Frank Hyneman Knight was born in Atlanta and received his doctorate in economics at Cornell University. he taught at Cornell University and the university of Iowa. He was also an economics professor at the University of Chicago from 1927 to 1955 and was president of the American Economic Association in 1950. Besides his work in economics, Knight was also an excellent social philosopher. He was one of the main contributors toward the birth of neoclassical economics, the other major contributors being Ludwig von Mises and Lionel Robbins. The main difference between neoclassical versus classical theory is that neoclassical theory is a much more subjective and individualistic theory than is classical theory. Knight's distinctive methodological contribution to neoclassical theory was his emphasis on the importance of uncertainty and error in economics, therefore economics must be looked at subjectively and not as a hard science. He believed that freedom would be undermined by increases in monopoly in income inequality.

Frank Knight's work on the issue of economics and human action is very thought-provoking and well worth reading. The following is Knight's "Economics and human action" as printed in ,"The Philosophy of Economics: An Anthology, by Daniel M. Hausman:

"In general, if explanation of economic behaviour in terms of motives is to be abandoned, s number of alternative possibilities are open. Perhaps the simplest is the one analogous to a trend in physics--to do away with all "explanation" and merely to formulate empirical laws; the result is statistical economic theory, having for its content the objective phenomena of commodities and prices alone. A second line of development away from the types of value theory represented by classical or utility economics centres around the emphasis on the social control of economic life with clearly implied advocacy of such control. In the past generation this trend has been most marked in Germany (socialism of the chair), in England (Fabianism and left wing liberalism), and in the United States (as a phase of institutionalist economics).

The third alternative to explanatory theory is that of treating economic phenomena as essentially historical, which, of course, must be done in any case if the concrete content of economic life at a particular time and place is to be explained. Historical economics again subdivides into as many varieties as there are basic conceptions of history and historical method. Two such varieties stand out. The first treats history as far as possible in objective, empirical terms, and may use statistics for the discovery and analysis of trends; logically this procedure contrasts sharply with the search for repetitive laws, analogous to those of natural science, which characterizes statistical economic theory, but in practice the two conceptions run together in the work of statistical economists. The second variety of historical economics uses the more familiar humanistic conceptions of political and social history--individual ambitions, efforts, and failures in a given social-psychological setting. It represents essentially a revival or continuation of the historical schools of the nineteenth century, especially prominent in Germany. In so far as it arrives at generalization, it may be described as institutional economics, a term which has come into use particularly in the United States. The related contemporary movement in German literature is referred to as noehistorical or sociological economics, with Sombart and Max Weber as its most prominent leaders.

At the root of the differences and disputes between the old and the new economics as well as among the three new lines of theoretical development noted above are two problems: the relation between description and explanation and the relation between statement of fact and critical evaluation. The first, inescapable in any thinking about human conduct, is fundamentally the problem of the reality of choice, or "freedom of will". It involve the essence of the value problem in the sense of individual values, and is at bottom the problem of the relation between individual man and nature. The second basic problem has to do with the relation between individual man and society.

The crucial fact in connection with the first problem is that, if motive or end in any form is granted any real role in conduct, it cannot be that of a cause in the sense of causality in natural science. This is the supreme limitation alike of statistical and historical economics. For, if motive or end is used to explain behaviour, it must in turn be brought into the same relation with events and conditions antecedent to it, and then the motive becomes superfluous; the behaviour will be fully accounted for by these antecedents. Motives cannot be treated as a natural event. A fundamental contrast between cause and effect in nature and end and means in human behaviour is of the essence of the facts which set the problems of interpreting behaviour. There seems to be no possibility of making human problems real, without seeing in human activity an element of effort, contingency, and, most crucially, of error, which must for the same reasons be assumed to be absent from natural processes.

Thus, motive or intent forces itself into any relevant discussion of human activity. But the subject of behaviour cannot be simplified even to the point of reducing it to dualism. At least three basic principles must be introduced into its interpretation. The typical human action is explained in part by natural causality, in part by an intention or desire which is an absolute datum and is thus a "fact" although not a natural event or condition, and in part by an urge to realize "values" which cannot be reduced entirely to factual desires because this urge has no literally describable objects. Interpretation in terms of factual desires is the procedure of economics as represented by the bulk of the theoretical literature, in so far as it is objective in outlook. Yet this second principle of explanation is perhaps the most vulnerable of the three. It is doubtful whether any desire is really "absolute", whether there exists any desire that does not look to achievement of some change in a growing system of meaning and values; this is a different thing from changes in physical nature, even though rearrangements in physical nature are the only means by which values can be realized. Every act, in the economic sense, changes the configuration of matter in space. But this does not exclude to possibility of "acts" which change meaning and values without changing natural configuration, since reflection may yield new insight and effect a change in personal tastes. More fundamentally, it is doubtful whether one configuration is in itself preferable to another.

People report and feel two different types of motivation for their acts. There is the wish or preference which is treated by the actor and by outsiders as final, as a brute fact. On the other hand, people make value judgements of various sorts in explanation of their acts; and explanation runs into justification. In other words, no one can really treat motive objectively or describe a motive without implications of good and bad. Thus not only do men desire more or less distinctly from valuing, but they desire because they value and also value without desiring. Indeed, the bulk of human valuations, in connection with truth, beauty, and morals, are largely or altogether independent of desire for any concrete thing or result. That individual economic motivation itself typically involves some valuation and not merely desire is established by two other considerations: first, what is chosen in an economic transaction is generally wanted as a means to something else, which involves a judgement that it "really" is a means to the result in question; and, second, what is ultimately wanted for its own sake can rarely, if ever, finally be described in terms of physical configuration, but must be defined in relation to a universe of meanings and values. Thus there is an element of valuation in the notion of efficiency in the realization of a given end; and, in addition, the real end contains as an element a value concept.

The dual conception found in motivation is reflected also in the more narrowly economic concept of value. The latter contains definitely more than the notion of quality measured by price; it is always imperfectly measured under actual conditions. Price "tends" to coincide with value, but the notion of value also involves a norm to which price would conform under ideal conditions. This norm includes two ideas: that of a goal aimed at but only more or less approximately realized because of errors of various kinds (which tend to be corrected); and that of a "correct" goal of action in contrast with incorrect goals as well as the actual goal. In a society based upon competition as an accepted principle, the competitive price, or price equal to necessary costs of production, is the true value in both senses; aberrations are to be attributed to two sets of causes--accidental miscalculations, and wrong objectives of action. This statement overlooks, of course, the existence of different technical conceptions of competitive price relative to the short run or local conditions; and a deeper ethical criticism may condemn given conditions other than the tastes of consumers which fix competitive price, especially the distribution of income and economic power.

To make the main point clear it is necessary to notice the difference in the conception of ideal conditions in economics and in mechanics. In the latter field the most notable of the ideal conditions is the absence of friction; an apparently similar conception of ideal conditions is one of the familiar features, almost a cliché, in economic theory. As generalized description the conception of perfect competition, reached by abstraction from the features of the economic situation which makes competition imperfect, is like the conceptions of frictionless mechanics and is similarly justified. But to assume that the specific thing abstracted from in the theory of perfect competition bears the same relation to behaviour as does friction to mechanical process would be utterly misleading. Friction in mechanics involves a transformation of energy from one form to another, according to a law just as rigid and a conservation principle just as definite as the law and conservation principle which hold good for mechanical changes where no energy disappears. There is nothing corresponding to any of this in the economic process. What is abstracted in equilibrium price theory is the fact of error in economic behaviour. Perfect competition is, among other things irrelevant here, errorless competition; fundamentally it is not comparable to a frictionless machine. The familiar "tendency" of competition to conform to the theoretical ideal is no mere possibility of experimental approximation, but a real tendency in so far as men are supposed to endeavour with some success to learn to behave intelligently. It cannot be treated as a tendency toward an objective result, but only as a tendency to conformity with the intent of behaviour, which intent cannot be measured or identified or defined in terms of any experimental data. The ideal conditions of economics involve perfect valuation in a limited sense, perfect economic behaviour which assumes the end or intention as given. The correctness of the intention is an ethical question, from which the economist abstracts just as he abstracts from error which causes the behaviour to end otherwise than according to the intent.

Thus far tow levels of interpretation of economic behaviour have been discussed. The first is that at which behaviour is reduced as far as possible to principles of regularity by statistical procedure; it may or may not be thought convenient to impute behaviour to some "force" but if it is so adjudged, the force must be assumed to correspond with the behaviour observed. The second is the interpretation of behaviour in terms of motivation, which must centre on the difference between motive and act and on the fact of error. It is at the third level of interpretation that the international end of action itself is submitted to valuation or criticism from some point of view. Here the relation between individual and society, the second main problem suggested above, and the concept of value as related to social policy become central topics of discussion.

In fact even at the second level two forms of social reference must be recognized: the individual ends as they are given are chiefly social in origin and content; and in societies in which economic thinking has any relevance there is a large social-ethical acceptance and approval of individual motivation in the abstract. Modern society, for instance, has accepted the right and even the duty of the individual to pursue his own ends within wide limits; in other words, individual liberty itself is a social value and not merely a fact. Thus the second level of interpretation tends to break down. If the notion of economic behaviour is effectively separated from mechanical process, if the ends are regarded as ends and not merely as physical effects, the discussion is already in large part at the third level. Factual ends as desired cannot be maintained unless they are given a large element of valuation in addition to desire. The "desires" for economic goods and services cannot be held to be final or to have a self-contained, independent reality. The least scrutiny shows that they are very largely rather accidental manifestations of desire for something of the nature of liberty or power. But such objects of desire are forms of social relationship and not things, and the notion of economic efficiency has only a limited applicability to their pursuit and attainment. Treatment of such activities, if it is to have any general, serious appeal, must be a discussion of social policy relative to social ends or norms and social procedure in realizing them.

The serious difficulty in economic theory in this connection has been the tendency to confuse advocacy of a policy of political noninterference (or the opposite) with description of a social organization based on free contract. Even when the authors have not deliberately intended to preach as well as to analyze, the difficulties of keeping the two types of discussion separate have been too great, especially in view of the requirements of an exposition which would be intelligible, not to say appealing, to any considerable reading public. In this field of interest in values, and especially in social policy, is in fact predominant. Thus, economic theory, growing up in an atmosphere of reaction against control, clearly over-emphasized this side of the case and neglected the other. it is now just as obvious that there are equally sweeping and complex limitations to the principle of liberty in the economic sense, that is, to the organization of economic life exclusively through free contract among individuals using given resources to achieve individual ends. Society cannot accept individual ends and individual means as data or as the main objectives of its own policy. In the first place, they simply are not data, but are historically created in the social process itself and are inevitably affected by social policy. Secondly, society cannot be even relatively indifferent to the workings of the process. To do so would be ultimately destructive of society and individual alike. This conclusion is strongly reinforced by the fact that the immediate interest of the individual is largely competitive, centred in his own social advancement relative to other individuals. In such a contest it is the function of the public authority to enforce rules impartially, and still more to make such rules as would tend to keep the "game" on the highest possible level. To this end it must maintain a standpoint distinctly different from the interest in which the individual, always more conscious of conflicts of interests than of community of interest with the social body as a whole, tends to be absorbed.

These reflections point to a logical error underlying the value theory typical of the classical economists. It was not ostensibly their contention that liberty as such is a good. Notoriously, they were hedonists; their argument for liberty made in instrumental to pleasure, on the ground that the individual is a better judge than government officials of the means to his happiness. It is not denying weight to this argument to point out that liberty itself is unquestionably a good to the individual, and in addition to an ethical good more or less apart from the degree to which the individual actually prizes it. Certainly an individual may desire liberty and claim a right to it without contending that he will uniformly make decisions more wisely than they would be made for him, from the standpoint of his own material comfort and security. And just as certainly it can be maintained that the individual should within limits make his own decisions and abide by their consequences even if he may not choose to do so. In other words, the classical economists did not realize, and the "scientific" spirit of the age has made economists generally reluctant to admit that liberty is essentially a social value, at least when advocated or opposed, as is any other social system or social relation.

The actual interests or desires expressed in economic behaviour are to an overwhelming extent social in genesis and in content; consequently they cannot be described apart from a system of social relations which itself cannot be treated in purely objective, factual terms. To a limited extent they can be conceived by an individual in such terms; they may even be described by one individual to another as matter of fact. But the parties to such a communication place themselves in the role of spectators rather than members of society of participants in the phenomena. Thus, any published discussion, presupposing a general appeal to readers as members and participants, necessarily takes the form of stating a case for a policy, possibly with more or less equal attention to both sides. In this conflict between the spectator's interest in seeing and understanding and the participants interest in action and change, the philosopher or methodologist cannot possibly take sides. The question of whether economics as such should be one or the other is to be answered only by recognition that it must be both, with more or less emphasis one way or the other according to the aims of a particular treatment; but always by implication it must be both, however one-sided the emphasis, since each interest presupposes and is relative to the other, and every writer and reader as a human being is motivated by both interests. What is desirable is that in any statement the relation between the two sets of interests should be clear. But what tends to happen is the reverse: he whose interest is primarily in truth tends to reinforce his statements by identifying truth and value, and he whose interest is in values tends to strengthen his statements by giving them the quality of truth.

While in the period of development of the classical economics the practical social interest centred almost exclusively on liberation from an antiquated system of control, at present the pendulum has swung definitely the other way. The new problem raised by the confusion of scientific and evaluative interests is enormously more difficult than the old. Society is positively seeking a basis of unity and order instead of negatively attempting to abandon an unsatisfactory basis. Moreover, the current standards of thinking have come under extreme domination of the scientific ideal, which has little if any applicability to the problem. The ultimate foundation of group unity must be of the nature of morale and sentiment rather than knowledge. There is no intellectual solution of conflicts of interest. Only values can be discussed, but the discussion does not necessarily lead to agreement; and disagreement on principles seems morally to call for an appeal to force. it is also of interest to note that the tendency to "rationalization" causes conflict of interest and disagreement regarding principles each to take on the quality of its opposite, and that in practice they are inseparably mingled.

The extremist wings in the advocacy of change recognize the inapplicability of purely intellectual knowledge. Both "fascist" and "communist" schools incline to treat the truth or falsity of propositions in economics as a matter of indifference or even illusory, judging the doctrines only by their conduciveness toward the establishment of the desired type of social order. This view is, of course, "untrue" from a narrower "scientific" point of view; in any social order the results of certain choices affecting production and consumption, by whomever made, come under certain abstract, essentially mathematical principles which express the difference between economy and waste. At the other extreme--at the first and second levels of interpretation indicated above--there is an equally energetic movement in the interest of a rigorously "scientific" treatment of economics. Analysis at the first level, disregarding motivation and considering only the results of action in the form of commodity statistics, leaves no real place for any concept of economy. Moreover, it cannot be carried out even literally, for commodities must be named and classified and the treatment must take account of similarities and differences as well as physical characteristics. And economics at the second level, treating desires as facts, is subject to very narrow limitations. Desires really have no very definite content, and of what they have the students can have no definite knowledge. The conception can be made the basis of a purely abstract theory, but it has little application to reality. To give the data any content, the desires must be identified with the goods and services in which they find expression, and the second method then is reduced to identity with the first. Moreover, the only desires which can be treated as at all akin to scientific data are purely individual, and any discussion of social policy must draw on values or ideals entirely outside of such a system.

Works by Frank Hyneman Knight:

• Economics and human action, The Philosophy of Economics: An Anthology
  
• The Economic Organization
  
• The Ethics of Competition, and Other Essays
  
• Freedom and Reform: Essays in Economics and Social Philosophy
  
• Risk, Uncertainty, and Profit
  
• Some Fallacies in the Interpretation of Social Cost, Quarterly Journal of Economics
  
• On the history and methods of economics
  

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