[An updated version of this biography can be found at Frank Hyneman Knight in the 2nd edition.]
Frank H. Knight was one of the founders of the so-called Chicago school of economics, of which Milton Friedman and George Stigler were the leading members from the fifties to the eighties. Knight made his reputation with his book Risk, Uncertainty, and Profit, which was based on his Ph.D. dissertation. In it Knight set out to explain why perfect competition would not necessarily eliminate profits. His explanation was "uncertainty," which Knight distinguished from risk. According to Knight risk refers to a situation where the probability of an outcome could be determined, and therefore, the outcome could be insured against. Uncertainty, by contrast, referred to an event whose probability could not be known. Knight argued that even in long-run equilibrium, entrepreneurs would earn profits as a return for their putting up with uncertainty. Knight's distinction between risk and uncertainty is still taught in economics classes today.
Knight made three other important contributions to economics. One was The Economic Organization, a set of lecture notes originally published in 1933. In it he lays out the circular flow model of the economy and emphasizes that investments will be made until the returns to investments in each use are equal at the margin. These elements still survive in textbooks today.
Another of Knight's contributions to economics was in his famous article "Some Fallacies in the Interpretation of Social Cost," in which he took on Pigou's view that congestion of roads justified taxation of roads. Knight showed that if roads were privately owned, road owners would set tolls that would reduce congestion. Therefore, no government intervention was required.
Knight's final contribution was his work on capital theory in the thirties. Knight criticized Böhm-Bawerk's view that capital could be measured as a period of production (see Böhm-Bawerk). Knight was seen to have won the debate over the Austrian concept of capital.
But Knight was much more than an economist. He was also a social philosopher, and most of his writings were in social philosophy rather than technical economics. A strong believer in freedom and a strong critic of social engineering, Knight worried that freedom would be undermined by increases in monopoly and in income inequality. George Stigler tells of Milton Friedman challenging Knight's view that inequality would increase, and Knight's relenting, only to take the same position at the next lunch.
Knight often despaired about whether even simple economic truths could be understood by the public. In his 1950 presidential address to the American Economic Association, Knight said:
Knight was an economics professor at the University of Chicago from 1927 until 1955, after which he was emeritus professor until his death.
The Economic Organisation. 1951.
The Ethics of Competition, and Other Essays. 1935.
Freedom and Reform: Essays in Economics and Social Philosophy. 1947. Reprint, edited by J. M. Buchanan. 1982.
"Cost of Production and Price Over Long and Short Periods," Journal of Political Economy vol. 29, no. 4 (1921): 304-335.
"Some Fallacies in the Interpretation of Social Cost." Quarterly Journal of Economics 38 (1924): 582-606.