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Pat Gunning suggests that Marshall had a more "Weberian ideal
type" notion of perfect competition that Knight. I would disagree,
although Knight's understanding of the relation between theory and
reality changes several times in his career and so it is not possible
to give one "Knightian" position on this.
In Risk, Uncertainty and Profit, Knight seems to adopt what we
could call a method of successive approximation: the assumptions
of theory are abstractions (we subtract elements of reality to get to
theory), and, after analysis is complete, we begin the process of
adding the elements of reality removed by abstraction back in.
Hence, his treatment of human knowledge, which is for him the
most important element of reality removed by the abstractions of
economic theory. So far, Pat is right.
However, later in Knight's career (the mid-1930s) he moves closer
to a Weberian ideal type analysis. Of course, Knight's reading of
Weber is instrumental in this. Read "statics and dynamics"
(German 1930, English 1935) for his ideal type reading of economic
theory: there is a gulf that cannot be crossed between theory and
reality. Theory is useful, however, because it creates an
idealization of an aspect of reality which we need to understand to
make sense of it all.
Later in life, his language on economic methodology shifts back
and forth between abstraction and idealization notions.
BTW, Knight's essay "statics and dynamics" is important here in
another regard: Barkley's comments on the Austrian propensity to
view the equilibrium process optimistically. Knight clearly says
there is no evidence that real processes will move toward
equilibrium, given the nature of human knowledge.
Ross Emmett
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