Search results

I have been asked to explore how James Buchanan’s work on public finance and constitutional political economy might have emerged out of themes present in Frank Knight’s oeuvre, especially his Risk Uncertainty, and Profit. Buchanan’s body of work has inspired the development of a style of political economy sometimes described as Virginia or Constitutional Political Economy to distinguish it from the Chicago Political Economy with which George Stigler is associated, and with Stigler and Buchanan both being students of Knight. While Buchanan, unlike Stigler, did not write his dissertation under Knight’s supervision, this is a minor distinction because Buchanan regarded Knight as his de facto supervisor even though Roy Blough was his de jure supervisor. The author explains how Knight’s scholarly oeuvre can in large measure be detected in Buchanan’s effort to fashion an alternative approach to public finance and to articulate the field of study now called constitutional political economy.

The paper published below was prepared by Taylor Ostrander for Frank Knight’s course, Economic Theory, Economics 301, during the Fall 1933 quarter.

In 1933, Lionel Robbins asked Frank Knight if he could republish Knight’s Risk, Uncertainty and Profit (RUP) in order for students at the London School of Economics to continue to have access to the book. He also asked Knight to write a preface to provide an update on Knight’s changing economic views. Between 1933 and 1957, Knight wrote four new prefaces for reprint editions of RUP outlining changes in his views. In the prefaces, he identified four aspects of the theory expounded in RUP that he came to reject: (a) the method of successive approximation; (b) the separation of production from distribution; (c) the tri-partite division of the factors of production; and (d) any notion of a period of production. These rejections placed him squarely in opposition to F. A. Hayek’s theoretical work. He also identified the key features he had sought to develop in a monetary theory that would oppose J. M. Keynes and John Hicks. At the same time, he sought to identify the new theoretical ideas he was developing, including an enterprise-based theory of market exchange, and the adoption of a unitary resource, called capital. He also pointed to the work in social philosophy that he had begun in the 1940s, especially the need for a combined approach to social science using economic theory, ethics and social philosophy. The prefaces came to serve as a bridge between Knight’s original theory and what he would argue at the conclusion of his career.

The following interview took place in Urbana, Illinois on October 27, 1978 and was recorded on an audiotape.

Ostrander went to Chicago at the urging of his Williams professor Walter B. Smith who had studied with Frank Knight at Chicago in the early 1920s. He took four courses from Knight: the history of economic thought, economic theory, current tendencies, and economics from an institutional standpoint (his notes taken in these courses have appeared in volume 22B and 23B in this series). At the beginning of the academic year in which he was a graduate student at Chicago, Ostrander’s major professor at Williams, Walter Buckingham Smith, wrote Knight introducing Ostrander to him. Ostrander did not know of this exchange of letters until he read a draft of this piece that I had sent him. The letters are useful in regard to Knight’s legendary pessimism and candor.September 30, 1933Dear Professor Knight:I am writing to tell you that we are sending you a graduate student named Ostrander from Williams. To a considerable extent he is coming to the University of Chicago on my recommendation. I particularly want him to work with you and with Professor Viner and with Professor Douglas. I’ll be interested to see what you do with him. In my opinion he has “promise.”Mr. Ostrander graduated here in 1932 and spent last year in Oxford. He seems to have survived a year at Oxford. Usually a year or two there is pretty hard for an American to get over. Ostrander, contrary to the usual rule, seems to have benefited rather than deteriorated under the direction of his English tutors.Ostrander is much interested in theoretical economics. My hope is that you will be able to do for him what I think you have a unique capacity to do. I hope that you can make him see economic theory not as a body of neat precepts nor as dogmas that one must learn but rather as a critical philosophizing about the categories. Needless to say, I’m not trying to tell you what you should teach your students. I’m merely telling you that I think that Ostrander is an intelligent enough person to understand you if you do in the class room what you used to do when I listened to you. He will understand; and he won’t reproach you if your lectures don’t enable him to get up a good note book.I spent the year before last in Berkeley at the University there and got very well acquainted with your brother M.M. Needless to say, that was one of the most valuable things that happened to me while I was there. I don’t understand why some eastern institution does not make M.M. a good offer and take him away from Berkeley where he is highly esteemed by all but sadly overlooked on pay-day.Do you ever come east? If you do we would be delighted to entertain you and Mrs. Knight here in Williamstown. I would like ever so much to be able to talk with you about economics. If you should come this way you may be sure that we would be very glad to see you.Sincerely yours,[signed] Walter SmithOctober 5, 1933Dear Smith:(I don’t know how I ought to address you, but can’t bring myself to “Professor” you, even though you did me.) I was just going to write you anyway when your letter came in the mail. Your man Ostrander arrived last week, and I had a couple of hours’ talk with him, business being slack on the first day of registration. He impressed me quite favorably. One thing he may have gotten in Oxford or in part from his eastern bringing up (we have a Princeton boy who is fully as bed [sic]) is an extremely deferential air which is embarrassing to me. I very much appreciate your comments, and I am, of course, quite set up at your sending him to us as against Harvard.By all means, any possible opportunity to get together and talk about economics. I am so depressed that it is really serious for my work. I have to fight the conviction that anything in any degree fundamental is impossible, hopeless. On one hand I agree very largely with the “rebels” that rationalistic economics doesn’t amount to a terrible lot, even if it were sound. But on the other hand the little that it does have to say about social relations and problems seems to me as peculiarly fundamental as it is limited in scope. But I suspect that man, in his well known capacity of “political animal,” is an inveterate romanticist, and will never see things in balance or perspective. He will either be a rationalist to the point of romanticism – the “Enlightenment” attitude – or else insist on scorning all fundamentals and transforming the world by wish[ful] thinking or some magic formula.I wonder what you think about current developments. I hope it may partly be due to a run-down physical condition, but actually my feeling is that we are seeing from day to day the “finish” of all we have educated ourselves to call the principal cultural fruits of western civilization. What gripes me is less this fact than the fact that I cannot rationally oppose the abolition of liberty and [the] establishment of tyranny. I feel that the regime of liberty has been a failure, or an experiment with negative results, that it has shown the incapacity of large masses of people to reach any sound conclusion by thinking and discussion – indeed the inevitability of their ending up by selling out to some hero-prophet. If this is the wrong view of events, I wish you would give me any possible help in reaching a view in which my own kind of person and of activity would have any place. I wonder if your failure to write may be based on a feeling similar to this one of my own, which is making it increasingly difficult for me to pretend to try to fan the wi[nd] of culture history into a new direction with a hen feather of words. Indeed, it is making it take an actual moral struggle a good deal of the time to open the door and go into an economics classroom and hold forth.Sincerely,Frank H. KnightNovember 24, 1933Dear FH:Thank you ever so much for your letter about Ostrander. You will be interested to know that Ostrander writes with the very greatest enthusiasm for your course. I am sure that you are doing him a lot of good. Before the year is over I would be interested to have your opinion of him and of his capacities to undertake the arduous job of being an economist. He has seemed promising to me. If this promise seems not to be fulfilled in your opinion, I should feel disposed to tell him so and urge him to resume his plans for going to the Harvard Law School.Your remarks about being depressed over the apparent disillusion of the existing economic order I very much sympathize with. Not only am I troubled about that but I am also very much troubled about the intellectual confusion and the lack of good sportsmanship on the part of the better trained economists these days. President Roosevelt seems to me to be willing to listen to reasonable and constructive suggestions and he has shown an extraordinary disposition to do some social experimenting. In the face of this extraordinary state of affairs it seems to me that the great body of well trained economists has contented themselves with growling quietly to one another and saying nothing in public. From the standpoint of maintaining one’s prestige that is in some ways the wise policy for it enables one to say “I told you so” when things in the world of business fact go wrong. It does seem to me, however, that under the circumstances economists ought to make their position known, that is[,] to point out where they think the existing policies are leading, the important and possibly conflicting goals of different lines of economic policy and certain long run changes in the set up of our legal economic structure. If the economists can’t do that much then it seems to be that they are confessing that their field is in such a state of intellectual confusion that it is practically worthless, or else they are confessing that they are a timid lot of thin-blooded academics who have no right to object if this country is run by the Babbitts.This letter comes to you to find out if there is any possibility of starting a movement or making the opinion of the economists heard. Personally I think we ought to speak out or else publicly admit that the study and teaching of economics is a racket.Sincerely yours,[signed] Walter Smith

This paper discusses Frank H. Knight's thought under three major themes, namely subjectivism, interpretation and social economics. Knight's economics starts with a conscious mind construct which is able to infer under partial knowledge. Conscious human action is purposive, forward looking and extends towards other individuals. Rejecting neoclassical positivism, Knight points to the need for economics to reconceptualize itself as an interpretative study, a methodology in the Weberian tradition. Furthermore, his allure for phenomenological economics opens a methodological possibility for the Austrian School of Economics. This paper concludes that Knight's insight earns himself a place in the history of subjectivist economics.

Published below are the course reading list and student notes taken by F. Taylor Ostrander in Frank H. Knight’s course, Current Tendencies, Economics 303, at the University of Chicago during Winter term of the 1933–1934 academic year. The reading list is surprisingly casual and uneven in detail among items. The notes are assumed, as usual in these volumes, to be a reasonably accurate summary account of what Knight said.

I am indebted to Anthony Waterman for identifying the largely illegible phrase cuius regio, eius religio, found near the end of Ostrander’s notes. Waterman writes, in explanation, apropos of Martin Luther: Lit. ‘whatever of the king, so of the religion’: it means that L. thought (being the Erastian he was), that the religion of a country should be that of its sovereign prince. Note: (a), the assumption, almost universal at that time, that there can be only ONE church in any Christian nation; and (b) the assumption, standard until the Scottish Enlightenment I should think (though people like Locke begin to chip away at it) that – as Louis XIV put it with admirable economy, ‘l’etat c’est moi’ (Waterman to Samuels, December 12, 2002).

This paper views the housing and credit bubble 2001–2008 as a sequence starting with a financial innovation in 2001 followed by the superimposition of other financial innovations leading to the prevalence of uncertainty in Knight's sense and ending in the last quarter of 2008 with both market failure and regulation failure. To the extent that financial innovations were an important factor in the development of the bubble, the most obvious question is whether anything can be done to prevent destabilizing innovations from entering the market. The paper outlines a policy proposal to keep pace with financial innovation and strike a balance between innovation and financial stability.

Knight’s Risk, Uncertainty, and Profit is, by the author’s own account, “a study in ‘pure theory’.” From pure theory, the scientific method’s “successive approximations” explain empirical phenomena. But Knight did not fully develop the boundary conditions for theory. In this chapter, the author elucidates the demarcation of pure theory in Risk, Uncertainty and Profit. For comparison and contrast, the author uses Mises’s Austrian aprioristic methodology praxeology and its strict distinction between theory and thymology. The author finds that Knight and Mises largely agree on the nature and importance of pure theory but differ on its meaning and use. The author’s findings suggest that Knight, while arguing for aprioristic pure theory, still places empirical observation first.