Frank Knight

Frank Knight

Frank Hyneman Knight (November 7, 1885 - April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates Milton Friedman, George Stigler and James M. Buchanan were all students of Knight at Chicago. Ronald Coase did not take courses from Knight but said he was a major influence on his thinking.

Frank H. Knight (B.S. and A.M., Tennessee, 1913; Ph.D., Cornell, 1916) was born in McLean County, Illinois, in 1885. Most of his academic career has been spent at the University of Chicago, where he is the Morton D. Hall Distinguished Service Professor, Emeritus, of Social Science and Philosophy. Knight is one of the world's leading economists, having made significant contributions to many problems of both economic theory and social philosophy. He is best known for his Risk Uncertainty and Profit, a monumental study of the role of the entrepreneur in economic life. In 1950 he was president of the American Economic Association and in 1957 the recipient of its coveted Francis A. Walker Award, given "not more frequently than once every five years to the living (American) economist who in the judgment of the awarding body has during his career made the greatest contribution to economics."

Knight is best known as the author of the book Risk Uncertainty and Profit, based on his Ph.D. dissertation at Cornell University. In that book, he carefully distinguished between economic risk and uncertainty. Situations with risk were those where the outcomes were unknown but governed by probability distributions known at the outset. He argued that these situations, where decision making rules such as maximising expected utility can be applied, differ in a deep way from "uncertain" ones, where the outcomes were likewise random, but governed by an unknown probability model. Knight argued that uncertainty gave rise to economic profits that perfect competition could not eliminate.

While most economists now acknowledge Knight's distinction between risk and uncertainty, the distinction has not resulted in much theoretical modelling or empirical work. A possible exception is the "Markets from Networks" model developed by sociologist Harrison White in 2002.

Knight also famously debated A.C. Pigou about social costs. He also contributed to the argument for toll roads. He said that rather than congestion justifying government tolling of roads, privately owned roads would set tolls to reduce congestion to its efficient level. In particular, he developed the argument that forms the basis of analysis of traffic equilibrium, and has since become known as Wardrop's Principle:

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.