The Economic Mind in America: Essays in the History of American Economics

By Malcolm Rutherford | Go to book overview

10

FRANK KNIGHT’S POSITION ON CAPITAL AND INTEREST

Foundation of the Knight/Hayek/Kaldor debate

Avi J. Cohen

INTRODUCTION

Frank Knight’s position on capital and interest was developed in a large scattering of articles (1916, 1925, 1931, 1932, 1933, 1934, 1935a, 1935b, 1935c, 1935d, 1935e, 1935f, 1936a, 1936b, 1937, 1938, 1941, 1944, 1946) between 1916 and 1946. Many of his articles are criticisms of others’ points of view, and he never lays out a clear, definitive statement of his own position. Coupled with his often opaque writing style and sometimes contradictory statements, it is difficult to explain his position. Even Lutz (1968:104), who provides the best summary of Knight on capital and interest, begins with the caveat that he “can claim no more than an earnest effort to understand” Knight’s position.

Knight’s position on capital and interest was the focal point of the 1930s debate between Knight, Hayek, and Kaldor. As a necessary prelude to analyzing that debate, I shall attempt in this chapter the most comprehensive articulation of Knight’s position to date. I do not intend to defend or to criticize Knight, but simply to try to understand his position. While there is no judgment of Knight in this chapter, two interesting issues emerge from clarifying Knight’s position. There is surprising heterogeneity among the early neoclassical capital theorists, Clark, Fisher, and Knight. Furthermore, there are remarkable similarities between Knight’s views on methodology and capital, and those of Joan Robinson regarding the Cambridge capital controversy.

My effort to understand Knight will place his theory in a broader context before focusing on his specific models. First, I briefly situate Knight’s capital and interest theory in the context of his general price theory. Second, I

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