The Road Less Travelled: Keynes and Knight on Probability and Uncertainty

Abstract

Knight’s risk/uncertainty distinction is reviewed in its original context as a contribution to the theory of profit. Knight’s approach to probability is paralleled by Ludwig von Mises, as emphasised by recent developments in strategic entrepreneurship theory. Von Mises distinguishes between class probability (i.e. risk) and case probability (i.e. uncertainty) in contrast to the frequentist approach of his brother, Robert von Mises. Keynes’s contribution to probability and uncertainty is reviewed, focusing on his logical theory of probability in A Treatise on Probability which he subsequently contextualised in the General Theory. Keynes’s fragmentary later philosophical writings are reviewed to provide some insight into the contextual issues encountered. The key contributions of Knight and Keynes are summarised as signposts for ‘The Road Less Travelled’. The possibilities of a Keynesian-Knightian synthesis as a way forward are considered by comparing these signposts. It is argued that, although there is some common ground between Knight and Keynes, there are fundamental differences particularly associated with Keynes’s concept of weight of argument.

Keywords: Risk, uncertainty, probability, relative frequency, degree of belief, weight of argument, human logic

JEL Classification: B5, D8, E12