The Entrepreneurial Economy I: Contracting under Knightian Uncertainty

Amarante, Massimiliano; Ghossoub, Mario; Phelps, Edmund S.

This is the first of a series of papers in which we address the questions How do capitalist systems generate their dynamism and Why a capitalist economy is inherently different from a centrally planned one. We believe that, in order to study these issues, we must thoroughly reconsider the role played by entrepreneurs and financiers in actual economies. We claim that this role has been grossly misrepresented in classical theories, mainly because of the way the "uncertainty" is modeled. We begin by proposing a new definition of "innovation". This differs from any other definition previously given in the literature and reveals at once the inadequacy of the current theoretical paradigm. In fact, it shows that (a) Knightian uncertainty rather than Risk plays a crucial role in capitalist economies; (b) that two groups of agents, entrepreneurs and financiers, play a special role in that they deal with Knightian uncertainty; (c) that a crucial difference between centrally planned and capitalist systems might reside in the latter's ability to deal with Knightian uncertainty. The final part of this paper focuses on the role of entrepreneurs and financiers as micro actors. There, we study the problem of two parties contracting in a situation of Knightian Uncertainty. This is widely recognized as a very difficult problem, which has not been solved despite several attempts. Here, we solve the problem in a special case, which is nonetheless sufficient for our purposes.


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More About This Work

Academic Units
Center on Capitalism and Society
Center on Capitalism and Society, Columbia University
Center on Capitalism and Society Working Papers, 68
Published Here
September 21, 2017