Economists use a shorthand method to identify one another. They divide economic theory—and its practitioners—into various “schools” of thought.[1] One of the most famous collections of thinkers and theoreticians is the Chicago school, housed at the University of Chicago. The cofounder of this school, along with Jacob Viner, was Frank Hyneman Knight. Because of his position at Chicago and the quality of his students, Knight became quite influential, although today his name is generally unknown to the public.

Knight was born in southern Illinois in 1885, the first of 11 children. He attended several small Southern schools before enrolling at the University of Tennessee, where he earned his bachelor’s and master’s degrees in two years. He then entered Cornell University in 1913. After a year in the philosophy department, he switched to economics because his professors decided that his extreme skepticism would be more profitably employed there. His economics dissertation—“A Theory of Business Profit,” completed in 1916— was revised and published in 1921 under the title Risk, Uncertainty and Profit. It has become a classic in the field.

From his earliest days as a teacher, Knight’s defining approach to economic theory—and most everything else—was a hard-nosed, often entertaining skepticism. Despite his idiosyncrasies and curmudgeonly demeanor, Knight’s students continually bestowed on him the distinction of having greatly influenced their thinking. Among these students were empiricists Milton Friedman and George Stigler, whose own approaches to economic problem solving were often attacked by their mentor. Knight was opposed to the use of mathematical models stuffed with real-world data. He did not believe that prediction in economics was the benchmark against which theories ought to be judged. However, he did agree with one of his most famous students—Friedman—that theoretical assumptions were, by necessity, unrealistic. Many of his students disagreed with him on this and other points; yet as a teacher Knight must be judged a great success if for no other reason than that he taught four future Nobel Memorial Prize winners in economics: Friedman, Stigler, James Buchanan and Paul Samuelson. Knight himself would probably have gotten the award had he not died shortly after it was added in 1969. The recipient must be living when the award is made.

Knight and the Free Market

Knight leveled some corrosive criticisms at capitalism and, simultaneously, punctured Marxist and institutionalist anticapitalist economic theory. He was especially sarcastic when criticizing egalitarian claims because he viewed society as a complex game in which there would always be winners and losers.[2] But he also believed that, in the long run, income disparities would widen under capitalism. Although he sometimes backed down when pressed on the point, especially by Friedman, he never changed his mind about this important tendency of capitalism, at least as he saw it. Being suspicious of reform and all alternative systematic thinking about the economy, he finally defended capitalism on the completely pragmatic grounds that it may not be perfect, but it was better than all the alternatives suggested by its critics.

As Breit and Ransom (1971, 197) put it:

Like David Hume, he rejected the view that the solution of social problems is to be found by the direct approach to them. And like Adam Smith, he had little hope that social reformers or “do-gooders” would solve problems and he thus was willing to allow the markets to solve them.

Knight’s attitude of allowing markets to work out economic problems led him not only to criticize avowedly antimarket theorists such as Marx but also to respond to other types of market critics. One of his most famous responses was to the doctrine of market failure developed in A. C. Pigou’s famous 1920 book The Economics of Welfare. In that work, Pigou argued that examples of market failure were easy to find because of the pervasiveness of external costs and benefits that “spilled over” from market transactions. Pigou did not argue that each of these instances of presumed externalities automatically called for government to step in and regulate the market.

However, many economists who came after him enthusiastically used Pigou’s idea to push for more government market interventions. But Knight was not among them, and he responded to one of Pigou’s alleged examples of market failure so persuasively that Pigou removed it from subsequent editions of his book. In this case, Knight proved that Pigou’s road use example wasn’t a failure of the market at all but a failure of government to specify accurate property rights for scarce resources.[3] Over the ensuing decades, economists questioned in detail all cases of claimed market failure and began to search for examples of government failure as well.

Knight stood almost alone among his contemporaries in his eclectic support for the market process and in his position on what economics was ultimately about. He rejected the simple, utility-maximizing, libertarian–utilitarian approach to economic theorizing that characterized the majority view during his lifetime, especially at the University of Chicago. For Knight, the central issue was how freedom can be maintained given that people, using a highly flawed technique they call reason, continually develop alleged scientific utopias against which they measure actual outcomes. Knight’s critical arrows were aimed at not just Marxists but any thinker—especially an economist—who approached economic questions from any viewpoint other than Knight’s quasi-theological one.

For Knight, a sort of economic Calvinist, labor was not a mere disutility but gave life purpose. People did not always act out of self-interest, nor were their preferences somehow generated internally, nor were those preferences consistent over time. Where he and so many others saw a breakdown in the market order, or of “bourgeois society,” Knight alone attributed it to a breakdown in people’s morals. To him, social problems are almost always moral in nature, not structural or political. Ultimately, Knight supported the market on moral grounds, not efficiency ones; he believed freedom was itself the ultimate good, enabling people to trade with one another irrespective of their religious or cultural differences, based on their reasoning as to what is important and worth pursuing. What was missing from defenses of free markets, he thought, was a fundamental, moral brief supporting this social arrangement. He believed economists had failed to provide one because their concerns and methods did not allow them to see that their attempt to be “value free” was a sophisticated delusion driven by scientism.[4]

As Stigler writes about the place of economics in Knight’s view of the world, its primary function “is to contribute to the understanding of how by consensus based on rational discussion we can fashion liberal society in which individual freedom is preserved and a satisfactory economic performance achieved. This vast social undertaking allows only a small role for the economist, and that role requires only a correct understanding of the central core of value theory.” [5]

Legacy of the Chicago School

Knight is clearly the intellectual godfather of the Chicago school. Even students who disagreed with him on many issues relate that he was the professor who most influenced them during their days at the University of Chicago. The Chicago school is far from some monolithic set of beliefs to which all its members subscribe. Knight’s extreme skepticism and lack of slavish deference to authority became the twin pillars of the school’s long and storied approach to theory and policy, and that is Knight’s enduring legacy.


[1] Kuhn, Thomas S. (1996), The Structure of Scientific Revolutions (Chicago: University of Chicago Press). Alternatively, after Thomas Kuhn, economists refer to paradigms. A paradigm is a disciplinary matrix by which a group of people interpret the world around them.

[2] Formaini, Robert (1999), “Evolution of the Regulatory State: The Mixed Economy Viewed Through a Complexity Lens,” Journal of Private Enterprise 15 (Fall): 67–97.

[3] Breit, William, and Roger Ransom (1971), The Academic Scribblers: American Economists in Collision (New York: Holt, Rinehart and Winston), 192–96.

[4] Hayek, F. A. (1988), The Fatal Conceit, ed. W. W. Bartley (Chicago: University of Chicago Press), especially chapters 1, 4 and 5.

[5] Stigler, George (1987), “Frank Hyneman Knight,” in The New Palgrave: A Dictionary of Economics, vol. 3, ed. John Eatwell, Murray Milgate and Peter Newman (New York: Stockton Press), 55–59.