Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Ronald Coase after Frank Knight: Common Sense Economics and Ethics at Chicago

Lazega Rafaël, Université de Lausanne

This article focuses on a little-known story of Chicago economics. Ronald Coase called Frank Knight "the greatest Chicago economist," and declared that he was strongly influenced by him, especially during his later years. But what was it about Knight, a thinker who insisted on the need for abstract theory, that so fascinated Coase, a critic of the excessive abstraction of economics? This paper explains the affinities between Frank Knight and Ronald Coase by their adherence to an epistemology of common sense. It explains how Frank Knight came to adopt this particular approach according to the American philosophical context of the early 20th century. It also relates Coase’s common-sense approach to his studies in Arnold Plant’s team at the London School of Economics that was studying actual firm practices such as accounting. Frank Knight thought of economic theory as an abstraction from the common experience that human rationality exists but is only one facet of human nature. Ronald Coase also saw economic theory as broadly applicable, with its hypothesis of self-interested calculating man, while insisting that the man or woman “on the Clapham bus” did not look like this. Thus, both thinkers emphasized the generality and applicability of neoclassical theory, while insisting also on its limitations. Both also insisted on history as the locus of experience of economic life. Frank Knight, the economist as philosopher, according to Buchanan's formula, and Ronald Coase, who declared that he knew nothing about the philosophy of science, are thus surprisingly similar in their adherence to common sense, of which one represents the abstract and theoretical side, and the other the empirical side. The commonsense approach also involves an ethical dimension, since the limited character of human rationality leaves a space for the aesthetic and moral dimensions of economic decisions. Coase declared at the end of “The Problem of Social Cost” that “as Frank H. Knight has so often emphasized, problems of welfare economics must ultimately dissolve into a study of aesthetics and morals.” Hence, I also insist on the importance of aesthetic and moral values for policy judgements and decisions in the context of common-sense thinking. However, the authors’ respective modes of intervention in the economics discussion are different. Knight sought to refocus attention on the fundamental principles of social progress in a free society, while Coase emphasized the limited nature of economic knowledge and encouraged economists to deepen it through empirical study and the improvement of theory on a more realistic basis.

Area: Eshet Conference

Keywords: Frank Knight; Ronald Coase; Chicago school; Common Sense; Ethics

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