----------------- HES POSTING -----------------
Thanks, Ross, for your interesting comment. When I wrote of
Lawrence's "ideal type" interpretation of Marshall, I was referring to
Lawrence's claim that Marshall regarded a model of an economy
that assumes perfect knowledge as an ideal type. I supported this
claim. I went on to write that I would not support the same claim
about Knight. I would go on to say that, to Knight, the model has a
different function, that of the counterfactual.
As I understand you, you do not object to this interpretation so
long as it is based on the early Knight who wrote Risk, Uncertainty
and Profit. But you seem to argue that Knight changed his views.
Among other things, you use his discussion in the paper "Statics
and Dynamics" to support your argument. You write that in that
paper, Knight argues that "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."
I agree with you that Knight's paper is important. I have had
occasion to return to it several times in my efforts to understand
Knight himself and American economics during the first half of the
20th century. I suspect that my understanding of Knight's message
is somewhat different from yours, however. In my view, Knight does
not argue in this paper that there is a gulf between theory and
reality, although there is a sense in which this is a truism and
would not be denied by anyone. Knight argues that equilibrium
theory, and in particular the equilibrium theory suggested by the
analogy with mechanics, probably ought to be rejected when
discussing historical change and progress. If one wants to
characterize this by referring to a gulf, he might say that there is a
gulf between theory which assumes a mathematical equilibrium or
a tendency towards it and the goal of understanding or interpreting
economic history.
I don't see anything particularly extraordinary about this claim.
What is interesting to me about the article is the discussion that
leads up to it. Knight decides to first write extensively about how
the theory of mathematical equilibrium is indeed relevant to
understanding the Marshallian very short run, short-run and long-
run models of economic interaction. As Knight recognizes, these
models disregard progress, growth and change. It follows, although
Knight does not say this, that if one's goal is to understand
progress, growth, and change, Marshall and his micro equilibrium
models are irrelevant and even distracting and harmful. Since
progress, growth, and change are the hallmark of the free
enterprise system, one might go on to infer that Marshall is
irrelevant to understanding that system. This would be an
extremely harsh criticism. The fact that Knight does not come right
out and say this attests to his style rather than to ambiguity,
wouldn't you agree?
An alternative reading of Knight's focus on Marshall is that he
regards Marshallian theory as relevant to understanding various
economic institutions. However, to read Knight in this way is to
assume that he was not a precursor of Coase and the new
institutional economics. This may be an accurate reading, however,
and because I am not a scholar on Knight, I defer to you since you
are in the best position to provide other evidence.
There is also evidence in the article about Knight's recognition of
the use of equilibrium as a counterfactual. I have argued in
unpublished works that this use was introduced by Clark. In the
opening paragraph of the paper, Knight writes this about the terms
static and dynamic:
"...Marshall's usage is typical; he constantly uses the terms
"static" and "dynamic," and kindred expressions like "ceteris
paribus" and "unchanging general conditions of economic life," and
repeatedly insists on the importance of clearness in regard to
them; but he nowhere offers a complete list of the static data, or
"other things," or attempts a clear statement of the principles at
issue. There are exceptions of course; notably the work of J. B.
Clark, Schumpeter, and the mathematical school of Walras and his
successors."
The paper, however, is not about Clark's or the others' uses of the
term. It is about Marshall's use and Knight assumes that this use
is based on an analogy with mechanics.(see the first and second
paragraph of the paper)
So I take it that Knight is writing in his "Statics and Dynamics"
paper about Marshall's mathematical conception of equilibrium
based on mechanics. I believe that he was writing about a different
kind of equilibrium when he described perfect competition in Risk,
Uncertainty and Profit. In his 1957 preface to the reprint, he writes:
"...Completely rational and informed behavior by everyone in a free
economy would make money costs equal to selling prices and
distribute the whole product among the productive agents
participating. Universal foreknowledge would leave no place for the
"entrepreneur." His role is to improve knowledge, especially
foresight, and bear the incidence of its limitations. Thus an essay
on the theory of profit becomes an analysis of the price economy,
with special reference to the entrepreneurial function and income..."
(fourth paragraph from the end.)
As I read this, he seems to be confirming his use of the perfect
competition model as a counterfactual. In light of this and my
interpretation of the "statics and dynamics" paper, I am led to see
a great deal more consistency in Knight's thought about this
subject than you seem to.
As many readers know, I have published quite a bit about this
concept of the entrepreneur. References and downloads are
available from my subjectivist home page, which is accessible from
my main home page, listed below.
Pat Gunning
Sultan Qaboos University
------------ FOOTER TO HES POSTING ------------
For information, send the message "info HES" to [log in to unmask]
|
