Version 2: Sat, Oct 12, 2024
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The year 1921 saw the publication of “A Treatise on Probability” by John Maynard Keynes and “Risk, Uncertainty and Profit” by Frank H. Knight. Compare and contrast the role chance, probability and risk play in the work of these two eminent economists in these books and later works. Did they changed their views over the course of their careers? Please direct me to academic sources with bibliographic information.
Mistral.AI
John Maynard Keynes
“A Treatise on Probability” (1921)
- Chance and Probability: Keynes viewed probability as a logical relation between propositions, not a frequency of occurrence. He argued that probability is a measure of the degree of rational belief in a proposition given the available evidence.
- Risk: Keynes did not sharply distinguish between risk and uncertainty. He discussed risk in terms of probabilistic outcomes but also acknowledged fundamental uncertainty where probabilities cannot be assigned.
Later Works
- Change in Views: In his later works, such as “The General Theory of Employment, Interest, and Money” (1936), Keynes placed more emphasis on the role of uncertainty in economic decision-making. He introduced the concept of “animal spirits” to describe the instincts and emotions that drive economic behavior in the face of uncertainty.
Frank H. Knight
“Risk, Uncertainty and Profit” (1921)
- Risk: Knight defined risk as situations where the probability of different outcomes can be measured and quantified. He saw risk as calculable and insurable.
- Uncertainty: Knight distinguished uncertainty from risk. Uncertainty refers to situations where the probability of outcomes is unknown and unmeasurable. He argued that true uncertainty is the source of profit in a market economy.
- Chance and Probability: Knight’s focus was more on the practical implications of risk and uncertainty in economic decision-making rather than the philosophical underpinnings of probability.
Later Works
- Consistency in Views: Knight’s views on risk and uncertainty remained largely consistent throughout his career. He continued to emphasize the distinction between risk and uncertainty and their implications for economic theory and practice.
Comparison and Contrast
- Probability: Keynes had a more philosophical and logical approach to probability, while Knight was more concerned with its practical implications for economic decision-making.
- Risk and Uncertainty: Knight made a clear distinction between risk and uncertainty, while Keynes’ early work did not sharply differentiate between the two. However, Keynes’ later work acknowledged the role of fundamental uncertainty in economic behavior.
- Change in Views: Keynes’ views evolved to place more emphasis on uncertainty, while Knight’s views remained relatively consistent.
Academic Sources
- Keynes, J. M. (1921). A Treatise on Probability. Macmillan.
- Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Macmillan.
- Knight, F. H. (1921). Risk, Uncertainty and Profit. Houghton Mifflin Company.
- Runde, J. (1998). “Keynes’s Early Philosophical Thoughts on Uncertainty and Probability.” Cambridge Journal of Economics, 22(5), 585-597.
- LeRoy, S. F., & Singell, L. D. (1987). “Knight and Keynes on Risk and Uncertainty.” Journal of Political Economy, 95(2), 391-405.
These sources provide a detailed analysis of Keynes’ and Knight’s views on chance, probability, risk, and uncertainty, as well as the evolution of their thoughts over time.
Claude.AI
Here’s a comparison of Keynes and Knight’s views on chance, probability, and risk, focusing on their 1921 works and later developments, in markdown format:
Initial Works (1921)
John Maynard Keynes: “A Treatise on Probability”
- Focused on logical probability
- Emphasized subjective probabilities based on available evidence
- Introduced the concept of “weight of evidence”
Frank H. Knight: “Risk, Uncertainty and Profit”
- Distinguished between risk (measurable uncertainty) and true uncertainty
- Risk: can be quantified and insured against
- Uncertainty: cannot be measured or predicted
Key Differences
- Nature of Probability:
- Keynes: Logical and subjective
- Knight: Empirical and objective
- Uncertainty:
- Keynes: Degrees of uncertainty based on available evidence
- Knight: Sharp distinction between measurable risk and unmeasurable uncertainty
- Economic Implications:
- Keynes: Emphasized role of expectations in economic decision-making
- Knight: Focused on entrepreneurship as a response to true uncertainty
Later Developments
Keynes
- In “The General Theory of Employment, Interest and Money” (1936), Keynes further developed ideas on uncertainty in economic decision-making
- Introduced the concept of “animal spirits” influencing investment decisions
Knight
- Continued to refine his ideas on risk and uncertainty throughout his career
- Emphasized the role of judgment in entrepreneurial decision-making
Evolution of Views
Both economists largely maintained their core ideas throughout their careers, but refined and applied them to broader economic contexts:
- Keynes applied his probabilistic thinking to macroeconomic theory
- Knight extended his concepts to discussions of economic organization and entrepreneurship
Academic Sources
Runde, J. (1994). Keynes after Ramsey: In defence of ‘A Treatise on Probability’. Studies in History and Philosophy of Science Part A, 25(1), 97-121.
LeRoy, S. F., & Singell Jr, L. D. (1987). Knight on risk and uncertainty. Journal of Political Economy, 95(2), 394-406.
Fontana, G. (2001). Keynes on probability, uncertainty and decision making. Journal of Post Keynesian Economics, 24(2), 267-294.
Langlois, R. N., & Cosgel, M. M. (1993). Frank Knight on risk, uncertainty, and the firm: a new interpretation. Economic Inquiry, 31(3), 456-465.
Brady, M. E. (2018). Keynes, mathematics and probability: A reappraisal. International Journal of Applied Economics and Econometrics, 26(1), 81-121.
These sources provide in-depth analyses of Keynes and Knight’s works on probability, risk, and uncertainty, including their evolution over time. They offer a good starting point for further research on this topic.
Gemini
Keynes and Knight were two prominent economists of the early 20th century whose works significantly influenced economic thought. Their views on chance, probability, and risk were central to their contributions, particularly in their seminal works:
- Keynes: A Treatise on Probability (1921)
- Knight: Risk, Uncertainty and Profit (1921)
Key Differences in Their Approaches
While both economists dealt with uncertainty, their perspectives differed significantly:
Keynes: * Subjective probability: Keynes emphasized the subjective nature of probability, arguing that it is based on degrees of belief rather than objective frequencies. * Logical probability: He introduced the concept of logical probability, which relates to the degree of belief that it is rational to have in a proposition given other propositions. * Risk: For Keynes, risk was associated with situations where probabilities could be objectively assessed.
Knight: * Uncertainty: Knight distinguished between risk and uncertainty. Risk involved measurable probabilities, while uncertainty was characterized by situations where probabilities were unknown or unknowable. * Profit: He argued that profit was primarily a reward for bearing uncertainty, not for taking risks.
Evolution of Their Views
Both Keynes and Knight’s views on probability and risk evolved over their careers.
Keynes: * Shift towards objective probability: In later works, Keynes’s views on probability shifted towards a more objective approach, acknowledging the role of objective frequencies in certain contexts. * Focus on uncertainty: He also became more interested in the concept of uncertainty, recognizing its significance in economic decision-making.
Knight: * Adherence to uncertainty: Knight remained steadfast in his distinction between risk and uncertainty, emphasizing the importance of uncertainty in economic analysis.
Academic Sources
For in-depth exploration of Keynes and Knight’s views on chance, probability, and risk, consider the following academic sources:
- Keynes, John Maynard. A Treatise on Probability. Macmillan, 1921.
- Knight, Frank H. Risk, Uncertainty and Profit. Houghton Mifflin, 1921.
- O’Donnell, Roderick M. “Keynes’s Philosophy of Probability.” Journal of Economic Literature 20, no. 3 (1982): 1237-1262.
- Shackle, G. L. S. Uncertainty in Economics. Cambridge University Press, 1955.
- Stiglitz, Joseph E., and Amartya Sen, eds. The Oxford Handbook of Uncertainty and Risk. Oxford University Press, 2009.
These sources provide valuable insights into the original works of Keynes and Knight, as well as subsequent interpretations and developments in their theories.
ChatGPT
In 1921, two significant works emerged: John Maynard Keynes’s “A Treatise on Probability” and Frank H. Knight’s “Risk, Uncertainty and Profit”. Both economists delved into the concept of probability, uncertainty, and risk, but their approaches and interpretations differed in important ways. Below is a comparative analysis of their views, alongside how their positions evolved over time.
Keynes: “A Treatise on Probability” (1921)
1. Concept of Probability
- Epistemic Probability: Keynes’s approach to probability in “A Treatise on Probability” was primarily epistemic, meaning that probability was not merely about frequencies or objective chances but about degrees of belief or rational credence based on available knowledge.
- Logical Relation: Keynes argued that probabilities express a logical relationship between propositions, grounded in our state of partial knowledge. For him, probability was a way of reasoning under uncertainty when certainty is unattainable.
2. Uncertainty
- Quantifiable vs. Unquantifiable Uncertainty: Keynes distinguished between measurable risks (where probabilities can be calculated) and unquantifiable uncertainties, where it is impossible to assign precise probabilities.
- Uncertainty in Economic Behavior: In his later works, notably in “The General Theory of Employment, Interest, and Money” (1936), Keynes emphasized the centrality of fundamental uncertainty in economic behavior. He argued that many economic decisions are made in conditions where future outcomes cannot be predicted probabilistically, leading to phenomena like investment volatility and economic instability.
3. Evolution of Keynes’s Views
- Increased Focus on Uncertainty: In Keynes’s later economic writings, particularly “The General Theory”, he expanded on the theme of unquantifiable uncertainty, focusing more on how psychological factors like confidence, expectations, and conventions drive behavior in uncertain environments.
- Enduring Epistemic View: Although Keynes became more concerned with practical economic uncertainty, his fundamental view that probability is tied to logical relationships and partial knowledge remained consistent throughout his career.
Knight: “Risk, Uncertainty and Profit” (1921)
1. Distinction between Risk and Uncertainty
- Risk: Knight made a clear distinction between risk, where the probabilities of outcomes are known and can be managed using statistical methods, and uncertainty, where these probabilities are unknown or unknowable.
- Profit and Entrepreneurial Activity: Knight posited that profit arises from true uncertainty, as only in situations where outcomes are unpredictable do entrepreneurs earn profits for bearing this uncertainty. Risks, on the other hand, can be insured or hedged, and therefore do not generate the same kind of profit.
2. Probability and Economic Decision-Making
- Focus on True Uncertainty: Unlike Keynes, who developed a broader theory of probability applicable to a variety of fields, Knight’s interest was specifically in economic decision-making. He stressed that much of economic activity, particularly entrepreneurial decision-making, takes place under conditions of uncertainty rather than calculable risk.
- Economic Theory Implications: Knight’s work led to the differentiation in economics between situations where market outcomes can be predicted based on statistical probabilities and those where they cannot. This had implications for theories of competition, market equilibrium, and entrepreneurship.
3. Evolution of Knight’s Views
- Consistency in Approach: Knight remained consistent in his view that true uncertainty is a key feature of entrepreneurial markets. He maintained that economic profit depends on the ability to deal with the unknown, a stance he continued to advocate in his later works.
- Philosophical Reflections: Knight, especially in his later life, became more interested in the philosophical implications of uncertainty and its connection to ethics and human behavior, though this did not significantly alter his core economic theory.
Comparison of Keynes and Knight
| Aspect | Keynes | Knight |
|---|---|---|
| Nature of Probability | Epistemic, grounded in degrees of belief. | Probability relates to known risks; uncertainty remains outside the scope of probability. |
| Risk vs. Uncertainty | Distinguishes between measurable and unmeasurable uncertainty. | Distinction between calculable risk and unquantifiable uncertainty is central. |
| Economic Focus | Uncertainty affects investment and behavior; emphasized in later works. | True uncertainty leads to profits in entrepreneurship. |
| Philosophical Approach | Logical relations between propositions. | Economic uncertainty has broader philosophical and ethical implications. |
| Change in Views | Increased emphasis on uncertainty in economic behavior, but epistemic probability theory remained constant. | Consistent in distinguishing risk from uncertainty; later works delve into philosophical dimensions. |
Academic Sources
- Gillies, Donald A.
Philosophical Theories of Probability. Routledge, 2000.- This book provides a detailed exploration of various philosophical approaches to probability, including Keynes’s epistemic probability. It contrasts his views with frequentist and Bayesian interpretations.
- Bateman, Bradley W.
Keynes’s Uncertain Revolution. University of Michigan Press, 1996.- Bateman explores how Keynes’s views on uncertainty evolved, particularly how they influenced his later work in macroeconomics.
- Emmett, Ross B.
The Elgar Companion to the Chicago School of Economics. Edward Elgar Publishing, 2010.- This work provides insight into Knight’s contributions to economic theory and how his views on risk and uncertainty fit into the broader Chicago School tradition.
- O’Donnell, R. M.
Keynes: Philosophy, Economics and Politics: The Philosophical Foundations of Keynes’s Thought and their Influence on His Economics and Politics. Palgrave Macmillan, 1989.- This text focuses on the philosophical foundations of Keynes’s work, including his theory of probability and uncertainty.
- LeRoy, Stephen F., and Larry D. Singell.
“Knight on Risk and Uncertainty.” Journal of Political Economy 95, no. 2 (1987): 394–406.- This paper discusses Knight’s key distinction between risk and uncertainty and its implications for economic theory, including profit theory.
Conclusion
Both Keynes and Knight offered pioneering views on the role of risk and uncertainty in economic decision-making, but their approaches were rooted in different intellectual traditions. Keynes’s focus on epistemic probability evolved into a broader theory of uncertainty in economics, while Knight maintained a consistent focus on the entrepreneurial implications of uncertainty. Both perspectives continue to influence modern economic theory, especially in areas such as behavioral economics and risk management.
Additional Resources
Risk, Uncertainty and Profit by Frank H. Knight - Online copy at the Mises Institute
Knight’s groundbreaking study of the role of the entrepreneur in economic life.
Risk, Uncertainty and Profit by Frank H. Knight Review by: Wesley C. Mitchell - The American Economic Review, Vol. 12, No. 2 (Jun., 1922), pp. 274-275
A Treatise on Probability by John Maynard Keynes (1883-1946) - Macmillan & co. (1921) - Online copy by Project Gutenberg
Originally written as a Fellowship Dissertation for King’s College, Cambridge, between 1906 and 1909, Keynes’s Treatise represents his earliest large-scale writing. Rewritten for publication during 1909-12 and 1920-1, it was the first systematic work in English on the logical foundations of probability for 55 years.
Keynes on Uncertainty and Tragic Happiness: Complexity and Expectations by Anna M. Carabelli, Professor of Political Economy at the University of Eastern Piedmont, Italy - Palgrave Macmillans 2021
J.M. Keynes Versus F.H. Knight: Risk, Probability, and Uncertainty by Yasuhiro Sakai, Shiga University, Faculty of Economics, Center for Risk Research - Evolutionary Economics and Social Complexity Series , Springer 2019
Probability, risk and uncertainty By Professor Jochen Runde
A century later, work on uncertainty by F.H. Knight and J.M. Keynes remain highly relevant in areas ranging from economics and finance to insurance, law and management, says Jochen Runde, Professor of Economics & Organisation at Cambridge Judge Business School.
Started: Sat, Oct 12, 2024
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