Posted originally on May 26, 2025 by Martin Armstrong 

QUESTION: What is your view of Frank Knight’s view of risk versus uncertainty?

HL

ANSWER: Frank Knight, an influential economist and founder of the Chicago School from which Milton Friedman emerged. He is known for his work on risk and uncertainty, and he articulated a key distinction between the two concepts in his 1921 book “Risk, Uncertainty, and Profit”. The widely cited quote is:

“Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term ‘risk,’ as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different.”

Knight argued that risk refers to situations where outcomes are unknown but probabilities can be calculated (e.g., gambling or insurance), making it measurable and manageable. On the other hand, uncertainty describes scenarios where probabilities cannot be determined due to a lack of historical data or predictable patterns (e.g., unprecedented market shifts). This distinction underpins his theory of profit, where entrepreneurs bear uncertainty (not mere risk) as a source of potential economic reward.

This framework remains foundational in economics and decision-making theory, emphasizing the role of unquantifiable unknowns in shaping entrepreneurial behavior and market dynamics. I, being a trader rather than an academic, however, disagree insofar as nothing is truly UNCERTAIN. The problem with classical economists is that they have not explored ancient history, assuming the data is inconsistent or nonexistent. Then this view is compounded by the idea that the economy is random, and we can manage it, which was first presented by Karl Marx.

I have said many times that when I was in school, in economics class, they said it was random, and this government can smooth out the booms and busts under Keynesian Economics to prevent another Great Depression. Then I went to Physics class and was told that NOTHING is random. I concluded that someone was lying, and it was the economists. They refused to investigate the business cycle and presumed they could manage it.

Anyone who had actual experience disagreed with the classic economists. Arthur Burns was the Fed Chairman when Bretton Woods broke. He concluded that the business cycle existed and always won. Then there was Paul Volcker, the next Fed Chairman. Paul also came to the same conclusion that the business cycle existed despite the classic economic theories.

I had a conversation with Paul Vocker, who told me my Economic Confidence Model was correct and agreed that the business cycle was about 8 years. This flies in the face of classical economists.

I knew that Roman coins were attainable. I bought my first one for $10 in the 1960s. When they removed the silver from the coinage in 1865, I saw the connection to the very same event that marked the start of the Third Century Crisis.

When I assembled the coinage to answer a gnawing question: How did Rome fall? Was it like a 747 coming in for a landing gradually, or was it abrupt? I discovered it fell from 50 %+ silver to 0.2% in just 8 years.

I discovered no such thing as random walks down the street. That is put out by people who cannot see the cycles before their eyes. Turn the economy down, and politics will always flip, no matter who is in power. The EU is fighting to stay alive, so they are interfering in elections to defeat anyone who is anti-EU. This will only blow up in their faces. The economy will always force a response, and human nature has never changed in 6,000 years. Whoever is in power will always respond similarly to the same old economic pressure.

Read Hammurabi’s Legal Code. It is wage and price controls in response to an economic crisis. Even the Bible outlawed socialism. Attacking the rich and class warfare has been a problem since ancient times and it has always resulted in the collapse of such economies. Nothing has changed – ever. So, where is the UNCERTAINTY?