Frank Knight on the impossibility of socialism

I have blogged about some surprising links between Frank Knight and Friedrich Hayek before. One might of course argue that such commonalities are only to be expected, both were liberal (political) economists, and they collaborated in the early years of the Mont Pelerin Society. But their work is also marked by important differences. Knight was the most vocal critic of what he perceived to be Hayek’s more conservative-religious intentions with the MPS. They held radically different perspectives on religion, with Knight highly critical of organized religion, while Hayek particularly appreciative of exactly the social dimensions of religious life. And then there were the repeated attacks by Knight on Austrian capital theory, which Hayek attempted to reinvent throughout the 1930s and 40s.

So, I thought it was interesting to find some student notes from Knight’s lectures on the socialist organization of production and consumption in his archives at the University of Chicago. As is not unusual in the 1930s, but quite different from the original Mises’ formulation of the problem, Knight believes that the key problem is the freedom of choice of consumers. The primary way in which he sets up the problem is to wonder how consumers can direct production, even when the capital goods are centrally owned.

After noting that he does not actually know whether or how the Soviets manage this, and that existing accounts by Russians in the United States are of little help, he suggests that coordinating production with consumer wants would require consumers to submit their wants years in advance, because production cycles for certain crops and industrial goods are lengthy. Although the notes do not indicate this specifically, it suggest that Knight would find this impossible. Not to mention that it would also preclude changing one’s mind and therefore (genuine) freedom of choice, a key aspect of Knight’s liberalism.

Knight also presents the more traditional Misesian argument that the Soviet system with centrally owned means of production has no way of accounting for the rate of return on capital. An interesting remark, to say the least, given that Knight would later dispute this bit of Austrian theorizing fairly directly in his critique of Austrian capital theory.

But I found the conclusion in the student notes most striking:

As F.H.K. thinks about problem, it seems that control pulls one in deeper and deeper. Controlling one thing means that you have to control this one also, and then that, and so on --- until you come out with result that a controlled society can have no consumer freedom ultimately.

This way of thinking is obviously congruent with Mises Logic of Interventionism, which suggests much the same thing about a cascade of interventions. But when read sympathetically I think Knight here also foreshadows Hayek’s broader analysis in the Road to Serfdom which suggests that controlling production must result in an attempt to establish a ‘social scale of values.’ As Hayek puts it, after an analysis of what central planning for the future would actually require:

To direct all our activities according to a single plan presupposes that every one of our needs is given its rank in an order of values which must be complete enough to make it possible to decide between all the different courses between which the planner has to choose. It presupposes, in short, the existence of a complete ethical code in which all the different human values are allotted their due place.

Here Hayek and Knight find common ground in the moral and political-democratic implications of the requirements for central planning (in contrast to the typical epistemic/knowledge focus in Hayek).

Knight’s phrase ‘consumer freedom,’ if it was his and that of his student, also clearly resonates with the idea of ‘consumer sovereignty’ which has recently attracted a lot of attention as a foundational idea for this generation of liberals. Eric Schliesser has rightfully blogged about the more political connotations of sovereign consumer voting daily in the market.

The student notes do not stop there. They also mention the fact that his fellow student Milton Friedman was the first to attempt to argue that with adjustments on the margin the planners could more closely resemble market outcomes (the position of some market socialists in the 1930s). Frank Knight disagreed, obviously.