The heterodox economics of "the most orthodox of orthodox economists": Frank H. Knight

I Orthodoxy and Heterodoxy Joseph Dorfman in his The Economic Mind in American Civilization, referred to Frank Knight as a "militant expositor of neoclassicism" and listed him, along with Jacob Viner, as "among the most sophisticated and able defenders of the neoclassical system" (1959, 467). In their book, The Academic Scribblers, William Breit and Roger Ransom describe Knight as the "Philosopher of the Counterrevolution in Economics" and said that those who followed his way of thinking became progenitors of the "new neoclassicism." They asserted (1982, 199) that a primary element upon which the "new neoclassicism" was erected was Knight's rehabilitation of "economic man." Paul Samuelson referred to his former teacher and "boyhood idol" as "Abraham" in his role as the founder of the Chicago School (1972, 55). From these characterizations of Knight, there emerges a picture of him as being amongst "the most orthodox of orthodox economists" (Witte, 1954, 133). Certainly a strong case can be made for such a view given the conservative nature of many of Knight's conclusions on matters of social policy as well as the nature of much of his theoretical work in economics (Kern 1987, Kasper 1993). While the weight of opinion on Knight's work properly places him in the orthodox camp, the presence of significant heterodox elements in his thought should be noted. This paper explores the often neglected, heterodox elements in Knight's work.(1) In particular, it examines his views on issues such as the rationality of economic agents, the role of factors such as luck and inheritance in income distribution, the ethics of capitalism, monopoly and business cycles, and his belief in a cumulative growth in inequality. The question thus arises as to how Knight could simultaneously be a critic and advocate of the market order. II Rational and Irrational Economic Man Defining the essential tenets of orthodoxy is likely to result in a list of principles with which some will agree and others will take issue. However, one of the broadly accepted principles would be the assumption of the rationality of economic agents. Indeed, for a number of economists, the notion of rational maximizing behavior is taken to be synonymous with economic behavior (Becker 1976, Hirshleifer 1984). When some economists' studies do not embrace the rationality assumption, they are seen as placing the analyses outside the boundaries of the economics discipline (Landsberg 1989, 596). Though Knight shared the view that economic behavior was identical with rational behavior (1956, 127), and in spite of the fact that Knight made extensive use of the concept of "economic man" himself, he nonetheless indicated a rather significant role for "irrational" factors in the determination of human behavior. With regard to the fundamental question of whether human behavior could be best understood scientifically, meaning as rational adaptation of means to ends, he was of the opinion that "it is only to a limited extent that our behavior, even our economic behavior, is of this character. Much of it is more or less impulsive or capricious" (Knight 1964, 52). Knight asserts that in order to develop a science of economics, it was necessary to adopt the assumption of rational behavior. Thus he argues that "economic man" is indispensable to developing a science of conduct in order to structure our thinking about economic activity: The 'economic man,' . . . underlies all economic speculation. The economic man is the individual who obeys economic laws, which is merely to say that he obeys some laws of conduct, it being the task of the science to find out what the laws are. He is the rational man, the man who knows what he wants and orders his conduct intelligently with a view to getting it. In no other sense can there be laws of conduct or a science of conduct; the only possible science of conduct is that which treats the behavior of the economic man, i. …