Frank Hyneman Knight

Frank Hyneman Knight (November 7, 1885 - April 15, 1972) was an American economist, the central figure in the development of the Chicago School of Economics. He remains famous for his Knightian uncertainty, the distinction between risk and uncertainty, and for his work on ethics in economics.

Life

Frank Hyneman Knight was born on November 7, 1885 in MacLean County, Illinois into a family of devoutly Christian farmers. He never completed high school but was admitted in 1905 to the American University in Tennessee. He graduated in 1911 from the 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 subject of interest 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 (later renamed into Risk, Uncertainty and Profit and published in 1921).

Knight first taught at the University of Iowa from 1919 to 1927, after which he transferred to the University of Chicago, where he served as Professor of Economics from 1927 until 1955, and as emeritus professor until his death. Under his presidency, the Department of Economics at the University of Chicago grew to become one of the dominant schools of economical thought in the United States.

Knight died on April 15, 1972 in Chicago, Illinois.

Work

Knight’s famous dissertation Risk, Uncertainty and Profit from 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.

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 maximizing 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 recognize 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.

Knight 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.

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.

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).

Knight was one of the leaders of the "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). 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 protégé Henry Simons, differed substantially from Knight on most matters.

Like Joseph Schumpeter (whom he both admired and resembled in many ways), Knight was an avid proponent of a cosmopolitan laissez-faire. 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. He said:

"the freest individual...is 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." (Ethics of Competition', 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.

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, was a very complex and unstable thing. Programs of government intervention were too simplistic and did 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," but rather because it holds individual freedom as an absolute good and that 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.

Legacy

Knight was one of the century's most eclectic economists and perhaps the deepest thinker and scholar American economics has produced. 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 or Robbins's at the L.S.E.

Knight carved a unique path in economics — being claimed by many schools of thought as one of their own, without really belonging to any. Unfortunately, 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 perspective 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.

Publications

• Knight, Frank H. 1921. Cost of production and price over long and short periods. Journal of Political Economy, 29(4), 304-335
• Knight, Frank H. 1924. The limitations of scientific method in economics. In R.G. Tugwell (Ed.), Trend of Economics. A.A. Knopf
• Knight, Frank H. 1933. The economic organisation with an article: Notes on utility and cost. New York: Harper and Row
• Knight, Frank H. 1935. Economic theory and nationalism. London: Allen & Unwin.
• Knight, Frank H. 1936. The quantity of capital and the rate of interest. Chicago: University of Chicago Press.
• Knight, Frank H. 1942. Fact and value in social science. In R.N. Anshen (Ed.), Science and Man. Harcourt, Brace and Company
• Knight, Frank H. 1956. On the history and methods of economics: Selected essays. University of Chicago Press. ISBN 0226446891
• Knight, Frank H. 1960. Intelligence and democratic action. Harvard University Press
• Knight, Frank H. 1982 (original published in 1947). Freedom and Reform: Essays in economics and social philosophy. Liberty Fund. ISBN 086597005X
• Knight, Frank H. 1991. The case for Communism: From the standpoint of an ex-liberal. In W.J. Samuels Research in the History of Economic Thought and Methodology (Supplement 2). JAI Press. ISBN 1559382457
• Knight, Frank H. 1997 (original published in 1923). The ethics of competition and other essays. Transaction Publishers. ISBN 1560009551
• Knight, Frank H. 2006 (original published in 1921). Risk, uncertainty and profit. Cosmo Classics. ISBN 1602060053
• Knight, Frank H. & T.W. Merriam. 1979 (original published in 1945). The economic order and religion. Greenwood Press. ISBN 0313209707

References

ISBN links support NWE through referral fees

• Bookrags.com. Frank Hyneman Knight. Retrieved on April 18, 2007, <http://www.bookrags.com/biography/frank-hyneman-knight/>
• Emmett, Ross. 2007. Introduction. In Ross Emmett (Ed.) Selected Essays by Frank H. Knight, (2 vols.). University of Chicago Press. ISBN 0226446964
• Kasper, Sherryl. 2003. The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers. Edward Elgar Publishing. ISBN 1840646063
• White, Harrison C. 2004. Markets from Networks: Socioeconomic Models of Production, Princeton, NJ: Princeton University Press. ISBN 0691120382

External links

• Chicago School of Economics – On the Chicago School of Economics. Retrieved April 25, 2007.
• Frank H. Knight Page – Knight’s page on Minnesota State University website. Retrieved April 25, 2007.
• Frank Hyneman Knight – Biography in the Concise Encyclopedia of Economics. Retrieved April 25, 2007.
• Profile of Frank Knight – Biography on the History of Economic Thought website. Retrieved April 25, 2007.
• Risk, Uncertainty and Profit – Full-text work by Knight (1921). Retrieved April 25, 2007.

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