Frank Knight

Frank Knight

region = Western Economists
era = 20th-Century Economists
color = lightsteelblue

caption =
name = Frank Hyneman Knight
birth = birth date|1885|11|7
McLean County, USA
death = death date and age|1972|4|15|1885|11|7
school_tradition =
main_interests = economics
influences =
influenced =
notable_ideas = Knightian uncertainty

Frank Hyneman Knight (November 7, 1885 - April 15, 1972) was an important economist of the twentieth century. He was born in McLean County, Illinois in a devoutly Christian family of farmers. He never completed high school but was admitted in 1905 to the American University in Tennessee. He graduated in 1911 from Milligan College. At the University of Tennessee he obtained a B.S. and an M.A. (the latter in German) in 1913. He then moved to Cornell University for doctoral studies. His initial main subject was philosophy, but he soon switched to economics. He studied with Alvin Johnson and Allyn Young, who both supervised the work on his dissertation, that was completed in 1916 under the title "Cost, Value and Profit". Knight would subsequently revise it for publication under its more familiar name " [ Risk, Uncertainty and Profit] " (1921).

Academic career

Jointly with Jacob Viner, Knight presided over the Department of Economics at the University of Chicago from the 1920s to the late 1940s, and played a central role in setting the character of that department that was perhaps only comparable to Schumpeter's tenure over Harvard; Robbins's at the L.S.E or Paul Samuelson's at MIT.

His famous dissertation " [ Risk, Uncertainty and Profit] " (1921) remains one of the most interesting reads in economics even today. In it, Knight made his famous distinction between "risk" (randomness with knowable probabilities) and "uncertainty" (randomness with unknowable probabilities), set forth the role of the entrepreneur in a distinctive theory of profit and gave one of the earliest presentations of the now-famous law of variable proportions in the theory of production.

While irreducibly Neoclassical in a general sense, Knight's peculiar economics were a direct inheritance of his Cornell professor, Herbert J. Davenport and what was then called the "American Psychological School" which sought to ground the Marginalist high theory of Jevons, Wicksteed and the Austrians in the relativist foundations of Thorstein Veblen's methodology.

Like Davenport, the notoriously belligerent Knight criticized other schools on several accounts while also adopting some of their ideas: for instance, from the Walrasians he adopted the idea of theoretical rigor and viewing the economy in terms of multiple markets, but disparaged their mathematical propensities; from the Austrians he adopted their theory of alternative cost, but attacked their theory of capital; from the Marshallians he adopted their literary tone, but attacked their lack of rigor and their "real" theory of cost; from the Ricardians, he adopted a concern with the interaction between social structure and theory but attacked the objectivist basis of their theory; from the Marxians, he adopted many of their ideas about the ethical critique of capitalism as well as its tendency towards the concentration of capital, but he abhorred the labor theory of value; from the Institutionalists, he adopted their concern with social impact on behavior and evolution, but he opposed their empirical techniques and conclusions ("history is to be sensed, not plotted", as Knight put it).

The famously opinionated Knight used his numerous book reviews in Chicago's "Journal of Political Economy" as a vehicle for his thoughts on many subjects. As a result, he was embroiled in many debates with the most prominent economists of his day ranging over capital theory (versus Hayek, Mises and the Austrians, e.g. 1933, 1935, 1937), welfare theory (versus Pigou, e.g. 1924), Keynesian theory (1937) and positivist methodology (versus Hutchison (1940)).

Thus, Knight amalgamated much of what was contained all over the spectrum of economic theory - but without once losing the skeptic's dissecting eye. Perhaps because he was endowed with enough of the demeanour and knowledge of a philosopher, sociologist and historian as well as an economist, he was able to appear as a kindred spirit to all schools as well as an opponent at the same time.

As noted, Knight was one of the leaders of the inter-war "Chicago School" (although we must keep in mind that during his stay there, the Chicago School had a much different tone than it acquired later). Yet, even then, he managed to remain an outsider in his own kingdom. Knight's well-known dislike of quantitative methods and especially empirical techniques brought him into conflict with several colleagues - notably, Henry Schultz, Paul Douglas and Oskar Lange. His opposition to the Marshallian propensities of his co-giant, Jacob Viner, earned him the latter's respect but not necessarily his friendship. Even Knight's own unlikely protegé Henry Simons, differed substantially from Knight on most matters.

Like Schumpeter (whom he both admired and resembled in many ways), Knight was an avid proponent of a cosmopolitan laissez-faire – but he did so on unique, "non-consequentialist" grounds. As is evident in his famous "Ethics of Competition" (1923) and in other works on ethics throughout his life, Knight does not regard the capitalist system as ethically defensible. Capitalism, he claims, does not produce what people want but merely creates the wants for what it produces - "the freest individual. in large measure a product of the economic environment that has formed his desires and needs, given him whatever marketable productive capacities he has, and which largely controls his opportunities." (Knight, 1923). Furthermore, he argued that there was a tendency in market systems towards monopoly, that the "efficiency" of markets was misleading for there was no sense of "usefulness" of its output to society, that the marginal productivity thesis had erroneous ethical implications as "the income does not go to "factors" but to their owners. ..and ownership of personal or material productive capacity is based upon a complex mixture of inheritance, luck and effort, probably in that order of relative importance" (Knight, 1923).

Knight's peculiar ethical assault on the market system and "apologetic economics" did not diminish his penchant for laissez-faire as a policy conclusion. The economy, he argued, is a very complex and unstable thing. Programs of government intervention are too simplistic and do not take into account the complexities of a market economy - thus making interventionism even more dangerous. Laissez-faire is recommended, he argued, not because it "works" (for it patently does not) but rather because it holds individual freedom as an absolute good and the alternative may be much worse.

As a result, Knight's position is quite the reverse of the Second Chicago School economists of the 1960s, (i.e. Friedman, Stigler and company). The Second Chicago School tended to argue the positivist line that laissez-faire is desirable because it delivers the goods, and not because it is a good in itself. Indeed, throughout his life, Knight explicitly deplored and attacked many of the assumptions that the Second Chicago School held dear: e.g. the denial of the importance of monopolistic competition, the assumption of consumer sovereignty, stable preferences, efficient outcomes of markets, empirical-intuitive reasoning, interdisciplinary imperialism, etc.

All these items are precisely and directly opposed to virtually every important argument and position of Knight's. Indeed, the later Chicago School's declared "positivist" methodology was wryly characterized by Knight as "the emotional pronouncement of value judgements condemning emotion and value judgements which seems to [me] a symptom of a defective sense of humor" (Knight, 1940). However, we must grant that Knight's theories of capital (Knight viewed all factors as capital to a greater or lesser degree) and his "public choice" view of political behavior could be said to have persisted in at least some quarters of the modern Chicago School.

In this sense, then, Knight, like Schumpeter, carved a unique path in economics – being claimed by many schools of thought as one of their own, without really belonging to any. Unfortunately, also like Schumpeter, although he educated and influenced many students, Knight failed to acquire any followers and failed to build up a distinctive "school of thought" around himself. We can see some traces of his persective in the work of Kenneth E. Boulding, Martin Bronfenbrenner, James M. Buchanan and George J. Stigler, but they can hardly be called "Knightians" in any meaningful sense.

Nobel laureate Milton Friedman was one of Knight's many students at the University of Chicago.

ome contributions

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. A possible exception is the "Markets from Networks" model developed by sociologist Harrison White 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."

Major publications

*"The Concept of Normal Price in Value and Distribution", 1917, "QJE".
*" [ Risk, Uncertainty and Profit] ", 1921.
*"Cost of Production and Price Over Long and Short Periods", 1921, "JPE".
*"Cassel's Theoretische Sozialökonomie", 1921, "JPE".
*"Ethics and the Economic Interpretation", 1922, "QJE" (repr. in 1999, I)
*"The Ethics of Competition", 1923, "QJE" (repr. in 1999, I)
*"Some Fallacies in the Interpretation of Social Cost", 1924, "QJE" (repr. in 1999, I)
*"The Limitations of Scientific Method in Economics", 1924, in Tugwell, editor, "Trend of Economics" (repr. in 1999, I)
*"Fact and Metaphysics in Economic Psychology", 1925, "AER" (repr. in 1999, I)
*"A Note on Professor Clark's Illustration of Marginal Productivity", 1925, "JPE".
*"Economic Psychology and the Value Problem", 1925, "QJE".
*"Economics at its Best: Review of Pigou", 1926, "AER".
*"Historical and Theoretical Issues in the Problem of Modern Capitalism", 1928, "Journal of Econ & Business History" (repr. in 1956 & 1999, I)
*"A Suggestion for Simplifying the Statement of the General Theory of Price", 1928, "JPE".
*"Freedom as Fact and Criterion", 1929, "Int J of Ethics"
*"Statics and Dynamics: Some queries regarding the mechanical analogy in economics", 1930, "ZfN" (repr. in 1956 & 1999, I)
*"Professor Fisher's Interest Theory: A case in point", 1931, "JPE".
*"Modern Economic Society Further Considered", 1932, "JPE".
*"The Newer Economics and the Control of Economic Activity", 1932, "JPE" (repr. in 1999, I)
*"The Economic Organisation", 1933.
*"Capitalistic Production, Time and the Rate of Return", 1933, in "Essays in Honor of Gustav Cassel" (repr. in 1999, I)
*"The Nature of Economic Science in Some Recent Discussion", 1934, "AER".
*"Social Science and the Political Trend", 1934, "Univ of Toronto Quarterly"
*"Common-Sense of Political Economy: Wicksteed Reprinted", 1934, "JPE" (repr. in 1956)
*"The Ethics of Competition and Other Essays", 1935.
*"The Ricardian Theory of Production and Distribution", 1935, "Canadian JE" (repr. in 1956 & 1999, I)
*"A Comment on Machlup", 1935, "JPE".
*"Professor Hayek and the Theory of Investment", 1935, "EJ".
*"The Theory of Investment Once More: Mr. Boulding and the Austrians", 1935, "QJE".
*"Some Issues in the Economics of Stationary States", 1936, "AER".
*"The Place of Marginal Economics in a Collectivist System", 1936, "AER".
*"The Quantity of Capital and the Rate of Interest", 1936, "JPE" (repr. in 1999, I)
*"Pragmatism and Social Action: Review of Dewey", 1936, "Int J of Ethics"
*"Note on Dr. Lange's Interest Theory", 1937, "RES".
*"Unemployment: and Mr. Keynes's revolution in economic theory", 1937, "Canadian JE" (repr. in 1999, I)
*"On the Theory of Capital: In reply to Mr. Kaldor", 1938, "Econometrica".
*"The Ethics of Liberalism", 1939, "Economica".
*"Socialism: The nature of the problem", 1940, "Ethics" (repr. in 1999, II)
*"'What is Truth' in Economics", 1940, "JPE" (repr. in 1956 & 1999, I)
*"The Significance and Basic Postulates of Economics: a rejoinder", 1941, "JPE"
*"Religion and Ethics in Modern Civilization", 1941, "J of Liberal Religion"
*"The Meaning of Democracy: its politico-economic structure and ideals", 1941, "J of Negro Education"
*"Social Science", 1941, "Ethics" (repr. in 1956)
*"The Business Cycle, Interest and Money: A methodological approach", 1941, "REStat" (repr. in 1956 & 1999, II)
*"Professor Mises and the Theory of Capital", 1941, "Economica".
*"The Role of the Individual in the Economic World of the Future", 1941, "JPE".
*"Science, Philosophy and Social Procedure", 1942, "Ethics"
*"Fact and Value in Social Science", 1942, in Anshen, editor, "Science and Man"
*"Some Notes on the Economic Interpretation of History", 1942, "Studies in the History of Culture" (repr. in 1999, II)
*"Social Causation", 1943, "American Journal of Sociology" (repr. in 1956)
*"Diminishing Returns Under Investment", 1944, "JPE".
*"Realism and Relevance in the Theory of Demand", 1944, "JPE" (repr. in 1999, II)
*"The Rights of Man and Natural Law", 1944, "Ethics" (repr. in 1999, II)
*"Human Nature and World Democracy", 1944, "American J of Sociology".
*"Economics, Political Science and Education", 1944, "AER"
*"The Economic Order and Religion", with T.W. Merriam, 1945.
*"Immutable Law in Economics: Its reality and limitations", 1946, "AER".
*"The Sickness of Liberal Society", 1946, "Ethics" (repr. in 1999, II)
*"Salvation by Science: The gospel according to Professor Lundberg", 1947, "JPE" (repr. in 1956)
*"Freedom and Reform: Essays in economics and social philosophy", 1947.
*"Free Society: Its basic nature and problem", 1948, "Philosophical Review" (repr. in 1956)
*"The Role of Principles in Economics and Politics", 1951, "AER" (repr. in 1956 & 1999, II)
*"Institutionalism and Empiricism in Economics", 1952, "AER".
*"On the History and Methods of Economics: Selected essays", 1956.
*"Intelligence and Democratic Action", 1960.
*"Methodology in Economics", 1961, "Southern EJ"
*"Abstract Economics as Absolute Ethics", 1966, "Ethics".
*"Laissez Faire: Pro and con", 1967, "JPE" (repr. in 1999, II)
*"The Case for Communism: From the Standpoint of an Ex-liberal." (published posthumously) in "Research in the History of Economic Thought and Methodology", edited by Warren J. Samuels, archival supplement 2 (1991): 57-108.

*"Selected Essays by Frank H. Knight", 2 vols., (ed. by Ross Emmett), 1999.


* Emmett, Ross. "Introduction", in "Selected Essays by Frank H. Knight", 2 vols., (ed. by Ross Emmett), 1999.
* Kasper, Sherryl. "The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers" (2002), ch 2
* White, Harrison C., "Markets from Networks: Socioeconomic Models of Production", Princeton, NJ: Princeton University Press (2002).

External links

* [ The Frank H. Knight Page]
* [ Concise Encyclopedia of Economics: Frank Hyneman Knight]

NAME= Knight, Frank Hyneman
DATE OF BIRTH=November 7, 1885
PLACE OF BIRTH=McLean County, Illinois
DATE OF DEATH=April 15, 1972

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