Frank Knight and Institutionalism

Abstract

In the “standard” history of economics, Knight was positioned as an “orthodox” economist who contributed to the development of neo-classical economics, and as “an ideological opponent of institutional economics.” Indeed, Knight took a critical attitude to the attack on “Traditional Economics” by American institutional economists, especially in the 1920s. However, in recent years, the “heterodox” elements and affinities with institutionalists of his work have been emphasized by certain studies. Moreover, several times he called himself an “institutionalist.” The question we have to ask is why (and how) Frank Knight, who has institutionalist elements, criticized his contemporary American institutionalists. The purpose of this paper is to answer this question by examining his articles in the context of the American economic thought of his day.
Knight agreed with most of his contemporary institutional economists regarding the necessity for a “reconsideration” of Traditional Economics. However, he criticized the institutionalist criticism of Traditional Economics as being “irrelevant, ” because, he said, they didn't understand the significance of deductive theory. Knight recognized the limitations of deductive theory; nevertheless, he emphasized its meaning in economics. Knight although criticized the institutionalists regarding their attempts to make economics more “scientific” like other natural sciences. He argued that this claim stood on the misunderstanding of the difference between natural science and social science. Knight emphasized that social science addresses many elements which are irrelevant in natural science. Knight argued that economics is not only a science but also an art. In addition, he positioned institutional economics positively as a “philosophy of history, ” which treats the long-term changes in the datum of deductive and applied economics as the object of consideration.
It is important to note that clarifying such a methodological position as Knight's may help us to understand why his main themes shifted from economics, in the narrow sense, to the historical and philosophical consideration of social economic systems. Since the mid-1930s, this shift has reflected the historical changes of western civilization after the emergence of Fascism and the New Deal, which comprised the long-term changes in the datum of economics. His discreet attitude, which placed both deductive economics and institutional economics in their proper positions, isolated him from both the mainstream institutionalists and the neoclassicists. However, his methodological position itself was consistent throughout his academic life. His economics, in the narrow sense, and the institutional economics defined by Knight, held a common value in his economic thought.