Frank Knight and the Austrians

12 May 2011 at 2:34 pm Peter G. Klein 3 comments

| Peter Klein |

At this year’s Austrian Scholars Conference I gave a presentation playfully titled “Frank H. Knight: The Forgotten Austrian.” The title was tongue-in-cheek, of course, as Knight was no Austrian. Though friendly with Hayek personally, Knight was a harsh critic of Austrian capital theory, particularly as formulated by Böhm-Bawerk and Hayek. (Knight conceived capital as a permanent fund of value, with interest determined by the technical marginal productivity of capital, rejecting notions of production structures and time preference.) Knight was also a key developer of perfect competition theory — anathema to Austrians — though mainly to illustrate the importance of uncertainty, not to serve as a welfare bechmark.

Still, there are many interesting similarities between Knightian and Austrian economics. Regular readers of O&M already know that Mises’s approach to entrepreneurship, uncertainty, and the firm is basically the same as Knight’s. Knight rejected positivism, calling it “the emotional pronouncement of value judgments condemning emotion and value judgments” (Knight, 1940). He often sounded like a Misesian praxeologist: “If anyone denies that men have interests or that ‘we’ have a considerable amount of knowledge about them, economics and its entire works will simply be to such a person what the world of color is to the blind man” (Knight, 1956). Indeed, critics dismiss Knight’s epistemological writings as “extended Austrian-style disquisitions on the foundations of human knowledge and conduct and the like” (LeRoy and Singell, 1987) — the ultimate insult!

With this in mind, I was pleased to see Richard Ebeling make the same points in a recent interview:

James M. Buchanan has explained in an interview that he did for the Mises Institute that he would consider himself an Austrian, and that Mises and Hayek, would accept that. Do you consider Buchanan an Austrian thinker? Is the Public Choice totally consistent with the Austrian tradition?

Dr. Ebeling: James Buchanan studied with Frank Knight at the University of Chicago. It is well known that Knight was a leading critic of “Austrian” capital theory, that he did not agree with Mises or Hayek about the impossibility of economic calculation under socialism, and that he was very far from being an advocate of laissez-faire.

But Knight, at the same time, was a strong and sometimes eloquent opponent of Positivism and Bahaviorism. Many of his methodological essays from the 1920s, 1930s, and 1940s, present arguments against Positivism that are very similar to those made by Mises and Hayek. Knight believed that economics could not be moulded along the lines of the natural sciences, and therefore could not limit itself to the methods of, say, physics. And he believed there are limits to the application of mathematics in economics.

He emphasized the importance of introspection as a source of knowledge in the study of human action and choice. He argued that one could not ignore the “subjectivist” elements to social and economic processes. Like Mises, Knight had been very influenced by the German sociologist and historian, Max Weber, in focusing on human action as “intentional conduct” to which the actor assigns subjective meanings.

Unlike Milton Friedman or George Stigler (who also studied or interacted with Frank Knight at the University of Chicago), James Buchanan absorbed many of Knight’s views and ideas on methodological subjectivism. This is seen most clearly in Buchanan’s short, but excellent, book, Cost and Choice. Here he presents a conception of the meaning and logic of cost that runs parallel to much of the Austrian analysis.

On the relationship between Knight and Hayek, see also this informative post by Ross Emmett. Tony Yu also wrote a paper on Knight and the Austrians.

Entry filed under: - Klein -, Austrian Economics, History of Economic and Management Thought, Methods/Methodology/Theory of Science, Myths and Realities, Papers.

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3 Comments Add your own

1. Sanjeev Sabhlok | 12 May 2011 at 9:43 pm

Thanks. This post has been useful in supplementing my limited knowledge about Knight.

I had written a brief post on Knight at: http://sabhlokcity.com/2011/03/a-brief-introduction-to-frank-h-knight/.

I found that Knight tends to talk more sense about the economy than nonsense. That’s a pretty good for an economist (given that Keynes managed to persuade most economists in the 20th century that they had wonderful magical powers to fine-tune the economy – even though they can’t manage a tiny grocery shop on their own!).
2. srp | 13 May 2011 at 9:11 pm

Watch out for those methods of physics! Economists waste so much money on particle detectors.
3. Richard Ebeling | 14 May 2011 at 10:49 pm

Frank Knight was a fascinating, insightful, and very inter-disciplinary scholar.

But he seemed to take great pleasure in often being an extremely argumentative contrarian. No matter how much he might like a book, in a review of it, he seemed to always find some flaws or “errors” that he might use to belittle the author and his ideas. Or he could just be downright rude — as his was in reviews of Hayek”s “Constitutional of Liberty” and Henry Hazlitt’s “The Foundations of Morality.”

Knight was closer to the Austrian views on methodoligy — including Mises’ a priori, deductive approach — than he would state directly. In essays beginning in the 1920s, he criticized behaviorism and positivism in social science and economics from a perspective usually considered of a “praxeological” type. (His 1925 essay on “The Limits of the Scientific Method in Economics,” especially rings true this way.)

On the other hand, as Peter points out, Knight seemed especially to be antagonistic to the “Austrian” conception of capital and any notion of a “period of production.” And while he was a critic of socialism on political grounds, in the 1930s he wrote in defense of the “possibility” of socialism as an economic system; he believed that socialist planners could use marginal cost analysis to make rational decisions about resource uses.

He also argued in the 1930s and 1940s, that (classical) liberal society had inherent ethical and social flaws due to the unfairness of inequalities in income and wealth — thus, opening the door in some of his arguments to justify the redistributive state.

Knight was a rather “mixed bag” due to these and a variety of other issues.

Richard Ebeling