Mechanical and Ethical Limitations of Competitive Theory
Knight’s discussion of the entrepreneur’s function in modern economic organization also allowed him to recast a distinction he had made early in his career between the “mechanical” and the “ethical” limitations of competition (Knight 1999a: 61-93; and Knight 1951).
At the time, he said in passing that the market had the means to overcome the mechanical limitations - things like monopoly power, externalities and public goods. For example, in his article on social cost that criticizes A.C. Pigou’s theory of externalities, Knight (1924) argued that competition would not only better serve the public, but would, over time, find ways to internalize whatever externalities that occurred. In Knight (1960) he argues that entrepreneurial action over relatively short time horizons will reduce any monopoly that is not sanctioned by government to the status of just another competitor.Unlike the mechanical limitations - which competitive forces would overcome through internalization and innovation, the ethical limitations of competition were, for Knight, serious obstacles for a free enterprise economy. Next to Risk, Uncertainty, and Profit, Knight is perhaps best known for the essay “Ethics of Competition” (Knight 1999a: 61-93) in which he argued that a competitive economy did not - indeed, could not - be reconciled to the ethical requirements of either classical or Christian moral philosophy. “We appear” he concludes, “to search in vain for any really ethical basis of approval for competition as a basis for an ideal type of human relations, or as a motive to action.” The only justification for competitive society “is that it is effective in getting things done; but any candid answer to the question, “what things,” compels the admission that they leave much to be desired” (Knight 1999a: 89). Knight’s conclusion, however, did not leave him any more satisfied with non-economic conceptions of value; in 1939 he published a scathing criticism of a wide range of moral theories as they applied to consideration of economic reform (Knight 1999b: 1-75). Perhaps the best summary of his ethics is provided by his adaption of Talleyrand’s famous line that “the best principle is to have no principles”. In his presidential address to the American Economic Association in 1950, Knight said that a better expression would be: “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” (Knight 1999b: 366, original emphasis).