The Common Sense of Economics and Divergent Approaches in Economic Thought

Abstract

This paper contextualizes the contribution of Risk, Uncertainty, and Profit to the development of economic theory in the 20th century. Our argument in this paper is twofold. First, we contend that this book embodied what had been the common knowledge of early neoclassical economics prior to WWII. Secondly, we also argue that embroynic to Knight’s account of economics were two divergent approaches to economic thought that emerged in the post WWII. The first approach is what has come to be known as microeconomics, characterized by utility maximization under fixed price, income, and institutional parameters that approximate equilibrium. This first approach is distinct from a second approach, referred to as price theory, in which prices are not sufficient statistics, as in microeconomics, but operate as guides to consumption and production decisions under alternative institutional arrangements. This second approach represented the continuation of the mainline of economic thought from its classical and early neoclassical roots.