Frank H. Knight on Market Thinking:Reflections on the Logic and Ethics of the Capitalist Economy

The purpose of this paper is to shed a new light on the working and performance of the market economy from a pluralistic viewpoint. To this end, we first pay attention to the general equilibrium theory a la L.W. McKenzie, K. J. Arrow and G. Debreu. Whereas this theory seems to be established on the foundation of solid logic and advanced mathematics, the existence of special ethics and ideology behind the scenes should not be forgotten. We next reexamine the thought of Frank H. Knight, who has raised an strong objection against glorification of the market economy. In the late 1960s, I was a graduate student at the University of Rochester. I still recall the touching moment when Professor McKenzie, finally succeeding after a long struggle to prove the existence of a competitive economy by help of a mathematical theorem of fixed point, posed a bit in a class and said quietly, "It' so beautiful! ". The world was then in the midst of Cold War and divided into the two powerful blocs, the socialist bloc dominated by the Soviet Union and the capitalist block led by the United States of America. McKenzie's complacent whispering sounded like the victory declaration of capitalism over socialism. Around 40 years have passed since then. It seems that the "academic Cold War" between Marxian economics and modern economics is now over. At the same time, the ethics and ideology of general equilibrium looks surely fading away although it is not completely vanished. It is our regret, however, the new, synthetic social science which can replace the existing dogmatic doctrines are not in sight yet. A completely new approach like a second Knight or a second Keynes would urgently be needed.