Knight's Personal Oxymoron: Principled Pragmatism

I also spoke earlier of philosophizing, or preaching, in contrast with more objective discourse. A sermon should have a text, and I have found a suitable one in the gospel according to "Saint" the Marquis de Talleyrand-Périgord: The only good principle is to have no principles (le seule bon principe est de n'en avoir aucun). Talleyrand, to be sure, is not regularly listed among the evangelists. But he was in fact a bishop in the Church, and another churchman, of the civilized eighteenth-century French pattern, the abbot Galiani, had earlier stated the same creed. And anyhow, the saying suits my purpose as a text. It is, no doubt, usually enjoyed and dismissed as a witty cynicism; but I propose to treat it quite seriously, as a starting point. Not literally, I admit. It is an epigram; and an epigram has been defined as a half-truth so stated as to be especially annoying to those who believe in the other half. I wish to stress both halves, the value of principles as well as their limitations. Accordingly, I must reword the text into one of rather the opposite literal import. The right principle is to respect all the principles, take them fully into account, and then use good judgment as to how far to follow one or another in the case in hand. All principles are false, because all are true—in a sense and to a degree; hence, none is true in a sense and to a degree which would deny to others a similarly qualified truth. There is always a principle, plausible and even sound within limits, to justify any possible course of action and, of course, the opposite one. The truly right course is a matter of the best compromise or the best or "least worst" combination of good and evil. As in cookery, and in economic theory, it calls for enough and not too much, far enough and not too far, in any direction. Moreover, the ingredients of policy are always imponderable, hence there can be no principle, no formula, for the best compromise. That laws must be stated in sentences partly accounts for the familiar "principle," "the law is an ass." And if people don't have good judgment, or won't use it, it is "just too bad," for themselves and for others over whom they have power.

—On the History and Method of Economics, 256.

Is Economics a Science?

In spite of all the foregoing, there is a science of economics, a true, and even exact, science, which reaches laws as universal as those of mathematics and mechanics. The greatest need for the development of economics as a growing body of thought and practice is an adequate appreciation of the meaning, and the limitations, of this body of accurate premises and rigorously established conclusions. It comes about in the same general way as all science, except perhaps in a higher degree, i.e., through abstraction. There are no laws regarding the content of economic behavior, but there are laws universally valid as to its form. There is an abstract rationale of all conduct which is rational at all, and a rationale of all social relations arising through the organization of rational activity. We cannot tell what particular goods any person will desire, but we can be sure that within limits he will prefer more of any good to less, and that there will be limits beyond which the opposite will be true. We do not know what specific things will be wealth at any given place and time, but we know quite well what must be the attitude of any sane individual toward wealth wherever a social situation exists which gives the concept meaning. In the same way we know that in any productive operations on this earth there are some general relations between quantity of resources used and quantity of product turned out.

These principles are only less abstract than those of mathematics. It is never true in reality that two and two make four; for we cannot add unlike things and there are no two real things in the universe which are exactly alike. It is only to completely abstract units, entirely without content, that the most familiar laws of number and quantity apply. Yet no one questions the practical utility of such laws. They are infinitely more useful than they could be if they ever did fit exactly any single concrete base, since all that they lose in literal accuracy they gain in generality of application. By not being strictly true in any case they are significantly true in all.

—Selected Essays by Frank H. Knight, Vol. 1, 28–29.

Risk and Uncertainty Lead to a Theory of Profit

Our preliminary examination of the problem of profit will show, however, that the difficulties in this field have arisen from a confusion of ideas which goes deep down into the foundations of our thinking. The key to the whole tangle will be found to lie in the notion of risk or uncertainty and the ambiguities concealed therein. It is around this idea, therefore, that our main argument will finally center. A satisfactory explanation of profit will bring into relief the nature of the distinction between the perfect competition of theory and the remote approach which is made to it by the actual competition of, say, twentieth-century United States; and the answer to this twofold problem is to be found in a thorough examination and criticism of the concept of Uncertainty, and its bearings upon economic processes.

But Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated. The term "risk," as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different. The nature of this confusion will be dealt with at length...but the essence of it may be stated in a few words at this point. The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating. There are other ambiguities in the term "risk" as well, which will be pointed out; but this is the most important. It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all. We shall accordingly restrict the term "uncertainty" to cases of the non-quantitive (sic) type. It is this "true" uncertainty, and not risk, as has been argued, which forms the basis of a valid theory of profit and accounts for the divergence between actual and theoretical competition.

—Risk, Uncertainty and Profit, 19–20.

Socialism as an "Answer" for Business Cycles

With reference to the use of the cyclical tendency as an argument for collectivism, however—or any sweeping action by government outside the monetary field—two very important sets of facts should be pointed out. In the first place, with negligible exceptions, the business cycle does not work to the advantage of any significant group or interest in "capitalistic" society. On the contrary, practically everyone suffers heavily from it, incurring serious economic loss, if not privation. Hence the problem of cycle analysis does not arise out of and does not involve conflict of interest. This means that remedial action is a matter of economic understanding and of political intelligence and administrative competence, in matters of an essentially technical character. The situation would hardly seem to call for solution along lines which would involve the most intense conflicts of interest and would raise the most serious political problems in that regard, while, in addition, the technical organization problems in connection with establishing and operating a collectivist economy would presumably be of infinitely greater magnitude than those involved in the control of one detail of it, the monetary system.

The second set of facts relates to the nature of the problem as it would present itself to the government of a collectivist society. If a collectivistic, or socialistic, state is to preserve any of the traditional economic liberties of individuals, it also must operate on the basis of money and market transactions, with prices of products and of productive services controlled by competition, in essentially the same manner as in the enterprise system. The fact that the government would be the chief owner of productive wealth, and the "entrepreneur" in the great bulk of economic activity, would not change things in that regard....In any other sense, the argument for collectivism from the standpoint of the problem of the business cycle does not seem to have much force. The general presumption is that, as already suggested, the control of all features of a national economy by a central authority would present much greater difficulty than the control of one feature.

—On the History and Method of Economics, 225–26.