Frank Hyneman Knight

Frank Hyneman Knight was an American economist who is considered the main founder of the “Chicago school” of economics.

Knight was educated at the University of Tennessee and at Cornell University, where he obtained his Ph.D. in 1916. He then taught at the University of Iowa (1919–27) and at the University of Chicago (1927–52), becoming an emeritus professor in 1952. Among his more notable economics students were future Nobel laureates Milton Friedman, George Stigler, and James Buchanan.

Knight’s book Risk, Uncertainty and Profit, published in 1921, is one of his most important contributions to economics. In it, he makes an important distinction between insurable and uninsurable risks. According to Knight, profit—earned by the entrepreneur who makes decisions in an uncertain environment—is the entrepreneur’s reward for bearing uninsurable risk.

Knight also produced a monograph entitled The Economic Organisation, which became a classic exposition of microeconomic theory. Its lucidity in perceiving logical distinctions may have been due to Knight’s early training as a philosopher, which made him skeptical of much economic theory.

Another of Knight’s important contributions to economics was his 1924 article “Fallacies in the Interpretation of Social Cost,” in which he challenged A.C. Pigou’s view that traffic congestion justified the taxation of roads. If roads were privately owned, wrote Knight, then the profits realized from roadway tolls would help reduce congestion and thereby make government intervention unnecessary. This insight remains part of the conventional economic wisdom.

Knight wrote extensively on liberal forms of social organization, criticizing attempts at social engineering. In one of his most famous speeches, his 1950 presidential address to the American Economic Association, he delivered a scathing yet humorous attack on government-imposed price controls. He was also a leading critic of the Austrian school of economics and its theory of capital.