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On the Economics of Risk and Uncertainty: A Historical Perspective

Author

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  • Yasuhiro Sakai

    (Faculty of Economics, Shiga University)

Abstract

The economics of risk and uncertainty has a long history over 300 years. This paper aims to systematically summarize and critically reevaluate it, with special reference to John M. Keynes and Frank H. Knight, the two giants in modern times. In our opinion, there are the six stages of development, with each stage vividly reflecting its historical background. The first stage, named the Initial Age, corresponds to a long period before 1700, the one in which statistics was firmly established by B. Pascal as a branch of mathematics but economic theory per se was not well developed. The second stage, called the "B-A" Age, covers the period from 1700 to 1880, is characterized by the two superstars, Daniel Bernoulli and Adam Smith. The third stage from 1880 to 1940 may be named the "K-K" Age because it was dominated by J.M. Keynes and F.H. Knight. The fourth stage, called the "N-M" age, eyewitnesses the birth of game theory, with von Neumann and Morgenstern being its foundering fathers. The fifth stage from 1970 to 2000, named the "A-S" Age, is characterized by several distinguished scholars with their initials "A" or "S". Finally, in 2000 and onward, while many doubts have been raised about existing doctrines, new approaches have not emerged yet, thus being named the Uncertain Age. The relationship between Keynes and Knight is both complex and rather strange. It has a history of separating, approaching, separating again and approaching again. As the saying goes, a new wine should be poured into a new bottle. We would urgently need a Keynes and/or a Knight toward a new horizon of the economics of risk and uncertainty.

Suggested Citation

  • Yasuhiro Sakai, 2018. "On the Economics of Risk and Uncertainty: A Historical Perspective," Discussion Papers CRR Discussion Paper Series A: General 28, Shiga University, Faculty of Economics,Center for Risk Research.
  • Handle: RePEc:shg:dpapea:28
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    File URL: https://www.econ.shiga-u.ac.jp/risk/DPA28Sakai20180112.pdf
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    References listed on IDEAS

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    1. Ross B. Emmett, 2010. "Frank H. Knight," Chapters, in: Ross B. Emmett (ed.), The Elgar Companion to the Chicago School of Economics, chapter 6, Edward Elgar Publishing.
    2. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633.
    3. Stiglitz, Joseph E, 1975. "The Theory of "Screening," Education, and the Distribution of Income," American Economic Review, American Economic Association, vol. 65(3), pages 283-300, June.
    4. Sakai, Yasuhiro, 1985. "The value of information in a simple duopoly model," Journal of Economic Theory, Elsevier, vol. 36(1), pages 36-54, June.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    Cited by:

    1. M. O. Kuznetsova, 2022. "Approaches To Managing Innovative Risks Of Industrial Companies," Strategic decisions and risk management, Real Economy Publishing House, vol. 12(4).

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    Keywords

    Economics of risk and uncertainty; Bernoulli; Keynes; Knight;
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