Uncertainty's Prophet: Frank Knight Is the Economist for Our Age

By Cowan, David | The American Conservative, July-August 2016 | Go to article overview

Uncertainty's Prophet: Frank Knight Is the Economist for Our Age


Cowan, David, The American Conservative


The Great Recession was not simply the bursting of an economic bubble. This middle-class recession also saw the bursting of a bubble of optimism, dating back to the Reagan-Thatcher era, in what the economy can do for human society. It's not just markets that lurch from good times to crisis; the same is true of underlying sentiment about the economy as well.

The principles of the Reagan-Thatcher era were clear in rhetoric, if not always successfully translated into policy. The program was to reduce government intervention in the economy, lessen the burden of regulation and taxation, and privatize state-owned industry. The thinkers commonly cited in support of these efforts were Milton Friedman and Friedrich von Hayek, along with a handful of other Chicago School and Austrian School economists.

Recessionary times have swept all of this away and ushered in a new era of Keynesianism--to the point that we are all Keynesians now, again. The pendulum has swung back and forth several times. We should recall that prior to Keynes economics was essentially a free-market discipline. Keynes mounted an intellectual assault on the free market, contesting both the classical view of economics derived from Adam Smith and the Austrian understanding of many of his own contemporaries. He wanted to bolster the role of government in managing society in the modern industrial age, which appealed in the postwar world and appeals again today.

There is a general sense these days that the economy is not fulfilling our needs, which makes this a pivotal moment. Trotting out Reagan-Thatcher economic ideas in response is akin to lighting up a cigarette in public--there are places for it, but it is socially unacceptable to most company. We could, however, turn to Friedman's old teacher, Frank H. Knight (1885-1972), to find a more fitting conservative economist for our difficult times.

Knight argued that Keynes, like the socialists, had too much confidence in government's ability to solve economic problems. But did the Chicago and Austrian economists also have too much confidence in markets? Knight certainly thought so. As a professor at the University of Chicago, he was in fact a cofounder of what came to be known as the Chicago School--his students included George Stigler, James Buchanan, and Gary Becker, as well as Friedman--but his ideas nonetheless defy easy classification.

His first and main work was Risk, Uncertainty, and Profit, published in 1921, the same year that Keynes published his book on probability. Knight's book established the notion of "Knightian uncertainty" in economics, drawing the important distinction that while "risk" can be calculated and insured against, it is true "uncertainty" in the world that paves the way for opportunities to create profit and entrepreneurial enterprise.

Knight had various testy engagements with the Austrians and Keynesians. His core argument with Hayek was over capital and interest theory. He disputed the same topics with Keynes, but his greater concern with Keynes was the latter's view that government can drive the economy: he believed that Keynes had largely recycled old fallacies. Knight argued that capital in a growing society is immortal, meaning that production has no beginning or end, unless the end of the world is known and the entire economy is able to prepare for it.

He thus rejected the classical notion that production is the result of labor and the Marxist spin on this that labor creates wealth. Wealth in an object is the capitalization of a perpetual income, and for Knight production cannot be broken down into this object or that slice of time. While the Austrians argued that production is a series of inputs and outputs, Knight disagreed, contending instead that the notion of a definite relation between the quantity of capital and time or length of production needs to be eliminated.

In other words, he managed to annoy just about everyone. …

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