Ross Emmett is the John P. Tandberg Chair and Associate Professor of Economics at Augustana University College. He is the editor of a two volume collection of the writings of Frank H. Knight recently released by the University of Chicago Press, and of a three volume collection of interdisciplinary material on the Tulipomania and the Mississippi and South Sea Bubbles, forthcoming with Pickering & Chatto.
Frank Hyneman Knight (1885-1972) was among the most broad-ranging and influential economists of the twentieth century. As an economic theorist, he laid the foundations for the modern theories of financial markets and entrepreneurship. As a teacher, he helped establish the Chicago school of economics: his students included Nobel Laureates Milton Friedman, George Stigler and James Buchanan. As a classical liberal, he argued against those who wished to use policy for the "betterment" of society. And as a critic, he urged economists not to forget the limits of their knowledge.
Knight was born in McLean County, Illinois on November 15, 1885. The eldest child of a farm family, Knight's early education was sacrificed to the demands of farm life (as was that of his brothers Bruce and Melvin, who went on to teach economics at Dartmouth and Berkeley). He did not leave for college until his early twenties. After stints at several small, evangelically oriented colleges, he graduated from the University of Tennessee, with a bachelor's degree in the natural sciences and a master's degree in German. He received his Ph.D. from Cornell University in 1916. Over the next fifty years, he taught at Cornell, the University of Iowa, and the University of Chicago.
Knight arrived at Chicago during a period of transition for the economics department. Along with the theorist Jacob Viner, he quickly established himself as an integral part of the department's future. He was hired to teach history of economic thought, but often taught economic theory as well. He eventually developed a course on economics and social policy, which he co-taught with a philosopher, Charner Perry (on Knight's teaching and role in the department, see Patinkin1 and Reder2). He also wrote a brief introduction to economics—The Economic Organization—that was adopted as a text in the general introductory course in the social sciences taught to undergraduates at the University of Chicago during the 1930s. Among the students who were introduced to economics through this book was Paul Samuelson, who used Knight's framework for the opening chapter of his own famous text.
Knight's contributions to the University were not confined to the classroom. In 1928, he and Viner assumed editorship of the Journal of Political Economy. During their tenure, the Journal became one of the top journals for economists. Along with Robert Hutchins (President of the University, and advocate of liberal education based on reading of the "Great Books"), the economic historian John Nef, and the sociologist Robert Redfield, Knight helped to found the University's interdisciplinary Committee on Social Thought. In recognition of his wider interests, Knight was eventually made Professor of the Social Sciences and Philosophy. Although he retired in 1952, Knight remained active both teaching and writing until the mid-1960s. He was a frequent visitor at universities across North America, speaking on the economics and philosophy of social policy. His lectures on that topic at the University of Virginia in 1958 were published as Intelligence and Democratic Action.
Knight's contributions brought him recognition throughout his career. His dissertation, the basis for his widely-read Risk, Uncertainty, and Profit, took second prize in a 1917 essay competition sponsored by Hart, Schaffner and Marx. In 1950, he was named President of the American Economic Association, and, in 1957, he was awarded the Association's Francis Walker Medal, which was given every five years "to the living American economist who has made the greatest contribution to economics." Knight was also a Fellow of the American Academy of Arts and Sciences and of the Italian national honorary society Accademia Nazionale Dei Lincei, and was selected by the United States Chamber of Commerce for one of its Great Living American Awards in 1959. (For general overviews of Knight's life and work see, Breit,3 Buchanan,4 Emmett,5 6 and Stigler.7) He died in Chicago on April 15, 1972.
Knight's influence on economics began with his doctoral dissertation. Completed at Cornell under the direction of Allyn Young, and revised following advice from J. M Clark, the thesis was published in 1917 as Risk, Uncertainty, and Profit. In it, Knight examined the relation between knowledge and changes in the economy. He argued that it was important to distinguish between two very different types of change, which he called risk and uncertainty. Risk arose from those repeated changes for which the probabilities can be discovered, such as car accidents or house fires. By joining together with others and pooling their risk, people could insure against these changes. Uncertainty, on the other hand, arose from those unpredictable changes in the "givens" of an economy—its resources, preferences, knowledge and so on—that could not be insured against. For Knight, uncertainty renders impossible the perfect knowledge implicitly assumed by neoclassical economics. However, uncertainty also creates the possibility of profit, which is generated as entrepreneurs try to predict the unpredictable; those who succeed make money from changing conditions.
Because uncertainty makes the prediction of human action impossible, Knight sees entrepreneurial action as essentially "tragic." Entrepreneurs who succeed try to replicate their success; yet because of uncertainty, their success depends on luck, and so cannot be replicated. Their failures lead them to substitute organization and management for true entrepreneurial action. Since managers are not entrepreneurs, the organizations they run are better at cost control than profit-seeking. In the end, Knight concluded that economic change emerges from the constant tension between new entrepreneurial action and existing businesses hedging against uncertainty by expanding the scope of their internal organization (Emmett8).
Risk, Uncertainty, and Profit set the tone of much of Knight's work over the next couple of decades. Knight defended traditional neoclassical economic theory as necessary, but not sufficient, to understand modern economic organization. He argued that economics' analytical power arises from its restrictive assumptions about the world. These would have to be relaxed, over perhaps even set aside, to fully explain the economy. Relaxing these assumptions, Knight went on to argue, takes us far beyond the boundaries of economic theory, and hence limits the predictive power of economics. Moreover, the combination of unpredictable human action and uncertainty limits the possibility for any predictive science of human conduct, making effective social control impossible.
Knight's contributions to the development of economic theory from the 1920s to the 1940s reflect this framework. In articles like "Cost of Production and Price Over Long and Short Periods", "Bemerkungen über Nutzen und Kosten", "The Ricardian Theory of Production and Distribution", the series articles on capital theory written in his debate with the Austrians (see "The Quantity of Capital and the Rate of Interest" for a summary statement of his view), and "Realism and Relevance in the Theory of Demand," Knight calls attention to the implications of the restrictive assumptions of neoclassical theory for the possibility of understanding economic change.
Knight's emphasis on the need to appreciate both the power of economic theory and its limitations carried over to his methodological and ethical writings during this period. In the mid-1920s, he extended the argument of Risk, Uncertainty, and Profit while defending economic rationality against the Institutionalist economists, who wanted to create a more realistic economic theory. At the same time, he, unlike most economic theorists (including many of his own students) explored the limitations of economic rationality as the basis for a predictive science. "The Limitations of Scientific Method in Economics" is the most famous of these articles, but see also "Ethics and the Economic Interpretation".
The interplay of economic theory and moral philosophy articulated in the latter essay was carried forward in "The Ethics of Competition", in which Knight argued that market organization does not "produce" moral people, at least by any standard account of ethical behavior. Eventually, Knight launched a major evaluation of the relation between ethics and economics, examining utilitarianism, liberalism and Marxism, and Christianity ("Ethics and Economic Reform"; Knight and Merriam, The Economic Order and Religion). His scathing attack on the possibility of Christian social ethics—"evil rather than good seems likely to result from any appeal to Christian religious or moral teachings in connection with the problems of social action"—foreshadowed his argument in the 1940s and 1950s against those who sought moral solutions to modern social problems.
By the 1930s, the importance of moral philosophy as a supplement to economic analysis was complemented in Knight's work by a focus on the importance of historical study. In "Statik und Dynamik", published in English in 1935 in The Ethics of Competition, he argued that there is an "impassable gulf" between the equilibrium states posited by economic theory and the actual path taken by a real economy, and that the latter require a historical examination which cannot assume movement toward equilibrium. The focus on history grew out of his immersion during the mid-1920s in the German historical school, which sparked a lifelong interest in the work of Max Weber. In 1927, Knight produced the first English translation of Weber's work: General Economic History. Knight would have continued to translate Weber's work, if his friend Talcott Parsons had not already arranged for the translation of several key works, including The Protestant Ethic and the Spirit of Capitalism.
During this period, Knight also laid the foundations for his own history of modern liberalism. Unlike his contemporaries, Knight did not see the history of liberalism as one of gradual illumination and progress. Rather, his account is tragic: the obstacles that our ancestors faced—arbitrary power and absolutist claims regarding knowledge—continue to rise up before us and threaten to return us to tyranny unless we are constantly vigilant (see, for example, "The Sickness of Liberal Society"). Knight argued that the most important contemporary challenges to liberalism were "scientism" and "moralism"—the substitution of the absolutisms of science or morality for the open-ended discussion of democracy—not socialism.
When Knight considered the threat of socialism to liberty, he did not focus on its economic shortcomings. In "The Place of Marginal Economics in a Collectivist System", Knight, like his socialist colleague at Chicago, Oskar Lange, argued that even socialist planners would have to obey the underlying principles articulated in neoclassical theory. Thus, what was needed was not an economic critique of socialism, but an ethical and political one. For Knight, socialism was just another of the diversions from the road to liberty for which modern liberals must constantly watch. But in principle socialism posed no greater threat to the open discussion of democratic society than scientism and moralism ("Socialism: The Nature of the Problem" and "Laissez-Faire: Pro and Con").
In an age which often featured new deals and great programs, and which usually cast the social debate in terms of the ideals of free enterprise versus those of socialism, Knight pointed to a less ambitious, more practical social philosophy. He reminded us of the common sense embedded in economic theory, a common sense that we ignore at our peril. He argued that economics should lead us to question the goals of those who would seek to "better" society by enforcing changes through government action. For Knight, the exercise of social control too often led to a state of affairs that was worse than the original situation.
Yet Knight was never unqualified in his acceptance of free enterprise. He argued that liberalism's greatest achievement—freeing individuals from the shackles of arbitrary power—could be abused if free individuals do not seek to become better persons. Thus, his reading of the history of liberalism offers only a qualified sense of hope for its future; unless we continue to strive and remain open to discussion about what we could (and should) become, tyranny awaits. Fortunately, for Knight and for us, the conversation remains open.
A complete bibliography of Knight's work is available9. The recent publication of Selected Essays by Frank H. Knight6 provides the first collection of Knight's essays spanning the entirety of his career and the breadth of his interests. Earlier collections of his work focused on economic and philosophical material from specific decades: The Ethics of Competition and Other Essays; Freedom and Reform: Essays in Economics and Social Philosophy; and On the History and Method of Economics: Selected Essays. Knight's papers are held in the University of Chicago Archives.10
Knight, Frank H. 1921a. "Cost of Production and Price Over Long and Short Periods." Journal of Political Economy 29 (April): 304-35. Online edition: "Cost of Production and Price Over Long and Short Periods."
________. 1921b. Risk, Uncertainty, and Profit. Boston: Houghton and Mifflin. Online edition: Risk, Uncertainty, and Profit.
________. "Ethics and the Economic Interpretation." Quarterly Journal of Economics 36 (May): 454-81.
________. 1923. "The Ethics of Competition." Quarterly Journal of Economics 37 (August): 579-624.
________. 1924. "The Limitations of Scientific Method in Economics." In The Trend of Economics, edited by Rexford Tugwell, 229-67. New York: Alfred A. Knopf.
________. 1925. "Economic Psychology and the Value Problem." Quarterly Journal of Economics 39 (May): 372-409.
________. 1929. "Freedom as Fact and Criterion." International Journal of Ethics 39 (January): 129-47.
________. 1930. "Statik und Dynamik—zur Frage der Mechanischen Analogie in den Wirtshaftswissenschaften." Zeitschrift für Nationalökonomie 2 (August): 1-26.
________. 1935a. "Bemerkungen über Nutzen und Kosten." Zeitschrift für Nationalökonomie 6 (1, 3): 28-52, 315-36. English publication in "Notes on Utility and Cost" (Chicago: University of Chicago Press, 1936).
________. 1935b. "The Ricardian Theory of Production and Distribution." Canadian Journal of Economics and Political Science 1 (February, May): 3-25, 171-96.
________. 1936a. "The Place of Marginal Economics in a Collectivist System." American Economic Review 26 (March Supplement): 255-66.
________. 1936b. "The Quantity of Capital and the Rate of Interest." Journal of Political Economy 44 (August, October): 433-63, and 612-42.
________. 1939. "Ethics and Economic Reform." Economica, n.s., 6 (February, August, November): 1-29, 296-321, and 398-422.
________. 1940. "Socialism: The Nature of the Problem." Ethics 50 (April): 253-89.
________. 1946. "The Sickness of Liberal Society." Ethics 56 (January): 79-95.
________. 1951a. The Economic Organization. New York: A.M. Kelley.
________. 1951b. "The Role of Principles in Economics and Politics." American Economic Review 41 (March): 1-29.
________. 1960. Intelligence and Democratic Action. Cambridge: Harvard University Press.
________. 1967. "Laissez-Faire: Pro and Con." Journal of Political Economy 75 (December 1967): 782-95.
Knight, Frank H., and Thornton W. Merriam 1945. The Economic Order and Religion. New York: Harper & Bros.
3 Breit, William, and Roger L. Ransom. 1998. "Frank Knight—Philosopher of the Counter-Revolution." In The Academic Scribblers. Princeton: Princeton University Press.
4 Buchanan, James M. 1968. "Frank H. Knight." In The International Encyclopedia of the Social Sciences, vol. 3, ed. David Sills, 424-28. New York: Macmillan.
8 Emmett, Ross. B. 1999a. "The Economist and the Entrepreneur: Modernist Impulses in Frank H. Knight's Risk, Uncertainty, and Profit." History of Political Economy 31 (Spring): 29-52.
9 ________. 1999b. "Frank H. Knight (1885-1972): A Bibliography of His Writings." Research in the History of Economic Thought and Methodology, archival supplement 9: 1-100.
10 ________. 1999c. "Frank Hyneman Knight Papers 1910-1972: Finding Guide." (Compiled by Glen James Gilchrist and George J. Stigler, revised by Ross B. Emmett.) Prepared for Special Collections Department, University of Chicago Library. Research in the History of Economic Thought and Methodology, archival supplement 9: 101-273.
6 ________. 1999d. "Introduction." In Selected Essays by Frank H. Knight, vol. I: 'What is Truth' in Economics?, vii-xxiv. Chicago: University of Chicago Press.
5 ________. 1998. "Frank H. Knight." In The Handbook of Economic Methodology, edited by John B. Davis, D. Wade Hands, and Uskali Mäki, 267-69. Cheltenham: Edward Elgar, 1998.
1 Patinkin, Don. 1981 . "Frank Knight as Teacher." In Essays On and In the Chicago Tradition, 23-51. Durham: Duke University Press.
2 Reder, Melvin. 1982. "Chicago Economics: Permanence and Change." Journal of Economic Literature 20 (March): 1-38.
7 Stigler, George J. 1987. "Frank H. Knight." In The New Palgrave: A Dictionary of Economics, ed. John Eatwell, Murray Milgate and Peter Newman, vol. 3, 55-59. New York: Stockton Press.
Last modified April 13, 2016