Risk, Uncertainty, and (Entrepreneurial) Profit Before Knight

Abstract Though Frank Knight framed its goal as “refinement, not reconstruction,” scholars have not fully appreciated Risk, Uncertainty, and Profit's debt to debates Frederick B. Hawley sparked on entrepreneurial profit. Hawley argued that profit compensated entrepreneurs for relieving capitalists, laborers, and landlords of risk by contracting to pay them fixed sums from their uncertain revenues. John Bates Clark objected that capitalists—not entrepreneurs—risked their fortunes. This terminological dispute reflected a deeper theoretical tension: Where Hawley saw risk-bearers’ profits as uncertain, Clark's risk premia were predetermined costs like insurance premia. Debates on speculators’ place in the theory of distribution would leave Hawley grappling with this tension. Believing that speculators earned no net profits, he drew on Clark's analysis of insurance to show that competition eliminated the profits rewarding entrepreneurs for bearing any risk that could be hedged, insured, or otherwise managed. Though Hawley did not theorize what made some uncertainties insurable and others uninsurable, his contemporaries wrote a series of inventive textbook syntheses that built on this forgotten contribution to lay further groundwork for Knight's 1921 classic. Beyond mere historical attribution, uncovering Hawley's legacy clarifies Knight's novel contributions and illuminates the primacy of ownership in his vexing treatment of entrepreneurs’ “function of responsible direction.”