Uncertainty An Earlier

Uncertainty An Earlier

Uncertainty An earlier theory of uncertainty, developed by the American economist Professor F. H. Knight, is of particular interest for the theory of profit. Profits are said to be earned by the entrepreneur for bearing the risks of uncertainty. Since the future is unknown and the outcomes of actions are uncertain, there are risks that the entrepreneur may have to meet unexpected costs arid, as a result, suffer unexpected losses. The probable frequency of thefts, fires, floods and so on can be calculated from the evidence of experience, and entrepreneurs can relieve themselves of these risks by insuring against them, thus converting them into a known cost. With many actions, however, it is not possible to derive a 'probability rating' of the possible outcomes, and so it is not possible to insure against the risk of undesirable outcomes. It is for bearing these uninsurable risks that Knight argued the entrepreneur receives a profit when his actions prove successful.

The existence of uncertainty raises the 'supply price' of entrepreneurs by what is in effect a risk premium which the entrepreneur must expect to be paid if he is to be persuaded to undertake production. This expected 'pure' or 'normal' profit is thus a true cost of production, and profit realized in practice would tend in the long run (and in the absence of restraints on competition) to be equal to it.

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Since then his writings have in turn been increasingly reinterpreted as a special case both by some followers and by some economists who had not wholly accepted his writings. The content of economics is in a state of change, and this consumeraffairs.org.uk site is therefore not a final statement of economic doctrine.

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