Frank Knight

Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist, who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school of economics.

Nobel laureates Milton Friedman, George Stigler and James M. Buchanan were all students of Knight at Chicago. Ronald Coase said that Knight, without teaching him, was a major influence on his thinking.

Quotes

"The limitations of scientific method in economics", 1924

Frank Knight (1924), "The limitations of scientific method in economics", in: Frank Knight, The Ethics of Competition, 1935, 1976, 1997, 2009

• Since economics deals with human beings, the problems of its scientific treatment involves fundamental problems of the relations between man and his world. From a rational or scientific point of view, all practically real problems are problems in economics. The problem of life is to utilize resources "economically," to make them go as far as possible in the production of desired results. The general theory of economics is therefore simply the rationale of life. - In so far as it has any rationale! The first question in regard to scientific economics is this question of how far life is rational, how far its problems reduce to the form of using given means to achieve given ends. Now this, we shall contend, is not very far; the scientific view of life is a limited and partial view; life is at bottom an exploration in the field of values, an attempt to discover values, rather than on the basis of knowledge of them to produce and enjoy them to the greatest possible extent. We strive to "know ourselves," to find out our real wants, more than to get what we want. This fact sets a first and most sweeping limitation to the conception of economics as a science.
  • p. 97 (2009 edition); Lead paragraph

• In spite of all the foregoing, there is a science of economics, a true, and even exact, science, which reaches laws as universal as those of mathematics and mechanics. The greatest need for the development of economics as a growing body of thought and practice is an adequate appreciation of the meaning, and the limitations, of this body of accurate premises and rigorously established conclusions. It comes about in the same general way as all science, except perhaps in a higher degree, i.e., through abstraction. There are no laws regarding the content of economic behavior, but there are laws universally valid as to its form. There is an abstract rationale of all conduct which is rational at alt, and a rationale of all social relations arising through the organization of rational activity.
  • p. 127 (2009 edition)

• Nor are the general laws of economics "institutional." They work in an institutional setting, and upon institutional material; institutions supply much of their content and furnish the machinery by which they work themselves out, more or less quickly and completely, in different actual situations. Institutions may determine the alternatives of choice and fix the limits of freedom of choice, but the general laws of choice among competing motives or goods are not institutional unless rational thinking and an objective world are institutions, an interpretation which would make the term meaningless. Economic activity consists in the use of certain resources by certain processes, to produce "wealth." The content of the concept wealth is largely institutional, and the resources available and processes known and used at any place and time for producing wealth are in a sense historical products; but there are general laws of production and consumption which hold good whatever specific things are thought of as wealth and whatever productive factors and processes in use.
  • p. 129 (2009 edition)

"Historical and theoretical issues in the problem of modern capitalism", 1928

Frank Knight (1928), "Historical and theoretical issues in the problem of modern capitalism", review of Der Moderne Kapitalismus, in Selected Essays by Frank H. Knight, vol. 1: ‘What Is Truth’ in Economics?, Emmett, R.B. (ed.), Chicago, IL: University of Chicago Press, 1999, pp. 133–48

• Most striking feature... is the author’s failure to understand the elementary mechanics of the competitive economic organization.
  • p. 134

• [Weber] is the only one who really deals with the problem of causes or approaches the material from that angle that can alone yield an answer to such questions, that is, the angle of comparative history in the broad sense.
  • p. 143

The Economic Organization, 1933.

Frank Knight. The Economic Organization, 1933.

• [We may view the] economic organization as a system of prize relations. Seen in the large, free enterprise is an organization of production and distribution in which individuals or family units get their real income, their "living," by selling productive power for money to "business units" or "enterprises", and buying with the money income thus obtained the direct goods and services which they consume. This view, it will be remembered, ignores for the sake of simplicity the fact that an appreciable fraction of the productive power in use at any time is not really employed in satisfying current wants but to make provision for increased want-satisfaction in the future; it treats society as it would be, or would tend to become, with progress absent, or in a “static” state.
  • p.59-60; on the circular-flow of income and the circular-flow diagram.

"Review of Institutional Economics", 1935

Frank Knight (1935), "Review of Institutional Economics", Columbia Law Review, 35 (5), 803–05

• Of the American institutionalists, his most generous comments concerned Commons’s work, work that he regarded as hopelessly unsystematic but highly ‘suggestive and valuable’

The Ethics of Competition, 1935

Frank Knight. The Ethics of Competition, 1935; 1976, 1997, 2009

• The Ethics of Competition is a book of Frank H. Knight's writings on a common theme: the problem of social control and its various implications. Knight believed in free economic institutions but was also aware that the competitive economic system could be improved. One of the central figures of neoclassical economics in the twentieth century, Knight pursued a lifelong campaign against irrationalities of nationalism, religious fanaticism, and group conflict, while conceding that these were fundamental orientations of human action that might yet frustrate his own work as an economist. While Knight vigorously defended human freedom and the liberal order, he also was sufficiently moved by the shortcomings of liberalism as to condemn it as rife with abuse.
  • Abstract

• Economics and ethics naturally come into rather intimate relations with each other since both recognizedly deal with the problem of value.
  • p. 11

• In Professor Pigou's study the argument that free enterprise lead to excessive investments in industry having relatively upward-sloping cost curves is developed with the aid of concrete example, the case of two roads; 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.
  • p. 211

The Economic Organization, 1951

Frank Knight (1951), The Economic Organization, with an Article ‘Notes on Cost and Utility’, New York: Augustus M. Kelley.

• [In 1932, Lionel Robbins declared economics ‘the science of choice’ (Robbins 1932). In the same year, when students at the University of Chicago opened their social sciences course reader, they read Knight’s response:] Such definitions come too near to saying that economics is the science of things generally, of everything that men are for practical reasons interested in. Such a definition is useless and misleading
  • p. 4 as cited in: Ross B. Emmett (ed). The Elgar Companion to The Chicago School of Economics, 2008. p. 53

"The Place of Science in Modern Civilization", 1906

Frank H. Knight and Thorstein Veblen. "The Place of Science in Modern Civilization." (1906): 518-520.

• A civilization which is dominated by this matter-of-fact insight must prevail against any cultural scheme that lacks this element. This characteristic of western civilization comes to a head in modern science, and finds its highest material expression in the technology of the machine industry.
  • p. 355

Quotes about Frank Knight

• [The Economic Organization by Frank Knight provided] the elements of theory that helped to establish for Chicago its eminence in neoclassical economics.
  • James M. Buchanan, (1968), ‘Frank H. Knight’, in The International Encyclopedia of the Social Sciences, 3, Sills, D. (ed.), New York: Macmillan, pp. 425

• To Knight the task for economists (and for social philosophers) is not to be located at the extensive margin of "science." The task is to be located squarely at the level of elementary common sense. No sophisticated analysis is required to recognize that legally-enforced wage floors cause unemployment or that inflation cannot increase production in any long-term sense. But many men are prejudiced and romantic fools.
  • James M. Buchanan (1982), Foreword to Freedom and Reform by Frank H. Knight

• Hayek greatly praised Knight on several occasions. In 1951, he grouped Knight, with Ludwig von Mises and Edwin Cannan, as one of three primary transmitters of classical liberalism during the 1920s and 1930s. Even more significantly, Hayek wrote in the beginning of the “Acknowledgments and Notes” section of The Constitution of Liberty: “If I had regarded it as my task to acknowledge all indebtedness and to notice all agreements, these notes would have been studded with references to the work of Ludwig von Mises, Frank H. Knight, and Edwin Cannan.” Hayek referred to Knight eight times in The Constitution of Liberty.
  Notwithstanding Hayek’s praise and references to him, Knight ripped the book in a 1967 review.
  • Alan Ebenstein, Hayek's Journey: The Mind of Friedrich Hayek (2003), Ch. 13. The Chicago School of Economics and Milton Friedman

• Knight is the first to use the circular-flow diagram as a means of explaining the way in which the interaction of individuals and businesses in goods and factor markets simultaneously solve all the functions required for effective social organization (Knight 1951, pp. 61–6). Prices provide a measure of the social importance of goods and services (albeit ‘not a true index of social importance according to any recognized ethical standard’), ensure that productive resources are allocated to the production of goods and services which place the highest value on them, and simultaneously distribute income across the productive resources accordingly. ‘The principal connection between the price system and social progress’, meanwhile, ‘is mediated by the phenomenon of interest on capital’ (pp. 63–5).
  • Ross B. Emmett. The Elgar Companion to The Chicago School of Economics, 2008. p. 54

• Knight's monograph The Economic Organization (1933) was prepared in the mid-1920s while Knight was at the University of Iowa and was later duplicated for student use at Chicago... It contains the elements of theory that helped to establish for Chicago its pre-eminence in neoclassical economics. While, according to Buchanan, there was little in the monograph that was wholly original, its value was in its emphasis on key points, its clarification of ambiguous concepts and notions, and its integrated approach to the economy as a social organization. According to Buchanan, several generations of undergraduate students at Chicago obtained their vision of the totality of the economic process only after encountering Knight (and Simons).
  • Ross B. Emmett. The Elgar Companion to The Chicago School of Economics, 2008. p. 238

• Like Mises, Knight owes his original reputation to a theoretical monograph; notwithstanding an early lack of recognition, the latter’s Risk, Uncertainty and Profit (1921) eventually became, and for many years continued to be, one of the most influential textbooks on economic theory, although it had not originally been designed as such. Knight has since written a great deal on questions of economic policy and social philosophy— mostly in articles the majority of which have since been republished in book form. The best-known, and perhaps also the most characteristic, volume is The Ethics of Competition and Other Essays (1935). Knight’s personal influence, through his teaching, exceeds even the influence of his writings. It is hardly an exaggeration to state that nearly all the younger American economists who really understand and advocate a competitive economic system have at one time been Knight’s students.
  • Friedrich Hayek, "The Transmission of the Ideals of Economic Freedom" (1951)

• Frank Knight wrote some polemics against Slichter's textbook in The Journal of Political Economy in the early 1930s. He smelled some kind of heresy in Slichter. But Knight's discussion was methodological. He argued that old Slichter was a do-gooder who thought he could change human nature, and that governments can do some good. Hardened, experienced people, by contrast, know that people are cussed. I think there's a lot of merit in Knight, but a lot of demerit, too. Whether his total effect on me was more bad than good I'm not sure. But from 1932 to 1936 I was besotted on Frank Knight.
  It's not true, I'll say categorically, what Milton Friedman at one time tried to sell: that there was a very subtle Chicago oral tradition on the demand for money and monetary theory. Read Robertson's handbook on Money, and you will have plumbed the depths of Chicago's monetary sophistication.
  • Paul Samuelson, in interview (in August 1986), David C. Colander and Christian A. Johnson, The Coming of Keynesianism to America: Conversations with the Founders of Keynesian Economics (1996)