1 God’s Prophet
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.
Knight was a co-founder of the “Chicago School”, but he was a teacher more than a theorist or producer of books. His work is scattered across a host of economic journals in essay form standing on the base of his first and major work Risk, Uncertainty and Profit published in 1921. Within the economic world, he is chiefly noted for the notion of Knightian uncertainty. He established his reputation in the pantheon of economic thinkers largely because of Risk, Uncertainty and Profit, which was based on his PhD thesis. The remainder of his writings comprised essays, lectures and book reviews, the most notable being collected in the single volumes of The Economic Organization (1933a), The Ethics of Competition and other Essays (1935a), The Economic Order and Religion, with T.W. Merriam (1945), Freedom and Reform (1947), On the History and Method of Economics (1956), and Intelligence and Democratic Action (1960). As one of his former students, James M. Buchanan, who became a long-time friend and Nobel prize-winner, notes in the foreword to the 1982 edition of Freedom and Reform, Frank Knight was a critic, and apart from Risk, Uncertainty and Profit his work “can be interpreted as a series of long book reviews.” His “social function” was that of “exposing fallacies, nonsense and absurdities in what was passed off as sophisticated scientific discourse” (Knight 1947, 1982 edn. p. xi). Because Knight was essentially a teacher and a critic, he did not pen the major volumes for which one might have hoped. His relevance as a great economic thinker for us today, apart from Knightian uncertainty and his status as a founding father of the Chicago School, was threefold. First, he is arguably one of the most interdisciplinary of economists, and thus provides a basis on which thinkers can discuss economic issues from their own disciplines. Second, he raised issues that are prevalent in the latest stages of capitalism, being issues we currently face and will continue to face in the future. Lastly, he was an economic realist who knew the weaknesses and strengths of capitalism, so while remaining a supporter of capitalism as the best available system he also addressed the limitations and difficulties thrown up by this imperfect way of organizing our economic affairs without overthrowing what he saw as an ultimately workable system.
2 An Observer of Fools
Frank Knight was born on 7 November in 1885, making 2015 the 130th anniversary of his birth. He was born 2 years after John Maynard Keynes, and died in 1972, surviving Keynes who died in 1946, by a quarter of a century. However, Keynes rose to pre-eminence in economics, while Knight is best remembered for bringing to light the true economic significance of risk, and being the cofounder of the highly influential Chicago School of Economics. Perhaps it was fitting that Knight, a teacher by instinct and temperament, should find his real influence through a School rather than in his own name. Reading his articles and book reviews in particular, one is struck by the number of times Knight takes a negative turn rather than setting out first to prove a positive point or going on to offer a solution. His methodology was one of razing to the ground the views or arguments of his target and then, seeing what had withstood the attack, he sought to build our understanding in the way he wanted us to understand, so that we could join him as economic realists.
Born into humble origins, Knight was the first of eleven children of Winton Cyrus Knight and Julia Ann Hyneman Knight, born in White Oak Township, the smallest town in Mclean County, Illinois, with a population that today is still below 1000. The town’s most historic site is a marker that notes Abraham Lincoln rode through the township before becoming president. Knight’s grandfather, Moses H Knight, was a church pastor who had settled in the county in 1850 and been ordained in 1858, serving the church in Lower and Upper White Oak. A history of the county records that Moses “In his preaching trips he traveled horseback or walked. Much of his service was without financial compensation. He was a pure, true and efficient servant of God and men.” (Haynes 1915, p. 553) One of his sons, James W. Knight, entered the ministry as well, and it seemed that the church was very much a family business, alongside farming. Knight was raised on a farm in a household that followed the Disciples of Christ, his brothers Bruce and Melvin, also went on to teach economics at Dartmouth and Berkeley denomination. Although his family was religious and adorned with pastors, religion for Knight was always a source for skepticism, as the May 28th 1972 edition of the Chicago Tribune noted on his death, “His skepticism, one of the trademarks of his brilliance in economic analysis, also carried over into other fields. Former students recall that his two great whipping boys were medical doctors and the clergy. He considered the clergy a form of quackery as bad as he regarded doctors. Both of them, Knight considered, pretended to know things that couldn’t be known.”
He may have rejected organized religion, but he did his first academic work at Christian universities in East Tennessee, and he retained a keen interest in theology for the rest of his life. Because of the farm work, Knight did not complete high school, but he was able to enter the American Temperance University, a theologically conservative college in an alcohol-free town of Harriman 40 miles west of Knoxville at the age of 20, but the university failed financially and closed in 1908. Knight had studied a range of subjects there, including chemistry, mathematics and German. Such was the financial modesty of the college resources he also acted as administrator and tutor. Knight moved to Milligan College, 100 miles east of Knoxville, where he graduated 3 years later. At Milligan, Knight met his first wife Minerva Olena Shelbourne, who started at the college in 1908 and graduated in 1911 as the top student in her class, above Knight. They married just before the graduation ceremony, and spent the next 16 years together, with Minerva balancing family life with ongoing studies in philosophy, eventually gaining a PhD in the 1930s. Their divorce came on the eve of the “great depression,” but Knight continued to provide a generous alimony and child support, as she continued to work at the University of Iowa for the rest of her professional career. In the meantime, Knight entered the University of Tennessee in Knoxville, graduating in 1913, before taking his doctorate at Cornell in 1916, where he also started his teaching career. Knight’s doctoral dissertation was entitled “A Theory of Business Profits”, which was supervised by Allyn Young who wrote to Knight saying this was the best thesis that had ever passed through his hands.1 Knight regarded Young as the greatest influence on his intellectual formation. The thesis was awarded the Hart, Schaffner and Marx economic essay prize in 1917, and was reworked to become his classic work Risk, Uncertainty and Profit. Knight switched from philosophy to economics at Cornell; with various versions of the switch portraying that he was, depending on which reports you read, either invited to look elsewhere or kicked out of the philosophy faculty.
Knight joined the Chicago faculty after his dissertation, taking up an appointment as instructor in economics from 1917 to 1919, but was then offered a tenured associate professorship at the State University of Iowa, a community of some 15,000 faculty and students, which he held from 1919 to 1922. It is easy to skip the Iowa years in Knight, but that would miss the significance of this period in his career. Knight did his core and lasting work at Iowa including the publication of Risk, Uncertainty and Profit. The other important work at Iowa was his article “Cost of Production and Price over Long and Short Periods”, published April 1921 in the Journal of Political Economy, the same year as Risk, Uncertainty and Profit. He wrote this article as a didactic tool from the standpoint of the student, whom Knight believed was baffled by many contemporary expositions of price theory He wrote much of the work collected by his Chicago students and published in the later volume The Ethics of Competition, while in Iowa.
Knight certainly enjoyed his time in Iowa. He lived close to campus and was heavily involved in the social and intellectual life of the university. He participated in many of the university academic and technical clubs, the latter being the name applied to those clubs specific to a discipline. His primary activities were with the Political Science Club and the Philosophical Club, and he gave numerous talks at these and other clubs. Despite a growing reputation, research by Norquist and Emmett reveals that Knight only had two doctoral students at Iowa, one of whom was Henry C. Simons, who would join him in Chicago in 1927 but never defended his dissertation at Iowa (Emmett 2011 p. xxii.). This low rate of supervision continued at Chicago, where again Knight only supervised two completed dissertations, one of whom was George J. Stigler who would go on to be a major figure in Chicago and win a Nobel Prize. The other was William D. Grampp, who remains an emeritus professor at the University of Illinois at Chicago.
The other major activity for Knight in Iowa was his involvement with the Unitarian Church, which he decided to join despite his well-documented opposition to organized religion. In a letter Knight explained, “I am committed to casting my fortunes with the local Unitarian association. I want some sort of religious connection, and while these people are really about as dogmatic and opinionated as any…at least they stand theoretically for a truth seeking attitude.”2 He was very active in various groups, including the Men’s Group, teaching the Sunday school, and leading discussion in other study groups. His wife Minerva was also involved in teaching the Sunday school and the woman’s group, which she continued to do after Knight’s departure to Chicago and their divorce. The Unitarians are cut from a different cloth than the conservative evangelical church of Knight’s upbringing, and whilst rooted in the Jewish-Christian tradition, they deny the Christian doctrine of the Trinity of the Godhead and the divinity of Jesus. This liberal and rationalist form of faith was new to Knight the sceptic, and he joined because he wanted to keep some religious connection without doctrine being too evident.
Life in Iowa and Chicago was not all about economics and religion, he was a great lover of books, poetry and other cultural pursuits. He also enjoyed the company of close friends. His second wife Ethel Verry Knight in conversation with Norquist told him about the bonfire talks he would have with friends, explaining Knight:
…had a lot of gusto, a lot of enjoyment in life. In Iowa, I know one of the things he liked…they used to go out [out into the country] and build a big bonfire – they drank, I guess, it was prohibition time. Anyway, they had awful things to drink, and they just had one whee of a good time. (Emmett 2011, p. 12)
He was then promoted to full professor, which may have been to prevent him from accepting an appointment at Harvard University, though his widow in the Norqist interview explained, “he wouldn’t go because he said he wouldn’t shake hands with people that were involved in the Sacco-Vanzetti case” (Emmett 2011, p. 6). The case, extending over the 7 years 1920–27, involved Nicola Sacco and Bartolomeo Vanzetti, who were anarchist immigrants from Italy. These men were tried and executed in 1927 for armed robbery and murder. Another man fled to Italy. The case remained controversial, with a fresh investigation in 1961, a proclamation by Massachusetts Governor Michael Dukakis in 1977 that Sacco and Vanzetti had not received a fair trial, and, confirmation in 1983 that the revolver taken from Sacco was used in the killings. The case grew in notoriety against the backdrop of communist fears in 1920s America, and the two men played on this to gain support from the left wing with claims that the prosecution was politically motivated, resulting in millions of dollars raised for their defense by radical left supporters around the world. The Harvard connection came though A. Lawrence Lowell, president of Harvard University, who was asked to head a committee to consider calls for clemency. The calls were rejected by the committee and the two men were executed, and as a result Harvard became stigmatized and Knight remained distasteful of the whole affair.
Whatever the reason, Knight was not lured away to Harvard. He left Iowa for the University of Chicago in the fall of 1927, with a brief return to the State University of Iowa for a term in 1928, before taking up the permanent post in Chicago later that year, replacing John Maurice Clark who had moved on to Columbia University. In September 1929, he then married his second wife Ethel Verry, who had been one of his students in Iowa. The following year they took a six-month sojourn to Europe on a Guggenheim Foundation fellowship, with Knight giving a lecture in Vienna on the possibility of a value-free economic science, and spending time with Ludwig von Mises and his circle.
Knight was essentially a teacher, and so his career focused on teaching rather than writing books or finding fame or fortune outside of academia. He stayed at Chicago for the remainder of his career, retiring in 1952 but remaining active in the Chicago community until his death in 1972. He stayed active on the Chicago faculty, and as a co-founder of the Chicago School, Knight continued to embody the Chicago spirit. He was a man who had little respect for orthodoxy and offered a radical challenge to the accepted norms. In a personal recollection, Buchanan classified Knight as “Chicago’s critical spirit,” and a pessimist at base who observed the behaviours of fools (Shils 1991, p. ...