Knight’s Early Life and Education
Frank H. Knight (1885–1972) was born in White Oak Township in rural McLean County, Illinois, not far from the twin cities of Normal-Bloomington, in the central part of the state.
Knight attended the University of Tennessee for his undergraduate education, before moving on to Cornell University for his graduate work. He obtained his PhD from Cornell in 1916.
After his schooling was completed, Knight’s first academic job was at the University of Iowa, where he taught economics from 1919 until 1927.
In 1927, Knight moved to the University of Chicago, where he taught until retiring and being given emeritus status in 1952.
Knight is considered to be the founder of the “Chicago school of economics.” He counted many future Nobel laureates among his students, including Milton Friedman, George Stigler, and James M. Buchanan.
While not as doctrinaire as the Austrian economists, Knight was committed to allowing the market to operate freely, unfettered by unnecessary government rules and regulations.
Knight is perhaps best known for his distinction—which lies at the heart of his first and best-known book (see below)—between risk and uncertainty.
According to Knight’s analysis, risk involves a situation in which the outcome itself is unknown but is known to be subject to a certain probability distribution. Uncertainty, on the other hand, involves both an uncertain outcome and an uncertain probability distribution.
Knight argued that these two fundamentally different kinds of situations give rise to different conditions of competition and different profit expectations.
During the 1920s, Knight engaged in a well-known public debate with Arthur C. Pigou about the problem of social costs.
Knight is also famous for his contribution to the argument in favor of toll roads, noting that privately owned roads would set tolls to reduce congestion to its efficient level.
Knight later extended this reasoning to the analysis of traffic equilibrium, in general, summarizing his fundamental idea as follows:
Suppose that between two points there are two highways, one of which is broad enough to accommodate without crowding all the traffic which may care to use it, but is poorly graded and surfaced; while the other is a much better road, but narrow and quite limited in capacity. If a large number of trucks operate between the two termini and are free to choose either of the two routes, they will tend to distribute themselves between the roads in such proportions that the cost per unit of transportation, or effective returns per unit of investment, will be the same for every truck on both routes. As more trucks use the narrower and better road, congestion develops, until at a certain point it becomes equally profitable to use the broader but poorer highway.
In 1947, Knight became one of the co-founders of the free market–oriented Mont Pèlerin Society, originally based on Lake Geneva, in Switzerland.
Knight’s Major Publications
“Cost of Production and Price Over Long and Short Periods,” Journal of Political Economy, 29: 304–335 (1921).
Risk, Uncertainty, and Profit (1921).
“Some Fallacies in the Interpretation of Social Cost,” Quarterly Journal of Economics, 38: 582–606 (1924).
The Economic Organization (1933).
“‘What is Truth’ in Economics?,” Journal of Political Economy, 48, 1–32 (1940).
“Fact and Value in Social Science,” in Ruth Nanda Anshen, ed., Science and Man: Twenty-four Original Essays (1942).
The Economic Order and Religion, with Thornton Ward Merriam (1945).
“The Role of Principles in Economics and Politics,” American Economic Review, 41: 1–29 (1951).
“Laissez Faire: Pro and Con,” Journal of Political Economy, 75: 782–795 (1967).
Selected Essays by Frank H. Knight, Volume 1: “What is Truth” in Economics?, edited by Ross B. Emmett (1999).
Selected Essays by Frank H. Knight, Volume 2: Laissez Faire: Pro and Con, edited by Ross B. Emmett (out of print) (1999).
Selected Books about Knight and the Chicago School
Applebaum, Benyamin, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society (2019).
Cowan, David, Frank H. Knight: Prophet of Freedom (2016).
Ebenstein, Lanny, Chicagonomics: The Evolution of Chicago Free Market Economics (2015).
Emmett, Ross B., Frank Knight and the Chicago School in American Economics (2009).
Emmett, Ross B., ed., The Elgar Companion to the Chicago School of Economics (2010).
Nash, Stephan John, Cost, Uncertainty and Welfare: Frank Knight’s Theory of Imperfect Competition (2018).
Overtveldt, Johan Van, The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business (2007).
Skousen, Mark, Vienna and Chicago, Friends or Foes?: A Tale of Two Schools of Free-Market Economics (2005).