Abstract
AbstractThe politics of financial governance under conditions of uncertainty has re-emerged as a significant issue for scholars of International Political Economy and related fields, not least because of the fallout from the 2007-2008 financial crisis. In this article I assess the legacy of Frank H. Knight's Risk, Uncertainty, and Profit for debates about reconceptualising financial governance and fostering financial stability. I argue Knight's book is productive in assisting understanding of the fallacies of the ‘risk-based’ economic theory tending to underpin financial governance, in particular drawing attention to the limitations of social scientific knowledge that reduce governance capacity and increase uncertainty in financial markets. I further argue, after Knight's deliberately paradoxical approach, that uncertainty in finance might be beyond regulation but at the same time there is still a societal need to attempt to achieve a politics of uncertainty that can cope with ignorance of the future through experimental governmental efforts.
Highlights
That the world of finance is characterised by uncertainty and this has implications for its governance is an idea that has regained renewed attention since the financial crisis 2007–2008
Scholars of International Political Economy (IPE) and related fields have in particular considered how the crisis demonstrated that, at the very least, financial markets operate as much in an environment of uncertainty as they do under conditions of risk (e.g. Kirshner, 2014; Nelson and Katzenstein, 2014; Lockwood, 2015; Lockwood and Nelson, 2018)
974 Chris Clarke conceptual support to a notion of uncertainty beyond regulation. The former position essentially holds that uncertainty in finance is synonymous with risk and can be tamed through an appropriate institutional structure, the latter that a new politics of uncertainty is required that can come to terms with the limits of social knowledge produced by uncertainty
Summary
Knight pursues an explicitly self-reflexive analysis in Risk, Uncertainty, and Profit. Change over time – and the constant nature of change – is a foundational aspect of Risk, Uncertainty, and Profit more generally and serves to illustrate the limitations of economic theory in Knight’s view. A central simplification of the risk-based view of economic activity that Knight (1921: 197) criticises is the ‘assumption of practical omniscience on the part of every member of the competitive system’ This is contained within Knight’s analysis of the limitations to knowledge about the social world. Knight explicitly acknowledges that even in studies using simplifying assumptions in order to depict a world of perfect competition, it is still extremely difficult to comprehend and systematise the full universe of potentially relevant change in the social world as it is experienced This boundary to an analysis of ‘change with uncertainty absent’ is illuminating.
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