----------------- 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]