9. Knight and the Austrian School Flashcards
What are two adjustments to perfect markets to make profit possible?
1) The future is uncertain (Frank H. Knight)
2) Individual agents lack information about the market as a whole (Austrian School)
What are the characteristics of ‘risk’ according to Knight?
Risk
- Calculable probability of future events
- Potential losses can be accounted for in advance
- Example: airline can calculate the number of empty seats
What are the characteristics of ‘uncertainty’ according to Knight?
Uncertainty
- Incalculable probability of events
- Futures events so unique/rare that there is no class of events to which they compare
- Example: what will be the impact of flight shame on airline business in 20 years?
What is a knightian entrepreneur?
Uncertain events create opportunities for profit
Employee vs Entrepreneur
- Employees get pre-established return on their labor investment
- Entrepreneurs gets no guaranteed return -> ‘responsibility and control’ over uncertain events
- Right to residual incomes of the firm
How do ‘zoom’ and ‘dropshipping’ relate to the two theories?
1) Zoom and the pandemic -> it relates to (Frank H. Knight) because the future is uncertain and covid-19 happened, which led to an increase in stock price for zoom
2) Dropshipping -> it relates to the (Austrian School) because the individual agent don’t have information on the actual price of the products
Why is ‘do only entrepreneurs bear losses from uncertainty’ a problem relating to Knight’s theory?
Because stakeholders and the state/population (too big to fail) could also get losses from uncertainty
How did misunderstanding risk and uncertainty contribute to the 2007-2008 financial crisis?
Misjudged uncertainties (Black Swan events) were treated as manageable risks, leading to financial instability and crisis.
What did the Austrian School reject?
The homo oeconomicus model
Why does the Austrian School see human ignorance as a vantage point?
Because it generates entrepreneurial opportunities
Why does human ignorance generate entrepreneurial opportunities?
It creates arbitrage
-> Selling coats in Tilburg and in Amsterdam
What is the ‘market for lemons’ problem? And who came up with this?
Quality uncertainty in markets where sellers know more than buyers, leading to trust issues and lower quality. Akerlof.
What is the ‘race to the bottom’ in market competition?
Producers cut costs by lowering quality and labor standards, leading to worst standards to prevail
