Locke, Marshall, and Knight, on uncertainty and risk

Abstract

Uncertainty pre-occupies Locke in The Two Treatises of Government (TTOG), which makes the argument for the elimination of uncertainty, which was then developed by Hegel through the analysis of history, where man gradually improves himself over time. Marshall incorporates the procedure of historical improvement, as provided by Hegel, and the elimination of uncertainty, as proposed by Locke, within his analysis of economics. While Knight correctly notices that Marshall fails to acknowledge uncertainty, Knight does not examine the philosophy that drives this failure in Marshall. Instead, Knight grounds uncertainty on a recent development in philosophy.

Keywords:

• Locke
• uncertainty
• Knightian uncertainty
• Knight
• risk

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 References to “man” are references to “man” as a human being, having no relevance to questions of gender whatsoever. Knight was well versed in modern philosophy, however he did not have much of an appreciation for ancient philosophy, possibly because of the historicist approach of German philosophy; the dominant form of philosophy at the time when RUP was written (Strauss 1952, 1953, 1964; Mansfield 2006, 2007).

2 Such a distinction, between the ancient and modern worlds can be illustrated by comparing the economics of Aristotle to modern economics. Locke was extremely careful about his elimination of all qualitative distinctions; however, a recent study has shown that Locke goes so far as to deny the qualitative difference between hue and tone exists, thereby eliminating the idea of natural beauty (Nash, Nash, and Rybak 2021). This interpretation of Locke shines some light on the underlying aims, and objectives, of Locke, which appear sedate on the surface, but are much sweeping in significance, below the surface. Within this work a generally coherent position is articulated within ancient philosophy, with regard to the conception of nature, and the relationship of man to nature. Specifically, the philosophy of Aristotle is seen as the main exemplar of ancient philosophy, which underlines the importance of prudence, as a virtue, in relation to practical matters. Here, the presence of uncertainty is argued to mark a distinction between theory and practice; a distinction that Locke makes redundant through his reduction of virtually all value to the labour of man, not the qualities bestowed on man by nature. “Nature” is defined as all that surrounds and supports man, from the subatomic level to the broader, and infinite, universe (Strauss 1959b [1989]; Mansfield 2007).

3 (Le Roy and Singell 1987; Langlois and Cosgel 1993). Uncertainty is a phenomenon that relies on the recognition of qualitative differentiation, and the problems that emanate from such recognition, where that recognition has a coherent philosophical basis. To modern philosophy and economics, as created by Locke, recognition of uncertainty effectively means recognition of the value that nature provides to man. To ancient philosophy, uncertainty means the acceptance of significant natural difference and The Republic represents an example of how men, of very different natural quality, benefit each other through association and the use of irony (Plato 1991). Uncertainty supports the very reason for political association, as it means natural difference is acknowledged and valued.

4 Ancient philosophers are, for the purposes of this piece, those preceding Machiavelli; primarily Plato, Xenophon, and Aristotle. The paper refers to the creation of value by man, which is typically dealt with in economics, as the idea of value. Uncertainty about natural events like weather is tractable by insurance markets, and is not what uncertainty refers to. As the idea of prudence needs uncertainty to exist, and because entrepreneurs are usually thought of as individuals that practice prudent decision-making, the discussion in the paper is highly relevant to entrepreneurship. Prudence is also relevant to manliness (Mansfield 2006), and the need for irony, where different things are said to qualitatively different men, as in the case of the Platonic dialogues. Locke practices irony through his careful writing, which reveals itself to only the careful and gifted reader. However, Locke effectively prevents future use of irony, and his work suggests that, because al men are equally ungifted by nature, that Socrates did not need to practice irony in dialogues like The Republic (Plato 1991).

5 Summers (2012). Summers recognizes the influence of uncertainty from a somewhat orthodox viewpoint, and that includes the recognition Knightian uncertainty, and there is no special influence of Knight on the work of Summers (2012). Tarullo (2009), among others, also sees the need to confront and act in the face of uncertainty. As others have shown in much detail, Marshall is the founder of orthodox economics, to which Summers generally refers (Marshall [1890] 1961, [1919] 1920), and is the main author that Knight engages with in his most famous work, Risk, Uncertainty and Profit ([1921] 1985), in order to develop his argument for the existence of uncertainty (Groenewegen 1990, 2002 196). Marshall largely based his work on the philosophy of Hegel, and Idealist philosophy (Hegel [1821] 1967, [1837] 1956; Kant [1787] 1929, [1790] 1997; Flay 1984). See also, Rousseau ([1762a] 1968, [1762b] 1991, [1770] 1964) and Heidegger (1971). Modern economics has explored almost every logical alternative, in order to explain uncertainty, within the mode of analysis first specified by Locke, each new alternative being less convincing, and less coherent, than the former (Caballero 2010; Champernowne 1969; Hicks 1931).

6 Trivial outcomes do not concern qualitatively different outcomes. Given virtually all value is made by man, then these are the outcomes that exist in the state envisioned by Locke and by the economy envisioned by Marshall. Non-trivial outcomes refer to qualitatively different outcomes, where the input of nature is accepted in the definition of value, so that non-trivial outcomes cannot exist in the work of Locke, or the economics of Marshall. Damage to naturally diverse qualities provided to man from nature, through poor decision-making, which result in outcomes that cannot be replaced, through labour, are examples of non-trivial outcomes. For example, Shakespeare shows the power of poor prudential decisions-making, in the context of uncertainty, in Romeo and Juliet (Shakespeare [1597] 2000).

7 Modern social science, especially economics, is partially built on an interpretation of Smith and his Wealth of Nations (1776), where Smith suggests that good things, or the things that society intends to be outcomes of social procedures, can come from individual actions that do not intend such benefits (Smith ([1759] 1976), in Part IV, Chapter 1; Smith ([1776] 1939, I Book IV, Chapter II, paragraph IX). See also, (Bloom 1975; Cropsey [1955] 1977; Mansfield 2006); Strauss (1952, 1953).

8 The paper refers to the creation of value by man, which is typically dealt with in economics, as the idea of value. Uncertainty about natural events like weather is tractable by insurance markets, and is, therefore, not what uncertainty refers to. As the idea of prudence needs uncertainty to exist, and because entrepreneurs are usually thought of as individuals that practice prudent decision-making, the discussion in the paper is highly relevant to entrepreneurship.

9 Others have already shown how important Machiavelli was, in terms of establishing modern political philosophy (Strauss [1959b] 1989, 85–86). See also, Strauss ([1936] 1963, 1952, 1953, [1959a] 1988, [1959b] 1989, 1964, 1970; Machiavelli [1513] 1985, [1517] 1996; Plato (1991); Aristotle 1980).

10 Knight recognizes this Hegelian circumscription many times throughout his work. For example, Knight notes that the ideal of autonomy in modern economics is antiquated and that as the scale of economic organization grows, that ideal becomes more and more irrelevant (Knight 1932, 110–111). While Robinson Crusoe might be autonomous, the typical economic agent is increasingly less autonomous (Knight 1947). Just as individual autonomy is circumscribed by history in Hegel, so is individual autonomy circumscribed by the scale of the economy in Knight.

11 While Knight correctly identifies the fundamental problem with Marshall as being a failure to recognize uncertainty, he omits to critique the philosophy that led Marshall towards making such a failure. As Hodgson shows, the influences on Marshall are not straightforward, where the use of the biological narrative was partly modified through the influence of Spencer (Hodgson 1993). Here, the use of references to uncertainty may be equally complex, and equally circumscribed by Spencer, however the importance of Locke and Hegel to the treatment of uncertainty is worth highlighting, as suggested herein.

12 Such an understanding of political association means that society is founded on what the ancient philosophers understood as “base” instincts, not on the pursuit of the “good” as the ancient philosophers thought was feasible (Bloom 1990b, 327). Economics, which Locke prepares the way for, has been so successful that it now has, for most economists, removed the awareness of other possibilities, or alternative views of the word, as noted by Bloom,

Freedom of the mind requires not only, or not even specially, the absence of legal constraints but the presence of alternative thoughts. The most successful tyranny is not the one that uses force to assure uniformity but the one that removes the awareness of other possibilities (Bloom 1987, 249).

13 (Locke [1689] 1988, Ch. V, sec. 40). Locke mentions the word “uncertain” eight times in TTOG, yet while the first five mentions concern the way in which uncertainty is evident in the state of nature, and how the law can eliminate uncertainty, the latter three mentions concern the administration and regulation of society, as opposed to the transformation of uncertainty into risk. Locke mentioning of the word “uncertain” is as follows:

(Locke [1689] 1988, Ch. IV, Sec. 22),

(Locke [1689] 1988, Ch. VII, Sec. 80),

(Locke [1689] 1988, Ch. IX, Sec. 123),

(Locke [1689] 1988, Ch. IX, Sec. 127),

(Locke [1689] 1988, Ch. XI, Sec. 136), uses the word “uncertainty”,

(Locke [1689] 1988, Ch. XII, Sec. 156), uses the word “uncertainty”,

(Locke [1689] 1988, Ch. XIII, Sec. 158), and

(Locke [1689] 1988, Ch. XIX, Sec. 223).

14 Marshall acknowledges the significant influence of Locke specifically as follows,

‘Locke, who exercised a great influence over Adam Smith, anticipated the ardent philanthropy of the Physiocrats as he did also some of their peculiar economic opinions’ (Marshall [1890] 1961, Appendix B, section 3, note 1).

15 Locke follows, at least to some degree, Hobbes ([1651] 1950). However, Locke effectively substitutes the desire to eliminate uncertainty about property rights, as the main reason for joining society, from what Hobbes suggests; the fear of violent death. As Hobbes indicates, nature provides nothing to man but the promise of a “nasty” existence and the fear of violent death. Man is better off in society, by seeking to escape a malevolent state of nature that leaves man in a poor “condition”, as Hobbes indicates,

In such condition [in the state of nature] there is no place for industry, because the fruit thereof is uncertain, and consequently, not culture of the earth, no navigation, nor the use of commodities that may be imported by sea, no commodious building, no instruments of moving and removing such things as require much force, no knowledge of the face of the earth, no account of time, no arts, no letters, no society, and which is worst of all, continual fear and danger of violent death, and the life of man, solitary, poor, nasty, brutish, and short [brackets added] (Hobbes [1651] 1950, XIII, 9).

16 Hence, step one establishes the following:

• man is separable from nature,

• nature is parsimonious in terms of the things that might produce value, and

• nature constantly threatens the value that man creates, and the threat of nature, to man-made value, can be summarized as uncertainty.

17 However, when the labour of man was not sophisticated or joined with industrialization, as in the time of Aristotle, and the ancient Greeks and Romans, nature may have played a somewhat larger role (Marshall [1890] 1961, Book 1, Ch. 1, Section 5).

18 (Bloom [1963]1987, 1975, 1987, 1990a, 1990b, 1993). See Bloom’s discussion of education, and contrast this to that provided by Locke (Bloom 1987, 1990b, 1993).

19 Locke points the way forward to what modernity has tried to assert; nature is controlled by man, and not the other way around, as the ancients suggested (Mansfield 2007, para. 27; ([1991] 1993, 2006, 2007).

20 Because man is permanently vulnerable to the natural selfishness of his uneducated and impoverished fellow man, within the state of nature, he can never experience any peace, as his uncertainty, concerning his title to property, effectively debilitates him. In the struggle to escape the impoverished state provided by nature, man effectively makes himself helpless. In nature, everyone lays claim to everything, in all places, all at one time.

21 Exactness has no tolerance for uncertainty, and hence the treatment of profit by Marshall, remains, as Knight observed, inadequate; if non-existent.

22 Instead of trying to dominate nature and eliminate uncertainty, as Marshall follows Locke in asserting, modern social science attempts, there may be a better approach (Strauss 1964, p. 42). See also Mansfield (2006), where the discussion of manliness addresses decision-making under uncertainty. Contrast the discussion with Nietzsche ([1884] 1956, [1886] 1993, [1887] 1996, 1910; Dannhauser [1963] 1987; Sartre 1956; Schopenhauer [1819] 1969, [1844] 1969).

23 If all value is created by man, and there are virtually no other qualitative distinctions created by nature, then one would have an adequate basis for being sceptical about all perception. If all men, at all times, and in all places, are seeking to increase property, then perceptions could be distorted by men, as a way of acquiring property. One is, therefore, sceptical for a reason asserted by Locke; nature is parsimonious and virtually all value is created by man. Man has only one way of escaping the poverty provided by nature; through his own labour. If that is the case, then men should be very sceptical of perception, as perception is not a vehicle to appreciate a barren nature, but it also provides a means whereby men can escape the poverty of nature. If perception is faulty, or if other men distort perception, then one might not be able to escape the penury of nature. As Hume notes,

All perceptions of the human mind resolve themselves into two distinct kinds, which I shall call IMPRESSIONS and IDEAS. The difference betwixt these consists in the degrees of force and liveliness, with which they strike upon the mind, and make their way into our thought or consciousness (Hume [1739] 1985, 49).

All ideas, therefore, emanate from sense perception, even though the senses cannot be trusted to deliver accurate perceptions, when compared to a form of knowledge that is objective and that is not derived from such faulty sense perceptions. Moreover, the faculty of reason, which links together all these disparate sensations is also not reliable since,

This sceptical doubt, both with respect to reason and the senses, is a malady, which can never be radically cur’d, but must return on us every moment, however we may chance it away, and sometimes may seem entirely free from it (Hume [1739] 1985, 267–268).

Hume transforms debate about uncertainty, in terms of the problems men face in a nature that he cannot control, with debates about the certainty of perception. As Hume points out, “Reason is, and ought only to be, the slave of the passions, and can never pretend to any other office than to serve and obey them” (Hume [1739] 1985, 462, book 2, part 3, paras. 3–6). Passion distorts knowledge such that it cannot be claimed as objective; the account of what one knows of external reality is therefore radically distorted by the emotional engagement that one has with reality (Hume [1740] 1990, 1748).

24 For a discussion of Idealist philosophers, see the following: (i) Hassner ([1963a] 1987; Hassner [1963b] 1987), (ii) Scruton ([1982] 1997), (iii) Pippin (1991, 1993, 1996 196), and (iv) Singer ([1983] 1997). In addition, see Hegel ([1821] 1967, [1837] 1956) and Kant ([1787] 1929, [1790] 1997), for a somewhat more direct reading of such philosophy. Compare this philosophy to that of the early modern philosophers, such as Machiavelli ([1513] 1985, [1517] 1996), Hobbes ([1651] 1950), Rousseau ([1756] 1991, [1770] 1964), and Hume ([1739] 1985, 1748). In addition, compare this Idealist philosophy to the critique by Schopenhauer ([1819] 1969, [1844] 1969) and Nietzsche ([1884] 1956, [1886] 1993, [1887] 1996). In interpreting Nietzsche be careful, and refer to commentary from many sources. For example, refer to the following: (i) Dannhauser ([1963] 1987), (ii) Deleuze ([1962] 1993), (iii) Hollingdale (1995), (iv) Tanesini (1995), and (v) Tanner ([1994] 1997). In addition, when considering the relative merits of Idealist philosophy, bear in mind the contrast between the modern philosophers and the ancient philosophy of Plato, and others (Plato 1991; Bloom [1963] 1987, 1987; Mansfield [1991] 1993, and Fortin 1996; Herbst [1965] 1972, 1995; Hodgson 2000).

While German Idealism remains intimately related to the work of Locke, the Idealists did not always agree with Locke (Fischer 1975).

25 Knight was quite accomplished in philosophy, as his career indicates well, and as his M.A. thesis (1913a) and many other works indicate (1913b, 1915, 1916, 1920a, 1920b). Knight’s review of Pigou, and his general approach to economics, shows argumentative skills that are indicative of these philosophical skills (Knight 1926, 1932, [1933] 1951). Knight maintained an interest in ethics, despite the fact that most economists thought such an interest was arcane, outmoded, and basically irrelevant (1935a, 1935b, 1937, 1940, 1943). Johnson refers to Knight as coming from a malodorous environment that was required to create a self-taught intellectual, who questioned everything (Ross 1991, 422).

26 Schuler (2014) is one scholar who has elaborated the various linkages between Hegel and Locke. See also Shamsur Rahman (1993).

27 (Coase 1937; Nash and Rybak 2010).

28 F.H. Knight, Risk, Uncertainty, and Profit [1921] 1985, hereafter [RUP]. See also Le Roy and Singell (1987), and Raines and Jung (1986).

29 Breit and Ransom (1982), Gonce (1972, 1992), Schweikhardt and Sellers (1988), and Stigler (1973) might provide an example of the tendency to re-formulate Knight in the light of recent theory.

30 Generally, the work of Knight is used like a like an empty framework, by various economists, so as to give extra justification for pre-existing points of view. Hence, present work might be seen in that light, although it does support the primary interest of Knight. For example, some, like Runde and Lawson are interested in issues that relate to Critical Realism, so their work on Knight is not used to analyse or develop the work of Knight, but to promote this interest. Alternatively, others, like Arrow, harbour the usual mathematical interests of neo-classical or largely Marshallian theory, when he discussing a subject like Knightian uncertainty, which is borne out of philosophical point of view that is diametrically opposed to Marshall and mathematical economics. Arrow [1951a] 1963, [1951b] 1971, [1952] 1970; Lawson (1985, 1988, 1994, 1997); Runde (1990, 1998a, 1998b, 1998c 196). See also (Davidson 1988; Runde 1998a; Lawson 1985).

31 Although the current authors remain skeptical regarding the adequacy of Pragmatism as a basis for proposing uncertainty, as Knight did himself, the fact remains that Knight grounded the notion of uncertainty in a coherent way, within a philosophical system (Nash 2003). Marshall was heavily influenced by Hegel, where Hegel realizes that reality is a complete artifice of the mind itself, and that there is nothing beyond this artifice. Mind, not matter, was the ultimate reality for Hegel. Such conclusions influenced Marshall (Marshall [1890] 1961; Groenewegen 1990; Singer [1983] 1997, 192–193; Hassner [1963b] 1987, 732–760).

32 What is true for Ellsberg is also true for modern economics; Ellsberg is merely representative of a generation of scholars who have forgotten philosophy, accepted what others have said about philosophy, or who refuse to consider the importance of philosophy. What Ellsberg says explicitly, modern formal economics accepts implicitly, and refuses to reconsider. While Ellsberg lacked the philosophical perspective of Knight, he is very similar to most economists of his time, and even more so now. Ellsberg, therefore typifies the inept handling of the risk-uncertainty distinction by economics; one borne of a philosophical vacuum.

33 By way of contrast to the modern interpretation of nature as provided by Locke, the ancient philosophy of Aristotle, provides an alternative view of nature, and the possibility of a firm foundation for uncertainty. Here, uncertainty is realized and here, non-trivial outcomes are captured in the analysis. By recognizing qualitative difference between individual men, ancient philosophy opens the door to the possibility of acknowledging uncertainty. If qualitative differences exist among men, through nature, then man then has some dependence upon nature, and that, then, opens the possibility for uncertainty to exist in a coherent manner. Dependence on nature means that man cannot control nature, which then means that the modern ambition of Locke can be challenged. If man must exist within a nature that he cannot control, then uncertainty has a real chance of existing in the analysis of practical decision-making once again, as it did before the modern philosophers ruled it out.

The following is a listing of literature related to the work of Knight; both directly and indirectly (Alchian and Demsetz 1972; Arrow 1948; Arrow 1950; Bloom and Jaffa 1964; Boisvert [1988] 1996; Boudreaux and Holcombe 1989; Coase 1960; Coase [1988] 1991; Coase 1994; Coates 1990; Cowling & Sugden 1998; Cropsey [1963] 1987; Demsetz 1997; Dewey [1882–1888] 1967, 1891, [1895–1898a] 1967, [1895–1898b] 1967, 1929, 1990; Dugger 1983; Duhs 2006; Duhs 2008; Emmett 1989; Emmett 1994; Emmett 1999a; Emmett 1999b; Emmett 1999c; Fioretti 1998; Friedman 1953; Gordon 1974; Graham 1947; Greer 2001; Hammond 1991; Hands 2006; Hardt 2009; Hart and Holmström 1987; Hart and Moore 1990; Hart and Moore 1999; Hart 1990; Hart 1995; James [1890] 1981; James 1897; James 1909; Johnson 1952; Kern [1985] 1988; Kern 1987; Keynes [1936] 1983; Keynes 1921; Locke [1693] 2007; Nash and Rybak 2014; Newton [1726] 1972; O’Donnell 1989; Peirce 1868a; Peirce 1868b; Peirce 1958; Pippin 1983; Platt 1908, 1909; Rawls 1972; Razeen 1997; Rockefeller 1991; Roe 2002; Rousseau and Rousseau [1765] 1991; Samuelson 1967; Sen 1966, 1970, 1979, 1985, 1986, 1988, 1993, 1995, 1999, 2009; Shils 1981; Slater and Spencer 2000; Strier 2004; Weber [1927] 1950; Weber [1948] 1968; Williamson 1975; Williamson 1981; Williamson 1998; Williamson 2000; Aristotle 1995).