Frank Knight and the Place of Principles in Economics and Politics

Published May 13, 2021

It is sometimes necessary to recall the old adage that the more things change, the more they stay the same. That never seems truer than when turning to the character and content of economic and social policy issues in modern America. Every time it seems that one of the collectivist confusions and fallacies has been once more shown to be wrong by argument and evidence, it rises up in some slightly new rhetorical dress.

We are likely to be faced with a lot of this from the new Joe Biden administration. Not that we did not have a goodly amount of it with the recently outgoing Donald Trump administration. Trump offered us a renewed hodge-podge of neo-mercantilist domestic and international trade policies. Trade wars were good and “fun,” we were told, as U.S. supply chains with other countries around the world were disrupted and made costlier by import tariffs and other trade barriers placed in the way of freer exchange between American producers and consumers and the rest of the world.

Trump huffed and he puffed in attempts to bully U.S. private enterprises not to move production facilities overseas or to relocate them back in the states, or to pressure American businessmen to reopen or move domestic production to places around the country where he wanted them for political purposes.

Not a dime’s worth of difference and Trump’s defeat

At the same time, Trump and most Republicans showed no intention of reducing or abolishing the entitlement programs of the interventionist-welfare state. Oh, they still used the anti-statist rhetoric sometimes on the campaign trails, but in the practical matters of the redistributive state, they demonstrated, as they have for decades, that there is not a dime’s worth of difference between them and the Democrats on matters of social and economic liberty.

Three years ago, Trump told his cabinet executives during a budgetary meeting that the American people liked their Social Security and Medicare benefits, so his administration would give the people what they wanted. That way he could buy his way into a second term in the White House in 2020. He might have been right, if not for the coronavirus and the consequences of his own policies and those of the state governors in response to the fear-mongering that permeated the news, social media, and all the political outlets of information.

Shutting down an entire country through lockdowns that stop production, throwing people into unemployment, and ruining retail businesses by ordering everyone to stay at home and not go shopping could do nothing but wreak havoc on the entire nation. Lies and misinformation about the nature and dangers from the virus, and bureaucratic central-planning snafus in restricting or hampering private-sector solutions to the need for medical equipment in hospitals and protective gear and products, were additional layers of disaster and disruption.

Given how many people around the United States found Trump’s persona repugnant and repulsive, the economic chaos of 2020 tipped the balance to ensure his defeat to Joe Biden in the November election. Trump ended up a member of his own “loser” pigeonhole category. He may have labeled Biden, “Sleepy Joe,” but the election outcome made him, “Donald the Dumped Who Had a Great Fall.”

Joe Biden and the push for a radical progressive agenda

Unfortunately, the Biden administration offers no “truth and light” for friends of freedom. His agenda is merely to make believe that the last four years never happened and proceed with the plans and policies that were expanding the intrusion of government into American society during the preceding Obama years, during which Biden served as vice president.

We are seeing the electoral musical chairs of changing who sits in the positions of political power, privilege, and plunder, while leaving the essence of the system and the ideas behind it untouched and unchallenged. Politics in modern America remains grounded in the four “C”s: command, control, compulsion, corruption, regardless of who wins elections every two, four, and six years.

The Nation magazine may be at the more radical end of the American “progressive” and “democratic” socialist movement today, but it serves, sometimes, as an indication of the direction that those on the Left wish to pursue in an America made to be on the “right side of history,” meaning more and more collectivist. For instance, for their January 4, 2021, online issue, the editors of The Nation called upon a number of “social justice” activists to lay out the plans of action that those with voices and influences in the Biden administration are expected to push during the first year of Biden’s term in office.

There is a demand for more direct, federal control in dealing with the coronavirus; but it seems that to successfully do so, the anti-pandemic central plan has to include “constraining corporate power, expanding Medicare coverage, and investing in robust clean energy infrastructure.” Who knew that to stop the spread of a virus and to distribute a vaccine, the government needs to command the retrofitting of buildings, bridges, and backyard BBQing to guarantee “clean energy”? I did not know that refined oil in the underground tank below a gas station was a virus “super-spreader,” did you? You learn something new every day.

One of The Nation authors says that what America needs to protect the Earth is an Office of Climate Mobilization, modeled after the New Deal programs of Franklin D. Roosevelt in the 1930s, directing industry, job creation, and employment guarantees for a “clean” planet, fostering a sense that we are all in this together both within the United States and the rest of the world.

Income inequality, racial injustices, and social equity require the remaking of America with coerced redistributions and planning of virtually all corners of human relationships. What if the Biden administration does not fully endorse and implement this huge agenda for a far more totally collectivist, planned, and politically paternalistic society? One other contributor declares, “If Biden is not inclined to embrace our goals, well, then, let’s go out and make him do it.” So, a Bidenian “moderate” collectivism will be forced to adapt a far more radical collectivism — with the implication of more threatening means to achieve utopia.

This political dogmatic irrationality and danger to a free society is nothing new. Seventy years ago, in March 1951, the American Economic Review published the association presidential address that had been delivered the previous December 1950 by internationally renowned University of Chicago economist Frank H. Knight (1885–1972). Famous for his classic work, Risk, Uncertainty, and Profit (1921), Knight’s American Economic Association address was titled “The Rôle of Principles in Politics and Economics.” He explained the situation in matters of economic theory and policy in those years not long after the end of the Second World War:

I have been increasingly moved to wonder whether my job [as an economist] is a job or a racket…. The critics, aggressors, have more or less explicitly advocated the abolition of an economics of principles and its replacement by almost anything, or everything else, other than principles if they can be found….

The latest “new economics” and in my opinion rather the worst, for fallacious doctrine and pernicious consequences, is that launched by the late John Maynard (Lord) Keynes, who for a decade succeeded in carrying economic thinking back to the dark age….

The same period of history has also seen a growing disregard for free economic institutions in public policy — increasing resort to legislative and bureaucratic interference and control, the growth of pressure groups employing both political and “direct” action, to get what they want, and with all this the debasement of the state itself, completely in much of the European world, from free forms to ruthless despotism.

Common-sense understanding and rational economic thinking all seemed to be out the window. Knight said that it had long been his habit to explain to his students the “sinister” significance of wrong-headed ideas about trade protectionism or “the perpetual popular demand for making capital cheap by manufacturing money; and for creating a demand for labor by enforcing all sorts of inefficiency, waste and even destruction.”

For the most part, teaching the fallacies in these things was not difficult for others to follow, if people were willing to see it. Instead, he was finding far too many people accepting “new and depressing” examples of “arbitrary price-fixing.” It should be common sense, with a little bit of thinking, that fixing a price above or below its market level will, respectively, create wasteful surpluses or unnecessary shortages.

What had helped to foster such misunderstandings and confusions were attitudes and rationales insisting that the only “principle” worth following was that there are no principles worth knowing or following, other than the expediencies of the changing political moment. But if not fleeting expediencies, what principles should be followed, and particularly those that economics may offer as guides to government policy?

The principles of and reasons for freedom

Knight argued, “Economic principles are simply the more general implications of the single principle of freedom, individual and social, i.e., free association in a certain sphere of activity…. The free association in question is exchange, in markets, an instrumentality necessary to specialized production, and distribution of the joint result.” He suggested that there were four general reasons for placing freedom and free association as the corner-stone principles of sound thinking on social and economic matters:

First, and most commonly cited, it is instrumental to the realization of other ends accepted as rightful. Modern thought locates value in the individual rather than making him an instrument to the purposes of the state and its ruler. And it is assumed that the normal adult person is ordinarily a better judge of his own interests, values, and well-being than any agent of society (bureaucrat) given authority over him is likely to be.

Second, freedom itself is a thing men want, and have a right to, even possibly at the cost of a formally better management of one’s affairs by an overlord of any kind; the normal person prefers within wide limits to “make his own mistakes.” Third, it is a “value,” a thing that the individual ought to want, even ought to have if he may not choose it, a part of the modern ideal of the dignity of the person…. Finally, a fourth, “pragmatic” reason, for extending the scope of freedom; policing is costly to the public authority and coercion itself needs to be economized….

Assuming that men have a right to want and strive to get whatever they do want, and to have the taste and “higher” values they do have, as long as their conduct does not infringe the equal rights of others, the business of the economics of principles, of utility, productivity, and price, is to explain that, and how, the organization through buying-and-selling enables everyone to do whatever he wants to do (whether rational or not, as judged by anyone else) is many times more effective than would be possible if each used his own means in a self-sufficient economic life.

Knight was confident that if, along with these principles, people could be persuasively taught that in a social setting of free and voluntary exchange, a person was not only effectively producing for and bettering himself, but was also indirectly producing for the needs and betterment of others, “it would surely put an end to all the insane or diabolical revolutionary propaganda and most of the stupid criticisms of the ‘capitalist system’ that menace our free institutions.” After all, he also pointed out, “The much-abused ‘profit-system’ is of course merely a pattern of cooperation, on the terms most satisfactory to the parties concerned, or the only terms they can agree upon…. The only agreement called for in market relations is acceptance of the one essentially negative principle, that the units are not to prey upon one another through force or fraud.”

Not expecting too much from the state and fearing political power

The companion thought to all of this, Knight stated, is that people should be told, “don’t expect too much of ‘the state’; be very critical in appraising the prospects for good and for harm to result before calling on ‘Leviathan’ and giving him power.” Once you give such political control to those in positions of power in government, they will have to either use force to make others bend to their plans and restrictions, or attempt to “rule through our minds and wills” by manipulating and controlling information, knowledge, and interpretations of everything that might hinder or prevent the political powers-that-be from having their way with us. Control over the educational system, he pointed out, “is the first aim of the totalitarian.”

It should be noted that Knight was not a proponent of laissez-faire. In many ways, very much to the contrary. Indeed, arguments he made in the 1930s and 1940s for “exceptions” to unfettered free markets and their relative income outcomes, were consistent with the direction of much of the postwar interventionist-welfare state. He was a compulsive “contrarian” and would constantly look for things to disagree with both in economists who were more free-market than he, and in socialists, communists, fascists, and welfare statists.

He wrote dozens of reviews and essays of other people’s works. He seemed to find it psychologically almost impossible to say he agreed with the arguments of others. He always insisted on differentiating the intellectual products of his own mind from those of everyone else, even when the nuances between his and theirs seemed fairly thin.

But in the setting and circumstances of 1951, when the United States was embroiled in a “hot war” with Chairman Mao’s China in Korea; when half of Europe had fallen behind the Iron Curtain of Soviet control with Stalin as its dictator in Moscow; and with the demands for increasing commands, controls, and centralized planning in the United States by the “progressive” intellectuals and policy proponents of that time, Knight’s concern was for the preservation of the principles and practice of a fundamentally free-market–based society, regardless of “exceptions to the rule” that he might harbor in his own mind.

He did not hesitate to state what he considered to be the issues at stake: “The danger now, in the world and in the West, is that freedom will be thrown away, for a promise or hope of [social] justice, but with an actual result of neither justice nor freedom, and very likely the suicide of civilization in war without rules. The world could be heading toward a new age of essentially religious wars, ideological wars,” the reason being that collectivist ideologies such as communism demand social justice “under absolute authority, ignoring freedom.”

In this setting, Knight feared that “people have too much faith in positive action, of the nature of passing laws and employing policemen.” For himself, “I mistrust reformers. When a man or group asks for power to do good, my impulse is to say, ‘Oh, who ever wanted power for any other reason? and what have they done when they got it?'”

New collectivism of blended Marxism and Nazi-like racialism

I would suggest that we are in a similar situation and dilemma today. Today’s collectivism is a peculiar and perverse blend of Marxism and Nazi-like racialism, in which the traditional socialist “class conflict” analysis has been transformed into a race- and “gender”-based identity politics and cancel-culture ideology committed to undermining and overthrowing the vestiges of what remains of a free, liberal, and market-oriented society.

Offering false narratives about the nature of the capitalist system, misinterpreting the causes behind the financial and housing crisis of 2008–2009, using the death of George Floyd while in police custody in May 2020, and conjuring up apocalyptic fantasies about the environmental end of the world, these new totalitarians are insisting that markets are socially oppressive and inescapably racist and sexist in their exploitation of all in the world outside of a narrow and privileged white male elite.

They advocate a centrally planned society to fight global warming; they insist on tribalization of human relationships based on race and “gender” quotas in all aspects of social interaction; they want a fascist-like command-and-control of all business and employment; and they demand the overthrow of virtually all the traditional ideas and ideas reflected in the Declaration of Independence and the U.S. Constitution.

A central aspect of claiming the desirability and workability of such a “brave new world” is the implied denial of all of what Frank Knight had laid out as the principles and practice behind the (classical) liberal system of personal freedom, economic liberty, and civil rights as understood in the American Bill of Rights.

Personal freedom, it is asserted, is merely the smoke screen for discrimination and bigotry; economic liberty is the watchword for abuse of “people of color” and oppression of women and “alternative genders” by a handful of property- and wealth-owning white males; the Bill of Rights is a tool for protecting “hurtful” and “harmful” words and actions that reinforce the injustice of white male domination of society.

The new dark age of anti-economic freedom

The laws of economics, starting with the idea and logic of individual choice and decision-making, to the interactive coordination of mutually dependent and supporting suppliers and demanders in a competitive market, to the incomes earned by serving others that enable the producer to be a consumer as well, have no place on that view, whether it be those older forms of collectivism when Knight wrote in 1951 or the newer ones threatening the remnants of a free society today.

What we are facing is our own version of a return to a “dark age” of backward thinking about economics, and freedom more generally, just as Knight warned in the context of the then-dominant Keynesian Revolution. Ignorant and irrational ideas abound about prices and competition and market harmonies are once more everywhere, especially if you just listen carefully to the cases for a Green New Deal, a fascist-like notion of corporate social responsibility, or the aggressively pushed tribalism of race and “gender” group-based social justice.

One of the four principles of freedom that Knight said was uniquely essential to the Western idea and ideal of liberty was that freedom is something that the individual ought to want even when he does not seem to want it. If there is to be a dignity for man, it requires a desire for and a reality of human liberty, a social setting in which, precisely because people want their own freedom, they will honor and respect it in others. For without such reciprocity society becomes a slave state of rulers and ruled in which those controlled by others are treated as less than willing, thinking, valuing, and acting free human beings.

It becomes a central task for all those who cherish and value freedom to inform, reason with, and persuasively make the case to our fellow human beings that freedom is a good in and of itself for each and every one of us, and that through the logic of the free marketplace it is also the means by which each of us benefits others in the peaceful and honest quest of improving his own life as he defines it.

This is not an impossible task. For untold centuries, the vast majority of human beings took it for granted that it was right, good, and necessary for a handful of others to rule over and command most things in their lives. Servitude and political paternalism were the “self-evident” way of life for humanity.

But over a few recent centuries, this all slowly was ended and was turned around. Slavery and servitude came to be seen as an “unnatural” way for a human being to live. The words in the American Declaration of Independence rang true for most people in Colonial America, for many in Great Britain, and for a growing number in Royal France because the notion of humanness, humanity, and the dignity of man had been nurtured with the revolutionary idea that the individual person was unique and rightly possessing rights that no one, even powerful kings, could take away. It changed the world.

The counterrevolutions of collectivism over the last 150 years, including our modern ones, have attempted to overthrow those victories and achievements and successes of liberty in practice. This counterrevolution can be repulsed and reversed. But it will require the type of defenses of the principle of freedom in politics and economics that Frank Knight called for and reasoned about seventy years ago. We must cultivate a new age of enlightened liberty so as not to fully sink into a new dark age of tyranny and despair.

[Originally posted on Future of Freedom Foundation (FFF)]