This is the best work of economic theory I have ever read. There is no work in economics that evinces better judgment on the main issues or that does a better job of balancing theory with a sense for the facts. Knight begins by defending theoretical (that is, deductive) economics. Unlike the economic rationalists, however, Knight does not believe that theoretical economics can lead to precise results. The application of the "analytic method" must always be "incomplete," he argues. Theoretical economics thus can only deal with "tendencies," that is, "with what 'would' happen under simplified conditions never realized, but always more or less closely approached in practice." This methodology Knight describes as "the method of successive approximations." Knight also warns of the dangers of rationalism and the necessity of constantly checking one's results against the facts. "When the number of factors taken into account in deduction becomes large, the process rapidly becomes unmanageable and errors creep in... It is better to stop dealing with elements separately before they get too numerous and deal with the final stages of the approximation by applying corrections empirically determined."

Armed with the method, Knight proceeds to tackle several important problems in economics, especially dealing with the theoretical construct of "perfect competition." By always keeping his head firmly within the empirically real, Knight is able to bring a great deal of sound judgment to a number of issues. Knight had a keen sense of human nature and how human beings behave in the real world of fact. He knew that most economists had made men out to be far more rational than they really were. Businesses, he argued, did not merely seek to meet the needs of the consumers; no, they sought to create new needs through innovation, advertising, and even a sort of manipulative hypnotism. In this, Knight argued, we find both progress and abuse, civilization and fraud. Knight also brings a good deal of sense to the problem of interest, demonstrating the psychological inadequacy of all time-preference theories of interest. But Knight's most important contribution consists in his analysis of the difference between risk and uncertainty. Risk, Knight argues, is a measurable probability that something could happen, like the probability that an individual will be struck by lightening or hit by a car. Uncertainty is a kind of immeasurable risk--e.g., predicting short term flucations in exchange rates. Knight's analysis is crucial to understanding economic reality. Knight's distinction between risk and uncertainty, for instance, explains why the rise of derivative securities in financial markets is so dangerous. Derivatives attempt to insure uncertainty, which is immeasurable, as if it were risk (which is measurable).

This is the standard work in the field, give or take some stuff Keynes wrote on risk and capital.

Transaction publishers should be congratulated for making this important book available. Knight has fair claim to be regarded, along with Joseph Schumpeter, as the greatest economist of the 20th century. The primary reason for Knight's greatness is his ability to synthesize economic theory with an empirical sense of actual economic reality. Unlike so many right-wing, pro-free market economists, Knight does not view economic reality solely in terms of abstract models of the market processes. He knows that there is more to economic reality than is to be found in the theories of supply and demand and consumer sovereignty. Although deeply symphathetic to the cause of freedom (including that old bugbear of the Left, economic freedom), Knight never shrinks from criticizing even pro-market ideas. This enables him to understand not merely the weaknesses in these ideas, but also their unique strengths.

Knight also manages to avoid the other major pitfall of economists, especially economists from the Left. He never becomes so excessively wrapped up in the empirical as to become interpretively obtuse. He understands perfectly well that, in the absence of theory, economic facts cannot be understood. He thus avoids the lamentable errors of left-wing economists who, noticing some fact which does not square with the laws of classical economics, decide to throw the entire classical system into the rubbish heap of refuted ideas. But economic laws, Knight would point out, are mere approxtimations measuring tendencies within the economic system.

Those who want to deepen their understanding of economics as it exists in the real world of fact rather than in the heads of shrill ideologues can do no better than to treat themselves to a perusal of "The Ethics of Competition."

For those reading this who may be unfamiliar with Mr. Knight, let me just say that he was responsible for creating the reputation of the "Chicago school" of economics, later popularized by Milton Friedman.

For those who might be prejudiced against the perceived conservative bent of the Chicago school of thought, I will hasten to say that these essays offer very little comfort for the defenders of consevatism. Indeed they offer little comfort to the holder of seemingly any position. The great strengths of his thought were in his great perception of the popular lines of political/economic thought of the 20th century, and his unapologetic criticism of all of these ideas.

This however, to me, is also the weakness of his thought. He seems to want to stand outside the fray, having no position of his own. This doesn't really get in the way of enjoying his essays though. I do have to admit that many of my thoughts about political ideas have been seriously challenged by this work and think that he brings a valuable contribution the debate about the future of American politics, even some 60 years after origianal publication

This is not a book for those looking for arguments to defend this or that ideological position. Frank Knight was far too critical and independent minded to ever be a defender of ideology. He had no interest in being a mere propagandist for free market economics or the mantras of classical liberalism. Although Knight regarded himself as an old-fashioned, nineteenth century liberal, he was well aware of the faults of classical liberalism, and he wrote about them with a candor and honesty sure to annoy the true believers of that creed. In fact, several of the essays in "Freedom and Reform" are critiques of what used to be staples of liberal belief: freedom, free markets, individualism, etc. Knight argues that, however important these ideas may be in the context of a free and democratic society, we would be lying to ourselves if we did not acknowledge their flaws. Individualism, Knight points out, is based on the "fundamental error" of taking the individual as given. What exists in society is not so much "individualism," but, more to the point, of what Knight calls "familism." "Some sort of family life, and far beyond that, some kind of wider primary-group and culture-group life, of a considerable degree of stability, must be taken as they are, as data," he insists. There is an important point here that has not been understood by liberal rationalists. Human beings are in fact social creatures, and if they are deprived of the social bonds of the family, they will search for a substitute elsewhere. Is this not one of the major causes behind multiculturalism and the group-fanaticism of the Left? Rootless individuals, deprived of familial bonds, look to race or gender or sexual orientation to provide what the family no longer can.

Knight's basic approach is to supplement the rationalistic analysis typical of social science (especially economics) with a strong dose of common sense. Anyone with even a moderate sense of social reality knows that human beings are not the rational calculators or profit maximizers envisioned by economists. "It has become clear that people individually, and much more so in collectivities, are not very rational," Knight points out. "Man typically describes himself as an intelligent animal-Homo sapiens; but the main significance of this seems to be that man loves to compliment himself and considers this the highest compliment. 'Intelligence' is a word of numerous meanings, and with respect to all of them man is both a stupid animal and a romantic, preferring emotion to reason and fiction to truth." By keeping the limitations of human nature in mind at all times, Knight is able to see through the cant of the social sciences. He is perceptive not only in regards to libertarians and classical liberals, but even more so to radicals and left-liberals. His review essay on Dewey's "Liberalism and Social Action" is devastating. And his analysis of Marxism in the essay "Ethics and Economic Reform" is one of the best ever. The essential hypocrisy and nihilism of the Marxist creed has rarely been stated with such force and clarity. "For in plain factual appraisal, what [Marxians] are doing is more catastrophically evil than treason, or poisoning the wells, or other acts commonly placed at the head of the list of crimes," Knight declared. "The moralisation of destruction, and of combat with a view to destruction, goes with the kind of hero-worship that merges into devil worship. Such phenomena show that human nature has potentialities that are horrible." Knight wrote this in 1939, long before the atrocities of Stalin were well understood in the West. It is to be regretted that, even to this day, there are professors in American universities incapable of understanding the points Knight makes concerning the Marxist creed.