Money, Banks and Finance in Economic Thought

Risky decision making in Adam Smith, JS Mill and Karl Marx

Zouboulakis Michel, University of Thessaly

As against the established view in HET textbooks, elements of risk decision making were present in economic theory of the entrepreneur, long before Frank Knight’s famous contribution in 1921. Thanks to Knight, economists were definitely able to distinguish between risky and uncertain decisions. In situations involving risk, agents are not certain about the prospect of their decisions but they are able to calculate its eventual risk. On the contrary, in situations involving uncertainty there is no way to calculate the possibility of the outcome, because as Knight put it, “the given outcome is not certain, nor even extremely probable, but only contingent” (1921: 213). More recently, a fruitful way of understanding the differences between risk and uncertainty is to associate the eventual outcome of a decision with probabilities. In situations of risk, the possible outcomes have objectively known probabilities. In the case of uncertainty, the probabilities, associated with the possible outcomes, are not known. Risk is related to measurable randomness and therefore should be differentiated from the notion of uncertainty, related to the unknowable. Schumpeter (1954: 646) asserted that until Knight, nobody “took the trouble to investigate why this item [risk-bearing] should be necessarily positive”. It is the object of this paper to investigate the presence of elementary risky decision-making theory in Smith, Mill and Marx, without claiming to be exhaustive. Although, “the distinction between insurable risks and non-insurable uncertainty” as Schumpeter (1954, 894) has observed, is not clear before 1921, it is true that some evidence of it is indeed perceptible. The main hindrance in comprehending measurable risk is the deterministic nature of their theory. For, as Keynes remarked to be able to “distinguish between risks which are properly insurable” and other risks which are related to the uncertainty of the future, you need to be in a position to estimate their probability “between comparatively narrow numerical limits” (1921, 23).


Keywords: Risk, Smith, Mill, Marx

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