Frank Hyneman Knight (November 7, 1885 - April 15, 1972) was an American economist. He remains famous for his "Knightian uncertainty," the distinction between risk and uncertainty, and for his work on ethics in economics. Knight was the central figure in the development of the "Chicago School of Economics," and the teacher of Nobel Prize winners in economics Milton Friedman, George Stigler, and James M. Buchanan. An eclectic thinker, Knight contributed significantly to the development of American economic thought in the twentieth century, and thus, directly or indirectly, was influential in determining the course of prosperity in human society.
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, which 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 economic thought in the United States.
Knight’s famous dissertation Risk, Uncertainty and Profit from 1921 remains one of the most interesting reads in economics even today. Knight made his famous distinction between "risk" (randomness with knowable probabilities) and "uncertainty" (randomness with unknowable probabilities) and set forth the role of the entrepreneur in a distinctive theory of profit.
Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated...The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomena depending on which of the two is really present and operating...It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all (Knight 1921).
He argued that situations with risk were those where decision making was made faced with unknown outcomes but known 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 now 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," with the exception of the "Markets from Networks" model developed by sociologist Harrison White in 2002.
Knight also made a contribution to the debate over toll roads. He said that rather than congestion justifying government tolling of roads as argued by Pigou, privately owned roads would set tolls to reduce congestion to its efficient level. In particular, he developed a simple behavioral principle to describe the spreading of trips over alternate routes due to congested conditions. Knight's concept has since become known as Wardrop's Principle and forms the basis of the analysis of traffic equilibrium.
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 his Chicago School was much different from what it later became). However, his dislike of quantitative methods and empirical techniques brought him into conflict with several colleagues. His opposition to the Marshallian views of Jacob Viner earned him the latter's respect but not necessarily his friendship. Even Henry Simons, Knight's student, 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 did not regard the capitalist system as ethically defensible. He argued that there was a tendency in market systems towards monopoly, and that the "efficiency" of markets was misleading for there was no sense of "usefulness" of its output to society. Capitalism, he claimed, does not produce what people want but merely creates the wants for what it produces:
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 (Knight 1923).
However, these attacks on capitalism did not cause him to reject laissez-faire as the best option. The economy, he argued, was very complex and unstable. Government intervention did not take into account the complexities of a market economy, making interventionism dangerous. Thus, he concluded that laissez-faire is recommended, 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 opposite to the Second Chicago School economists of the 1960s, including Friedman and Stigler. They tended to argue the positivist line that laissez-faire is desirable because it works, and not because it is a good in itself.
Frank Hyneman Knight was one of the twentieth century's most eclectic economists and one of the deepest thinkers 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, playing a central role in setting the character of that department.
Knight carved his own unique path in economics, claimed by many schools of thought as one of their own, without really belonging to any. Unfortunately though, although he educated and influenced many students, he acquired no followers and thus failed to build up his own distinctive school of thought.
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