Skip to main content

Über dieses Buch

This book argues for the reconsideration of Frank Knight and the Chicago School of Economic thought in a post-Financial Crisis world. The author posits that the discussion of the founder of "Knightian Uncertainty" can reveal new insights into what the economy can do for society, as his prophetic insights can offer a view into the soul of the modern economy. The book first considers Frank Knight's early history and the unfolding of his economic philosophy before going on to evaluate his enduring legacy. All those interested in the influence of political and religious philosophy on economics will be delighted to discover the lasting impact of this great economic thinker.



1. A Prophet and a Pioneer

The subtitle for this book on Frank Hyneman Knight (1885–1972) is in part inspired by what his students said of him, which is “There is no God, but Frank Knight is his prophet.” However, the main reason for the title is that it is one that describes the voice that Knight had in the economics profession in his time, namely that of prophet in the deep sense in which theologians talk about prophecy. The popular conception of a prophet is of someone who warns believers of the future. The more refined view is that a prophet is someone who reveals laws, speaks to the nature of persons as they are and warns them of the path they should tread and the outcome of their errors. Biblical prophets were not particularly popular people, because they had a habit of telling people what they did not want to hear. Knight, whose curmudgeonly persona was not out of place with a Jeremiah or Isaiah, was similarly direct and sought to reveal economic truths, warning us, cajoling us in the hope of eliciting a realistic response. As one of my old teachers wrote of prophetic speech, “Contingent language is not directly predictive but is threatening or warning. It is not designed to forecast the future but to create responses” (Carroll 1979, p. 67). Knight certainly tried to create responses.
David Cowan

2. Knightian Uncertainty

If Frank Knight is arguably the most famous economist few have heard of, it is because of Knightian uncertainty which established a major idea and reputation in the discipline of economics, but was not the beginning of other pioneering work, as he turned to teaching and essay-writing as a critic of other ideas and thinkers that were to remain more famous than himself. Knight put forward his ideas on uncertainty in his doctoral thesis and then turned it into his classic book Risk, Uncertainty and Profit (1921). As Jochen Runde quips “It is safe to say that Frank Knight is more widely quoted than read on his eponymous distinction between risk and uncertainty” (Runde 1998, p. 539). Knight is credited with drawing out the distinction between risk, as known chance, and uncertainty, as unmeasurable probability. The distinction is important to Knight because while risks can be calculated and insured against, it is uncertainty that paves the way for opportunities to create profit and the entrepreneurial enterprise. Risk, Uncertainty and Profit was to establish Knight in the pantheon of economists, but he never became a household name like his contemporary John Maynard Keynes or pupil Milton Friedman. Many have attempted to assess Knight in modern terms, either to make use of his work for today or to offer a modern-day insight into what he said at the time. Knight, as one author has said, is one “itch economists need to scratch” (Emmett 2009, p. 49). Knight’s thesis rewards study today, even scratching that itch, for economic reasons given the rise of an entire risk management industry in recent decades and the recessionary times that erupted in 2008, as well as for social reasons given the ever-increasing tendency to be risk-averse in our modern society; all of this in the context of globalization and protest over these past decades.
David Cowan

3. The Grand Crusade

Austrian economist Friedrich Hayek opened his 1936 essay “The Mythology of Capital,” referring to “Professor Knight’s crusade against the concept of the period of investment” (Hayek 1936, p. 199). What Knight was crusading about has been named in different ways, in terms of length of the production process, roundaboutness, period of waiting, period of investment, period of maturing, and others. It may be overstating the case to say this was a crusade, though it fits with the theological terminology so often applied to Knight, but it was certainly true that in the 1930s one of Knight’s core interests was capital theory and his writings on capital and interest theory were to span two decades. Like so much of his thinking, during this period Knight never offered a systematic theory; rather he developed his views through a series of journal articles, essays and book reviews, starting in 1916, with the bulk published from 1931 onwards. It was, as Emmett so neatly states, “a string of conversations with other theorists” (Emmett 2009, p. 78). As a result, trying to explain his theory is a process of picking one’s way through a series of essays and opponents’ responses to present a unified view, rather than explaining a coherent theory presented by Knight himself. This picking one’s way means encountering repetition and restatement of ideas in different ways, a fraught exercise that can easily give rise to debate with the other attempts to piece together his theory. If this is a problem for his critics, it certainly wasn’t for Knight, who was fully aware of the criticism, as he noted in a letter to Hayek:
David Cowan

4. Knight contra mundum

There is an element in Knight’s career that gives the impression he was against the world. He founded the Chicago school, but they subsequently took somewhat different paths. He had close affinities with the Austrian School, but had some serious points of difference. He shared some of the social concerns of Keynes, and yet despite even sharing some fundamental assumptions, Knight ended up diametrically opposed to his conclusions. While he had great interest in socialism and Marxism, going back to his early study visit to Germany, he was greatly opposed to such schools of thought. It seemed that it was indeed Knight the prophet contra mundum, or at least at odds with the world of intellectual economic endeavour. This chapter will look at these oppositions, except for Chicago which was examined briefly in the opening chapter, but let us first consider the Austrians.
David Cowan

5. The Economic Organization

Given issues today, ranging from the continued anti-market view of the world to concerns about a growing rich/poor divide, Knight is a critical dialogue partner in this current climate, because he takes a realistic view whilst recognizing the imperfections, and hence the contradictions, inherent in our economic organization of human beings. After Risk, Uncertainty and Profit, Knight’s core writings were essays and collections of essays, rather than any systematic works or impressive individual volumes. Two of his early and most important collected volumes were The Economic Organization (1933a), published as a volume in 1951 but dating back to 1933 as course material for his students, and The Ethics of Competition (1935a), published in between the course material and the published volume. In these works, Knight explored the market system and its weaknesses, and engaged with socialism and communism as alternatives to capitalism. He was also developing his thought on the role of science in economics and economics itself as a science, along with his interest in ethics, psychology and behaviour. Knight was coming at his economic interest from a variety of angles, and much of what is discussed in this period has its roots in Risk, Uncertainty and Profit, often drilling more deeply into this or that aspect. In this, and the next, chapter we will look chiefly at two major themes which emerged in his early to mid-career works. The two themes are, first, Knight’s understanding of economic organization, and second, the ethical basis of competition. The work undertaken here also provided a Knightian critique of the quest for an alternative, a Knightian view of the overarching concerns that critics of capitalism have entertained since the dawn of capitalism.
David Cowan

6. Understanding the Ethics of Competition

The roots of economic thinking, and political issues related to economy, lie in moral thinking, going back to the Greek classics. Frank Knight noted that there was no justification of competition as a motive to be found in the Aristotelian conception of the good as that which is intrinsically worthy of the human as human, or what Plato called the archetypical goodness. Knight explained:
David Cowan

7. Welfare Economics

In his last major work, Intelligence and Democratic Action (1960), Knight recalled reading Ruskin who described Adam Smith as a half-bred, half-witted Scotsman who founded the dismal science of economics and encouraged the blasphemy of people hating God and despising God’s commandments whilst coveting their neighbour’s goods. Knight noted “This is a somewhat florid statement of what the world at large seems to think about us political economists” (Knight 1960, p. 96). Nowhere, perhaps, is the negative view of economists more clearly seen than in the area of welfare, and its connection to ethical considerations of economic life. Welfare in Knight’s work is approached somewhat differently from the way the subject is normally discussed today. Knight contended that there are two sets of policy problems in considering welfare, those arising because the system doesn’t work according to theoretical principles, and problems arising for just the opposite reason that they do work. Economic theory describes, he suggested, what superficially appears to be an ideal social order of “perfect cooperation” based on mutual advantage, achieving maximum possible efficiency in the use of available resources and rational choice, and so on and so forth. The classical economists had taught that free market equilibrium would create the most efficient allocation of resources. However, reality is not so ideal and free enterprise does not in truth imply an ideal social order.
David Cowan

8. Freedom and Reform

Much has been said about the centrality of freedom in Knight’s thought, and having looked at the moral and welfare limitations on freedom, it is time to look at his understanding of freedom in more detail. In the latter part of the 20th century and ever since, the question of economic equality has been at the forefront of public economic discussion. The inequalities of capitalism became clearer with the fall of the Berlin Wall and the end of communism in 1989. For much of the 20th century there was a foil for capitalism in communism, so that supporters could point to the failures of communism, and opponents could imagine at least there was an alternative, even if that alternative was not fully defensible; and for the early part of the 20th century there were many in the West who thought it to be fully defensible. To understand Knight’s view of freedom, we have to understand that for him capitalism and western-style democracy go hand in hand. Ross B. Emmett offers great insight into the connection between Knight’s view of the democratic process and the free market, both of which are integral to freedom:
David Cowan

9. The Economic Order and Religion

Having made many references to Knight’s religious attitude and discussed his ethics, it is time to delve more deeply into the religious aspects of Knight’s prophetic work. It has already been noted how his students viewed this role, but we gain a little more insight from Paul Samuelson who assigned biblical names to the key figures of his era. Samuelson explained that Knight, as the founder of the Chicago School, was Abraham, the tragic figure Henry Simon was Isaac, and Milton Friedman was Jacob (Nelson 2001, p. 114). In spite of all this religious talk, however, Knight was not writing as an avid follower of religion. At an early age he had given up his conservative religious traditions, but retained active religious worship in the Unitarian tradition. He certainly saw the church and organized religion as being a stumbling block to economic progress. At a meeting of the Mont Pelerin Society in 1947, religion was a debate raised by Hayek, inspired by the Christian opposition to Hitler in Germany. He posed the question of whether there was an opportunity to bridge the gap between Christians and liberals, to which Knight retorted “the question is whether Christians will allow us to be liberals” and “we do not discuss public issues in terms of whether they are Christian or not” (Hartwell 1995, p. 38). However, despite many comments which may give us a picture of Knight as someone who had rational contempt for religion, such a picture would not be fully accurate. Just as he was a jilted lover of liberalism, there is a case to be made that he was likewise a jilted lover of Christianity.
David Cowan

10. Why Knight Was (Not) a Conservative Prophet

The recession of 2008 was not just the bursting of an economic bubble; it was the bursting of the bubble of optimism, dating back to the 1980s, for what the economy can do for human society. It also brought Keynes and his policy ideas back into favour, an evolution Knight would no doubt question were he alive today, as noted in an earlier chapter, Knight had said of Keynes in 1950:
David Cowan


Weitere Informationen

Premium Partner

BranchenIndex Online

Die B2B-Firmensuche für Industrie und Wirtschaft: Kostenfrei in Firmenprofilen nach Lieferanten, Herstellern, Dienstleistern und Händlern recherchieren.



Wieviel digitale Transformation steckt im Informationsmanagement? Zum Zusammenspiel eines etablierten und eines neuen Managementkonzepts

Das Management des Digitalisierungsprozesses ist eine drängende Herausforderung für fast jedes Unternehmen. Ausgehend von drei aufeinander aufbauenden empirischen Untersuchungen lesen Sie hier, welche generellen Themenfelder und konkreten Aufgaben sich dem Management im Rahmen dieses Prozesses stellen. Erfahren Sie hier, warum das Management der digitalen Transformation als separates Konzept zum Informationsmanagement zu betrachten
und so auch organisatorisch separiert zu implementieren ist. Jetzt gratis downloaden!