Frank Knight was a social philosopher that wrote about philosophy more than technical economics. The economy is made of people not numbers. LongTop Financial showed us the folly in depending too much on numbers to predict what people will do. But still these new economist lay it on thick. This is why the vast majority of them can't trade.
George Stigler, another one of Knights students spoke of him and Friedman arguing at lunch because knight said: "A competitive enterprise system inherently leads to a cumulative increase in the inequality of the distribution of income." Friedman would argue the contrary and make some good points and Knight would back down only to state the same thing the next time they had lunch.. The state of affairs we find ourselves in as a country now lends credence to what Dr. Knight was preaching.
But Dr. Knight was no enemy of capitalism he just knew it had flaws.
Paul Samuelson, yet another one of Knight's students said: "If Milton Friedman is one of those optimist who believes capitalism is the best of all possible worlds, Dr. Knight is one of those pessimist that is afraid that this is indeed the case." In my favorite economic essay ever written the Ethics Of Competition, Dr. Knight made points that are still sharp as ever 89 years later saying:
"The desire for wealth takes on more or less the desire to capture ones opponents pieces or cards in a game. An ethical criticism of the industrial order must there fore consider it from this point of view... In so far as it is a game, what kind of a game is it?
There is no doubt that a large amount of radical opposition arises in this connection. The property less & ill paid masses protest not merely against the privation of a low scale of living but against the terms of what they feel to be an unfair contest in which being defeated by the stacking of the cards against them is perhaps as important to their feelings as the physical significance of the stakes which they lose."
This is the occupy movement described to a tee!!! For the most part people don't care that someone is rich it's how they get rich. And more importantly how pompous and oblivious they are to how they got that way. Especially when you think about the reverse Robin Hoodness way the stimulus packages were executed.
A tweet from @GSElivator lead me to write this blog post. Check it out:
"It's outcome (the game of capitalism) is a very inaccurate test of real ability. Fore the terms on which different individuals enter the contest are too unequal. The luck element more over is so large, far larger than any fairly successful participant would admit that capacity & effort may count for nothing. And this luck element works cumulatively as in any gambling games generally. The effects of luck in the first hand or round instead of tending to be evened up in accordance with the law of large numbers in the further progress of the game, confer on the player who makes an initial success a differential advantage in succeeding hands or rounds, and so on indefinitely."
This "initial success" more than likely has less to do with ability than with things totally out of their control. Things like your parents' station in life, your family that picks you up when you're down by encouraging old friends and family to loan you money, or even your skin color. For example, in the technology start-up space if you don't first raise money from friends & family it's nearly impossible to raise money anywhere else. And this isn't to say every person who's rich got it solely by luck. The Google founders come to mind, but for every Sergey & Larry there's 10 others whom the cosmos lined up just right for.
All this is not to say we shouldn't stay a capitalist nation. One person's unbridled pursuit of personal riches does help us all in a lot of ways. Lots of products have been improved or invented that make our lives better partly if not solely because of said pursuit. It's this animal spirit that keeps us ahead of China, and helped us defeat the U.S.S.R. in the cold war. It's also what lets us bounce back from shocks that would have destroyed less free nations. But it has it's short comings and it needs constant tweaking and vigilant tweakers.
Frank Knight taught 4 economic Nobel Peace prize winners and was the greatest economic thinker America has ever produced.
He took every great econ thinker of his time to intellectual war. Everybody! Hayek, Keynes, Pigou, Mises, The Austrians, Marxians, Ricardians, and anybody else you can think of. He took what was good from each and showed them what was bad with laser like logic. And although he ripped Economist that came before him he held them in high regard and made sure his students did also. His dislike for economic central planning was a sore spot during the New Deal years but he never wavered.
He was famously quoted as saying "Maybe there's no answer for the business cycle" so as one of his economic theories looks to be getting validated before our very eyes almost 90 years later, his disgust for New Deals could be next.
Or maybe Japan has already proven him right there?
Even if so, it won't truly get validation until it blows up here because Bernanke and the like have put forth some strong arguments in theory and practice that maybe there is an answer to the business cycle.....
Either way I can imagine him in heaven tapping Friedman on the shoulder pointing at the occupiers and the rest of the protesters around the western world and saying "Look Milton! I was right!"