The Common Sense of Economics and Divergent Approaches in Economic Thought : A View from Risk, Uncertainty and Profit

This paper evaluates the contribution of Risk, Uncertainty, and Profit to the development ofeconomic theory in the 20th century. Our argument in this paper is twofold. First, we contend thatthis book embodied what had been the common knowledge of early neoclassical economics priorto WWII. Secondly, we also argue that embroynic to Knight’s account of economics were twodivergent approaches to economic thought that emerged after WWII. The first approach, what hascome to be known as microeconomics, is characterized by utility maximization under fixed price,income, and institutional parameters that approximate equilibrium. This first approach is distinctfrom a second approach, referred to as price theory, in which prices are not sufficient statistics, asin microeconomics, but operate as guides to consumption and production decisions underalternative institutional arrangements. This second approach not only represented the continuationof the mainline of economic thought from its classical and early neoclassical roots. It alsoembodies the basis for Knight’s understanding of uncertainty, profit and entrepreneurship, as wellas its implications for economic organization and social progress