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.