Today in my entrepreneurship PhD seminar we discussed the iconoclastic American economist Frank Knight. Though friendly with Hayek personally, Knight was a harsh critic of Austrian capital theory, particularly as formulated by Böhm-Bawerk and Hayek. (Knight conceived capital as a permanent fund of value, with interest determined by the technical marginal productivity of capital, rejecting notions of production structures and time preference.) Knight was also a key developer of perfect competition theory -- anathema to Austrians -- though mainly to illustrate the importance of uncertainty, not to serve as a welfare benchmark.
Still, there are many interesting similarities between Knightian and Austrian economics. Knight’s approach to entrepreneurship, uncertainty, and the firm is very close to Mises’s. Knight rejected positivism, calling it “the emotional pronouncement of value judgments condemning emotion and value judgments” (Knight, 1940). He often sounded like a Misesian praxeologist: “If anyone denies that men have interests or that ‘we’ have a considerable amount of knowledge about them, economics and its entire works will simply be to such a person what the world of color is to the blind man” (Knight, 1956). Indeed, critics dismiss Knight’s epistemological writings as “extended Austrian-style disquisitions on the foundations of human knowledge and conduct and the like” (LeRoy and Singell, 1987) -- for a neoclassical economist, the ultimate insult!
Richard Ebeling has also emphasized the connections between Knight and the Austrians:
It is well known that Knight was a leading critic of “Austrian” capital theory, that he did not agree with Mises or Hayek about the impossibility of economic calculation under socialism, and that he was very far from being an advocate of laissez-faire.
But Knight, at the same time, was a strong and sometimes eloquent opponent of Positivism and Bahaviorism. Many of his methodological essays from the 1920s, 1930s, and 1940s, present arguments against Positivism that are very similar to those made by Mises and Hayek. Knight believed that economics could not be moulded along the lines of the natural sciences, and therefore could not limit itself to the methods of, say, physics. And he believed there are limits to the application of mathematics in economics.
He emphasized the importance of introspection as a source of knowledge in the study of human action and choice. He argued that one could not ignore the “subjectivist” elements to social and economic processes. Like Mises, Knight had been very influenced by the German sociologist and historian, Max Weber, in focusing on human action as “intentional conduct” to which the actor assigns subjective meanings.
On the relationship between Knight and Hayek, see also this informative post by Ross Emmett. Tony Yu also wrote a paper on Knight and the Austrians.
Peter G. Klein is Carl Menger Research Fellow of the Mises Institute and professor of entrepreneurship at Baylor University’s Hankamer School of Business. Contact: email, twitter, facebook.
