Yasuhiro Sakai,Book Reviews

Kayoko Misaki

J.M. Keynes Versus F.H.
Knight: Risk, Probability,and Uncertainty

Shiga University ／ProfessorSpringer, 2019In 1921, F. H. Knight (1885-1972) published
Risk, Uncertainty and Profit, where he argued
about the distinction between measurable risk
and non-measure uncertainty. In the same year,
J. M. Keynes (1883-1946) published A Treatiseon Probability, dealing with a similar subject.
Unfortunately, Keynes’s contribution has been
underestimated in the shadow of his main work,
The General Theory (1936), although he continued to insist on the significance of uncertainty.
With different visons and methodologies, bothauthors contributed to the study of uncertainty. The purpose of this book is to clarify thesignificance of their contributions from various
viewpoints.
In the history of economic thought, theconcepts of risk and uncertainty, somehow,
have been neglected for a long time. This bookaims to return to economists in the past, including Knight and Keyes, and go beyond
them toward new horizons of integrated science. According to J. K. Galbraith, there exists
a clear dividing line between the 19th and 20thcenturies in terms of uncertainty. In the 19thcentury, when capitalists were certain of thesuccess of capitalism, and socialists of socialism, problems could be posed and solved withfull certainty (p.5). Galbraith’s interpretationof the lack of uncertainty in the economy before the 19th century has been widely accepted.

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In my opinion, this idea led many economists
to believe that there existed no study of uncertainty in economics until the 20th century.
This book, on the contrary, argues that thehistory of the economics of risk and uncertainty stretches back over 300 years by paying
attention to the achievements also of mathematicians in this field. The topic is divided into
six stages of development. Although the firststage, or the mercantile economy before the1700s, had no economic theory, statistics as abranch of mathematics was firmly established
by Pascal and Fermat. In the same way, in thesecond stage, which the author calls the B-AAge, the mathematician Daniel Bernoulli is
considered the “father of risk economics”, andAdam Smith is called the “father of economics.” Keynes and Knight belong to the thirdstage, or the K-K Age. The fourth stage is called
the N-M Age, when Von Neumann and Morgenstern worked on game theory. The fifthstage is called the A-S Age, when Arrow, Akerlof, Spence, and Stiglitz focused on imperfect
information. Finally, by the sixth stage, the author discusses the return of Keynes and Knightand beyond.
It is already known that Keynes andKnight worked on micro and macro respectively. The author shows that while Knight
intended to perform a direct comparison be-彦根論叢

Summer / July 2020 / No.424

tween risk and uncertainty without the help of
any type of middle passage, for Keynes, “probability” played a very important role as the“intermediate belt” (p.54). To emphasize theirdifferent approaches is the main purpose ofthis book. However, I was more impressed by
how both figures tackled the same problem,
namely the difference between natural scienceand economics. In this book, I believe that
Knight’s ideas on the human aspects of economics would interest readers more than thatof Keynes, for the latter’s considerations about
this problem, such as “animal spirits” and hisdefinition of economics as a moral science, arealready better known to readers.
In order to understand Knight’s ideas on
human aspects, the explanation about Arrow’s
criticism of Knight (chapter 4) is very useful.
As the author points out, Knight was a philosophical man who took account of the nonreasonable aspects of the human mind andbehavior, whereas Arrow was a very reasonable
man who tended to balance the cost and benefit of his action, thus under-evaluating theeffect of psychology on economic behavior(p.67). This leads us to the question about thecharacteristics of the Chicago School to which
Knight belonged. Uzawa’s remark, which istranslated from Japanese into English in thisbook, would interest readers about the decisivedifference between Knight, who early on led theoriginal Chicago School, and Friedman, wholater modified the morals of the school in a different direction (p.118). As the author concludes,
Knight did not believe that individualism
could automatically bring about an ideal utilization of economic resources. As the authorargues, Knight’s idea on the ethical foundations of a competitive economy can beunderstood in terms of criticism not only of
capitalism but also of the general equilibrium
theory.
In my opinion, the most interesting part ofthis book is how Hicks, influenced by Keynes
and Knight, explained the difference between
natural sciences and economics (pp.54-55).
Knowledge is extremely imperfect. There arevery few economic laws we can know with precision. Hence, Hicks thought that economics
does not belong to the core of natural sciences
but rather is located at the edge of the sciences.
Causality in economics is not as simple as innatural sciences. Hicks proceeded to think that
economics is not only on the edge of sciences
and but also on the edge of history. So, a consideration of economics may throw light on
both directions. According to the author,
Hicks also concluded that statistics is also on
the edge of sciences and of history. By taking alesson from Hicks, we can reconsider why students and scholars of economics and statistics
should learn history.

Yasuhiro Sakai, J.M. Keynes Versus F.H. Knight: Risk, Probability,and Uncertainty

Kayoko Misaki

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