Uncertainty : the ethical basis for the economic theories of Frank H. Knight and John M. Keynes

John Maynard Keynes built his General Theory upon the assumption of an entrepreneurial economy in which money matters, because of the existence of uncertainty. Frank Hyneman Knight recognized the existence of uncertainty when he distinguished it from risk, incorporating each into his articulation of the classical economic model. In so doing, Keynes and Knight are as much philosophers as economists.

The study examines the ethical dimension of uncertainty within the economic theories of Knight and Keynes. Intellectual and theological influences upon their respective theories of probability and uncertainty are considered. The role of uncertainty in defining the purpose and method of economics and leading to their divergent economic outlooks and policy recommendations is also investigated.

The results of the study indicate that despite their common emphasis, both Knight and Keynes viewed the role of uncertainty from different perspectives, derived from significant, formative influences upon their thinking and differing views regarding the role and purpose of economic theory as applied to the real world. The intellectualism into which Keynes was born was based upon logic, science, and rational thinking. The resulting enlightened thinking led Keynes to consider individual and collective action positively, enabling society to take purposeful, deliberate action, in the face of an uncertain, nonergodic future.

The theological, conservative thinking from which Knight emerged left him cynical and critical of the established orthodoxy. While accepting its theoretical basis, Knight criticized classical theory for omitting uncertainty as an endogenous variable and for the assumed rationality of economic man. Knight’s pessimism led him to suggest the government assume a negative role, limited to establishing and enforcing “rules of the game” to ensure the smooth operation of a system of otherwise free-markets.

Still, both economists recognized the dramatic impact of uncertainty upon individual and collective decision making. Their mutual abhorrence for the inevitable results of unrestrained capitalism led each to suggest that economics be used in order to improve the conditions of society. Both Knight and Keynes remained passionate in their concern for the ultimate welfare and improvement of mankind, despite differences of opinion as to how this goal is to be achieved.