This message was originally sent in the midst of the discussion a week ago, but email address issues caused it not to be circulated. I’m sorry to be posting it so late in the discussion, but had been encouraged by private email correspondence with some of the contributors to add it.

Hi all,

Keith Tribe’s mention of Weber on “different forms of economic organization” is historically important. Frank Knight’s “little textbook” that Robbins/Hayek encouraged students to read (The Economic Organization ) is explicitly Weberian at the beginning (never formally published by Knight, btw, but originally written in 1924-25 – right after Mises’ book, although I have no evidence that Knight read Mises at that point; he was reading the German historical school, and translated Weber’s General Economic History two years later). The first chapter (I will remind you that Gary Becker kept that chapter on Chicago’s first Price Theory course syllabus until 2012) is entitled “Social Economic Organization” (in its original version, the title included “… and its Five Primary Functions”). “Economics deals with the social organization of economic activity” (emphasis in the original), Knight tells us in the chapter’s intro. The chapter explains the “meaning of organization,” the “five functions of an economic system” (here is the list Samuelson picked up and carried forward, still used in many texts), the advantage/disadvantages of organization, and then the “types of economic organization” – caste, autocratic/military, anarchism, democratic socialism, and exchange. For our purposes here, the second function is where the ambiguity emerges: “The Function of Organizing Production” breaks down into two parts: a) the “assignment or allocation (emphasis in the original) of the available productive forces and material among the various lines of industry”; and the “effective coordination of the various means of production in each industry … as will produce the greatest result.”

The context of the entire discussion is that society has to choose what form of economic organization it will use. The discussion of the five functions is cast, then, as functions that “society” as an entity has to choose to fulfill. In each function, the language is parallel – the first function, for example, indicates that society has to choose how to establish a “social value scale”. A market society “chooses” to use the scale of value established through private choices in market interactions to fix standards and solve the efficiency problem. As someone in the discussion yesterday (8/1) mentioned, “allocation” is by a process – the price system – in a market form of economic organization, while “allocation” is by fiat of a ruler in an autocratic system. In “democratic socialism” Knight tells us, a social value scale is determined by democratic political choices, and carried out by social functionaries.

The ambiguity of Knight’s discussion bothered Jim Buchanan. I just finished an essay on Knight and Buchanan that includes discussion of this point (posted on my SSRN site). Buchanan objected to Knight’s functions because they presuppose, he argues that “society” is the chooser (look at “What Should Economists Do?” for the best attack on Knight about this, but it’s also in his 1987 Ethics article on Knight’s “economizing element” as a contributor to Knight’s ethical criticism of competition).

Buchanan argues, quite rightly I think, that Knight’s approach fits what Buchanan sees as the “constrained maximization” tradition’s approach to markets, which allows the substitution of a social chooser (a benevolent dictator who is as smart as Paul Samuelson) for market coordination. Buchanan complained that Knight never abandoned that tradition for a catallactic approach.

So now we can see why your interlocutor wants to insist that “organization” is close to “allocation.” For Knight, the two are not the same: organization is the larger concept, and includes at least four other terms beside allocation. And for Knight, there are 5 different ways we can socially organize our economic activity (not just 2!). 

Ross Emmett