The neoclassical market model is the overwhelming basis for contemporary views of markets as fair, efficient, or both. But is it an appropriate starting point? The article draws on Frank Knight’s 1920s work on the economics of uncertainty to show that the ideal of perfect competition conceals a tacit trade-off between equality and certainty. Largely undetected, this trade-off continues to govern financialized capitalist democracies, evading normative and political debate. By explaining how markets and firms resolve the problem of uncertainty, Knight shows that all supposed market benefits, even allocative efficiency, are not costless to society. More specifically, Knight argued that modern markets are premised on a tacit agreement between a handful of “daring” entrepreneurs and the “risk-averse” public: the former agree to carry the uncertainties of business-life in return for a substantially larger share of its power and rewards. Despite the highly static assumptions of neoclassicism, therefore, and its linked assumption of perfect knowledge, uncertainty is far from absent in modern economics. It is built into firms and markets and manifests itself as a steep social and material hierarchy.
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For their indispensable feedback on earlier drafts and for helpful conversations on these topics, I would like to thank Danielle Allen, Eric Beerbohm, Bruce Caldwell, Hanoch Dagan, Joshua Dienstag, Ross Emmett, Stefan Kolev, Roy Kreitner, Attila Mráz, Laura Phillips Sawyer, Lucas Stanczyk, Roy Weintraub, and the anonymous reviewers. I would also like to thank the participants of the E. J. Safra Center for Ethics Faculty Seminars at Harvard and at Tel Aviv University, and the panelists and audiences at the American Political Science Association and the History of Economics Society annual meetings. The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Center for the History of Political Economy Research Fellowship, Duke University.
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Center for the History of Political Economy Research Fellowship, Duke University.
© 2021 University of Utah.
- Frank Knight
- markets and justice
- risk and uncertainty
- theories of the firm
ASJC Scopus subject areas
- Sociology and Political Science