. Then the internal organization is nolonger a matter of indifference or a mechanicaldetail. Centralization of determination andcontrolling function is now imperative. A very
important change in this direction resides inthe tendency of the groups themselves to specialize, finding the greatest managerial capacityand placing them in charge of the group work.
With the specialization of function goes also a
differentiation of reward. The produce of society is now divided into two kinds of income.
The first kind is contractual income or rent, thesecond one residual income or profit. The question which might occur to our mind is who isthe person acquiring the first income, and who
is the man being entitled to obtain the secondone.
2.3.2 Manager versus Entrepreneur

When uncertainty is absent, the duties ofmanagers at business organization would be ofa routine character, thus being not significantly
different from those of any other operatives;
they would be just like other ordinary workers
and their incomes are wages like other wages.
When the managerial function comes to require the exercise of judgment, however, thebusiness situation would change dramatically.
Then the judgment by the management is liable to make an error, and the manager in charge
ought to have responsibility for the correctnessof the opinion. In a sense, "the nature of thefunction is revolutionized; the manager becomes an entrepreneur." (Knight, 1921, p. 276)
We must keep in mind that the entrepreneur's income is not determined, but rather
may be regarded as residual in the sense that it
is what is left after the others are determined.
In other words, "the entrepreneur's income is
not fixed, but consist of whatever remains overafter the fixed incomes are paid." (Knight, 1921,
p. 280) The presence of true profit, therefore,
depends on an absolute uncertainty in estimating the value of judgment, or on the absence ofthe requisite organization for combining a suf-5) Arrow (1951, 1970) seemed to react rather harshly

both are just human beings, but not automata.

Frank H. Knight on Uncertainty and Profit

Yasuhiro Sakai

against such strong opinion of Knight. So Arrow once
remarked: "[A]ccording to Professor Frank Knight,
even human consciousness itself would disappear in theabsence of uncertainty." (Arrow, 1970, page 1) In retrospect, the two giants, Knight and Arrow, seem to beconsiderably emotional at this stage, thus showing that029

ficient number of instances to secure certainty
through consolidation.
In conclusion, Knight (1921) has left us thefollowing impressive sentence:
The only "risk" which leads to a profit is aunique uncertainty resulting from an exercise
of ultimate responsibility which in its uniquenature cannot be insured nor capitalized norsalaried. Profit arises out of the inherent, absolute unpredictability of things, out of the
sheer brute fact that the results of human activity cannot be anticipated and then only inso far as even a probability calculation in regard to them is impossible and meaningless.
(Knight, 1921, pp. 310-311 )By carefully reading the above sentence, westrongly feel Knight's passion for true uncertainty or absolute unpredictability of things
that may serve as the source of true profit distinct from ordinary rent. Knight was a manwith many faces. He was truly a man in paradox.

III

Bronfenbrenner on"the Chicago School" :Final Remarks

It is generally agreed that Frank H. Knight is
one of the superstars in the history of economic thought. His distinction between risk anduncertainty seems to be a common knowledge
among all the economists in the world.
Although Knight has been called the "Grand
Old Man" of Chicago, it is worth mentioningthat he has managed to remain an outsider in
his own kingdom. It is fair to say that he failed
to build up an exclusive "school of thought"

around himself. As we have repeatedly mentioned in the above, however, we are able tofind some important traces in his thought in
the work of Martin Bronfenbrenner. Of
course, Knight is Knight, and Bronfenbrenner
is Bronfenbrenner. Although there are some
important interactions between them, the ideological foundations seem be a bit apart. For
example, while Knight has constantly opposed
Keynesian macro policies of market intervention, Bronfenbrenner sometime called himself"Bastard Keynesian." We do see, however, thatthose two economists are not mathematicallyoriented, but find much interest in much wider
area such as philosophy, history, religion, policies, real world problems. In short, they aremen of dualistic views, with sharp tongue andsarcastic remarks.6)
There remains an important question ofwhether and to what extent the "Chicago
School of Economics" has ever existed. As far
as we can see, there are opposing views on thismatter. On the one hand, Laurence Miller, Jr.
(1962) claims that the Chicago School represents a subject of legitimate professional
interest. In historical perspective, in the 1930s,
1940s, and 1950s, so many eminent economists
such as Frank Knight and Jacob Viner were doing outstanding research in theories andapplications. And in the 1970s, 1980s, andhereafter, Chicago has produced so many leading theorists including Milton Friedman andGeorge Stigler. Although Milnor has beenbrave to propose several elements as defining
the "Chicago economists", alas, his proposal has
not gained full endorsement from George Stigler himself (1962). We should not forget thepresence of Paul Douglas, Oscar Lange, andMartin Bronfenbrenner, who have been rather
6) While the life and work of Frank H. Knight weresystematically reviewed by Patinkin (1973) and later byBoyd (1997), those of Bronfenbrenner were carefully
evaluated by Goodwin (1998). It is quite interesting tocompare those two review articles.

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independent , bastard Keynesian or liberal-oriented economists.
Martin Bronfenbrenner (1962) has caught a
golden opportunity to say his unique opinion
on the "Chicago School." In his famous or infamous paper, he characteristically has declared
his strong position against the existence of such
school:⦿Arrow, K.J. (1970) / Essays in Theory of Risk-Bearing,North-Holland/American Elsevier.

⦿Boyd, R. (1997) / "Introduction to the Transaction Edi-tion." Contained in: The Ethics of Competition by
Frank H. Knight, Transaction Publishers.

⦿Bronfenbrenner, M. (1962) / "Observations on the 'Chi-cago School(s)'," Journal of Political Economy Vol. 70,
pp. 72-75.

⦿Bronfenbrenner, M. (1971) / Income Distribution Theory,

Aldine-Atherton, Chicago.

⦿Emmett, R.B. (ed.) (1999) / "Introduction," Contained

I [namely, Bronfenbrenner] never heard ofany "Chicago School" until I left Chicago. I
thought of my teachers and my older fellow
students as good economists, not as membersof a sect of cult or clique. Shortly after leaving the Midway, however, I encountered theterm full force, It was usually used pejoratively, especially when I was included in themembership. On the banks of Lake Mendora, for example, "the Chicago School" meant
Pangoloss plus Crandgrind, with touches ofPeachum, Torquemada, and the Marquis deSade thrown in as "insulter's surplus."(Bronfenbrenner, 1962, p. 72)

in Selected Essays by Frank H. Knight, Volume One,
University of Chicago Press.

⦿Goodwin, C.D. (1998) / "Martin Bronfenbrenner, 1914-

1997," Economic l, Journal Vol. 108, pp. 1775-1780.

⦿Knight, F.H. (1921) / Risk, Uncertainty and Profit, Uni-

versity of Chicago Press.

⦿Miller, Jr. L. (1962) / " On the 'Chicago School of Eco-nomics'," Journal of Political Economy, Vol. 70, pp. 6469.

⦿Patinkin, D. (1973) / "Frank Knight as Teacher," Amer-ican Economic Review, Vol. 63- 5, pp. 787-810.

⦿Schumpeter, J.A. (1954) / History of Economic Analysis,

Allen & Unwin Publishers, London.

⦿Stig ler, G .J. (1962) / "Com ment [on t he Ch ica go

School]." Journal of Political Economy, Vol. 70, pp. 7071.

Here Martin Bronfenbrenner's sharp tongue
is so apparent, requiring no further explanation. Especially, the use of the word "Marquis
de Sade" is amazingly provocative. I believethat he has been more or less influenced by theworks and deeds of his mentor, Frank H.
Knight. The relation between Knight andBronfenbrenner should be brought to light, requiring still further investigation.
References
⦿Arrow, K.J. (1951) / " Alternative Approaches to the

Theory of Choice in Risk-taking Situations," Econometrica Vol. 19, pp. 404-437. Later contained in Arrow(1970), Chapter 1.

Frank H. Knight on Uncertainty and Profit

Yasuhiro Sakai

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Frank H. Knight on Uncertainty and Profit
Manager versus Entrepreneur

Yasuhiro Sakai

This chapter aims to carefully discuss how
Frank H. Knight, the "Grand Old Man" of
Chicago, dealt with uncertainty and profit,with special reference to manager versus entrepreneur. Frankly speaking, Knight was a sortof man in paradox, having a dualistic view andadopting an eclectic approach. In order to sheda new light on his life and work, we first argue
that there possibly exist some traces of the great
Knight in the words and deeds of Martin Bronfenbrenner, once one of Knight's students at
Chicago. Then we focus on the distinction between risk and uncertainty. According toKnight, non-measurable uncertainty must radically be different from measurable risk: only
uncertainty, but not risk, enables the entrepreneur to acquire true profit as its reward. In
contrast to the manager who are doing justroutine jobs every day, the entrepreneur dares
to engage in new venturous activities, thus
playing the central figure of the capitalist system. We live in the new age of uncertainty.
The second Knight is urgently needed.
Key words: Frank H. Knight, Martin Bronfenbrenner, risk, uncertainty, entrepreneur, profit,
capitalist system

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Frank H. Knight on Uncertainty and Profit

Yasuhiro Sakai033