Uncertainty, market, and organization The Meaning and Scope of Knight’s Contribution

In Risk, Uncertainty and Profit, Knight not only distinguishes between uncertainty and risk. He explicitly addresses the problem of controlling and reducing uncertainty by making it dependent on the form of social organization and not on a calculation of probabilities – which is in any case impossible because of the very nature of the production process, which takes time. The theory of the firm based on transaction costs, initiated by Coase, rejects this approach by dint of being a theory of choice and exchange without any real consideration of either production or uncertainty. Returning to Knight and deepening his analysis requires (i) a recognition, following Arrow, of the imperfection of information and the resulting failures of the price system, which implies breaking with individual rationality to consider the importance of collective action and thus make room for the firm, and (ii) a recognition, following Richardson, of the need for the firm to face the interplay of irreversibility and uncertainty by implementing collusive forms of organization.