Frank H. Knight on the 'Entrepreneur Function' in Modern Enterprise

24 Pages Posted: 28 Oct 2010 Last revised: 7 Feb 2011

See all articles by Ross B. Emmett

Ross B. Emmett

Arizona State University (ASU) - Center for the Study of Economic Liberty; PERC - Property and Environment Research Center

Date Written: December 15, 2010

Abstract

Frank Knight’s theory of the entrepreneurial function in modern enterprise is explored in two contexts. The first is the dismissal of the neoclassical theory of business enterprise by Berle and Means in The Modern Corporation and Private Property, and their subsequent call for measures that would ensure corporations acted in the social interest. The second context used to explore Knight’s theory of entrepreneurship is his later arguments regarding the problem of intelligent control in a democratic society. Underlying all of Knight’s work are his concerns about freedom and moral judgment in the midst of uncertainty, with the attendant problems commonly referred to today as the principal-agent problem and moral hazard. Knight argues that the entrepreneur personally absorbs these problems through his responsible direction of the modern enterprise; seen this way, profit is not just the return for bearing the risks of unknown consequences, but specifically for the courage to take up the challenge of organizing productive resources in the face of principal-agent and moral hazard problems. In the latter part of Risk, Uncertainty, and Profit, Knight argues that social functionaries are not entrepreneurs, and hence that democratic action will be plagued by principal-agent and moral hazard problems; a conclusion that much vexed him in his later ruminations on the fate of liberal democratic society. Were we to apply Knight’s insights to Berle and Means’ call for social control of the modern corporation, we could turn their argument around and ask: control by whom, for whose interest?

Keywords: Frank H. Knight, Frank Knight, entrepreneurship, modern corporation, Adolf Berle, Berle and Means, The Modern Corporation and Private Property, Risk Uncertainty and Profit, uncertainty, moral hazard theory of firm, social control, organizational theory

JEL Classification: B13, B31, D70, L22, M13, P12, P21

Suggested Citation

Emmett, Ross B., Frank H. Knight on the 'Entrepreneur Function' in Modern Enterprise (December 15, 2010). Available at SSRN: https://ssrn.com/abstract=1698107 or http://dx.doi.org/10.2139/ssrn.1698107

Ross B. Emmett (Contact Author)

Arizona State University (ASU) - Center for the Study of Economic Liberty ( email )

CPCOMM 4th Floor
United States

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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