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Frank Hyneman Knight (November 7, 1885 - April 15, 1972) was an important economist in the first half of the twentieth century. A founder of the Chicago school, he authored the book Risk Uncertainty and Profit, arguing that perfect competition would not eliminate profits due to uncertainty.

Knight invented the notion of what has come to be called Knightian uncertainty, where he made a distinction between "risk" and uncertainty. He argued that situations with risk were those where decision making was made faced with unknown outcomes but known ex-ante probability distributions. He argued that these situations, where decision making rules such as maximising expected utility can be applied, differ in a deep way from those where the probability distribution of a random outcome is unknown. While most economists today would recognise the difference between the two situations, there has been little progress in terms of writing models and doing empirical tests of problems with Knightian uncertainty (notable exception is Bewley's working paper (1986), published later in 2002).

He entered a famous debate with A.C. Pigou over social costs. He also made contributions to the arguments about toll roads. He said that rather than congestion justifying government tolling of roads, privately owned roads would set tolls to reduce congestion to its efficient level. In particular, he developed the argument that forms the basis of analysis of traffic equilibrium, and has since become known as Wardrop's Principle:

Suppose that between two points there are two highways, one of which is broad enough to accommodate without crowding all the traffic which may care to use it, but is poorly graded and surfaced; while the other is a much better road, but narrow and quite limited in capacity. If a large number of trucks operate between the two termini and are free to choose either of the two routes, they will tend to distribute themselves between the roads in such proportions that the cost per unit of transportation, or effective returns per unit of investment, will be the same for every truck on both routes. As more trucks use the narrower and better road, congestion develops, until at a certain point it becomes equally profitable to use the broader but poorer highway.

References

• Kasper, Sherryl. The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers (2002), ch 2
• Knight, Frank. "Some Fallacies in the Interpretation of Social Cost" Quarterly Journal of Economics 38 (1924): 582-606.