Methodology: From Successive Approximation to Weberian “Verstehen”
Risk, Uncertainty, and Profit (Knight 1921) introduced another key theme of Knight’s economic thinking: the tension between the analytical relevance of economic principles to understanding and participation in economic life and, at the same time, the mistake of viewing economics as a predictive science.
In Risk, Uncertainty, and Profit, the distance between the realm of perfect competition and the realm of actual economic life was traversed for Knight by the relaxation of one assumption at a time. The assumption of perfect knowledge was the first to be relaxed, and the most important, but other assumptions would need to be relaxed, altered or replaced to enable economists to speak more directly about the relevance of economic principles to policy matters. T.W. Hutchison later described this approach as the method of “successive approximation” (1938: 73).In the mid-1920s, however, Knight began reading intensively in the literature of the German Historical School, and translated Max Weber’s General Economic History, the first of Weber’s work to be translated into English (Weber 1927). Shortly thereafter, he re-evaluated his conception of equilibrium theorizing; instead of traversing from perfect competition to actual competition via successive approximation, Knight argued that there was an “impassable gulf” between the two, and hence, that economic theory could not predict the dynamics of actual economic activity (Knight 1999a: 149-71). However, non-predictability does not mean that economic theory is not scientific or relevant to understanding economic life (Knight 1999a: 372-99). Like Weber, Knight ends up arguing that fundamental concepts in a social science provide a way of understanding the economy even if they cannot be turned into predictive models (a good summary is Knight 1961). The transition in his economic methodology can be seen in his theory of comparative economic organization, and his re-evaluation of capital and cost theory, in which he developed an approach that generated further controversies and/or theoretical developments.