Frank Knight's Mixed Legacy
Selected Essays by Frank Knight: Vol. 1, "`What is Truth' in Economics?" xxiv + 406 pgs.; Vol. 2, "Laissez_Faire: Pro and Con," vi + 459 pgs. Edited by Ross B. Emmett (University of Chicago Press, 1999)
Frank Knight complicates things in interesting ways. He first argues for a free economy in a way that Austrians can only applaud. After making an incisive case for classical liberalism, he next raises objections (in my view mostly wrongheaded) that threaten to undermine his own case.
But he is not yet finished. After setting forward his objections to the market, he in turn raises problems about attempts to respond through state action to these same objections. Knight ends up, to an extent difficult to specify exactly, as a chastened supporter of the market. It is not the "best" social system: rather it is the "least bad" arrangement.
Knight succinctly presents the basic principle on which classical liberalism depends: "[A]ll relations between men ought ideally to rest on mutual free consent, and not on coercion, either on the part of other individuals or on the part of the `society' as politically organized in the state. The function, and the only ideally right function, of the state . . . is to use coercion negatively, to prevent the use of coercion by individuals or groups against other individuals or groups" (vol. 2, pp. 4-5, emphasis removed).
The principle, prima facie, has considerable force. Why should you not be allowed to act, as you think best, so long as you do not violate the rights of others? Who among us qualifies as a moral dictator, able to coerce people into doing what he deems best for them?
Further, the principle seems desirable on grounds of utility. If two or more persons freely consent to an exchange, we know that, as each sees matters, his utility has risen. Freedom of exchange guarantees an increase in welfare. With coercive exchange, by contrast, we can make no such claim. The utility increase of the supporter of coercion cannot be measured against the decrease to the loser.
But is not this happy picture vulnerable to objection? If external economies or diseconomies exist, voluntary action by individuals in the market, it has been alleged, does not maximize utility. Knight has little patience with this argument. The claim that a market inefficiency exists assumes that the external good (or public good, as we would now say) is not owned.
But why make this assumption? In his classic article, "Some Fallacies in the Interpretation of Social Cost," Knight demolishes an example, devised by A.C. Pigou, of "excessive" investment in roads. Professor Pigou's assumptions, Knight charges, "diverge in essential respects from the facts of real economic situations. The most essential feature of competitive conditions is reversed, the feature namely of the private ownership of the factors practically significant for production. If the roads are assumed to be subject to private appropriation and exploitation, precisely the ideal situation, which would be established by the imaginary tax, will be brought about through the operation of ordinary economic motives" (vol. 1, p. 97). Knight's article, incidentally, anticipated by some thirty_five years the famous article by R.H. Coase, "The Problem of Social Cost," which makes a similar point.
Nor were Knight's arguments confined to arcane issues of high theory. He had no patience with attempts to raise wages beyond the free_market rate. "There is no sense in minimum_wage laws apart from provision for supplying the prescribed income in some other way, and this would make any prohibitive measures superfluous. And the only discoverable reason for existence of large national unions is to coerce the public, rather than the employers. . . . It is simply impossible for all labor to benefit significantly at the expense of all employers" (vol. 2, p. 354).
On yet one more issue, Knight's position resembles Austrian doctrine, though here his views have often been misunderstood. According to the standard picture, Knight rejected Mises's calculation argument against socialism. By contrast with Mises, Knight viewed socialism as a purely political issue.
Closer examination shows that Knight fully agreed with the vital core of Mises's argument. A socialist economy faces exactly the same problems as a capitalist system, and these it can attempt to solve only through managers of firms. But socialist managers cannot adequately cope with changing conditions. In a neglected footnote, Knight makes his position entirely clear: "Thus the contention of Professor von Mises . . . that there would be no objective rationale for the organization of production under socialism, while adequately refuted by Professor Lange (and others) for the routine operations of a stationary economy, is after all essentially correct for the really serious problem of organization. This is the problem of anticipating substantial changes in the given conditions of economic life" (vol. 2, p. 105).
Knight has failed to note that Mises did not intend his argument to apply to a stationary state: in Human Action, he dismisses attempts to solve the calculation problem via differential equations, just because these equations hold true only in a stationary state (Mises Institute, 1998, pp. 706-11). Knight, then, contrary to his own belief, is a full Misesian on the argument.
One can thus quite easily construct a full_fledged Knightian defense of the free market. Unfortunately, Knight himself did not know when to call a halt to an argument. He thought that various considerations weakened, if they did not rule out of court altogether, the case for laissez_faire.
One of these difficulties has a familiar ring. The rewards individuals obtain in the market depend, to a large extent, on their natural abilities. Since I lack the talent Michael Jordan has to shoot baskets, or talents that the market values comparably, I am doomed to make far less money than he. Is this situation unfair?
Knight answered yes. We do not gain our talents because we morally deserve them: we are born with them, or somehow acquire them through our environment. To make our fortunes depend on such arbitrary affairs as talents, Knight holds, offends against both morals and aesthetics.
Any student of political thought who hears this argument will at once say to himself, "John Rawls." An entirely Knightian argument lies at the heart of A Theory of Justice. And, indeed, if one turns to that fabled tome, one encounters the following: "No one supposes that when someone's abilities are less in demand or have deteriorated (as in the case of singers) his moral deservingness undergoes a similar shift. All of this is perfectly obvious and has long been agreed to . . . it is one of the fixed points of our moral judgments that no one deserves his place in the distribution of natural assets" (J. Rawls, A Theory of Justice, Harvard, 1971, p. 311). A footnote to this passage cites Knight.
I regret to report, then, that Knight bears at least partial responsibility for the principal antimarket argument of our time. But unlike his epigone Rawls, Knight continues to raise complications. Although, in terms of ideal justice, we do not deserve the rewards we get in the market, it does not follow that the state should alter matters through a principle of radical social reconstruction.
If the market is imperfect, the state is even worse. What grounds do we have to think that power_hungry politicians can achieve a more equitable outcome than the free market? Knight puts the essential point eloquently: "I mistrust reformers. When a man or group asks for power to do good, my impulse is to say, `oh, yeah, who ever wanted power for any other reason? And what have they done when they got it?' So I instinctively want to cancel the last three words, leaving simply `I want power'; that is easy to believe. And a further confession: I am reluctant to believe in doing good with power anyhow" (p. 390).
Knight has thus, by a circuitous route, returned us to a location near the free market: how near, I should not care to hazard a guess. If the journey has taken some unneeded detours, it remains a valuable one that teaches us much-in part by opposition