The Frank Knight archives confirmed to me how central the question of preferences was to this Chicago economist. All throughout the 1920s he was working out a dilemma: economic science needed a stable foundation, but preferences could not be it. It was not just that Knight worried about the stability of preferences – although he certainly believed that they changed over time. Or that he just believed, like Thorstein Veblen, that preferences are social in nature, shaped by the desire to both imitate and differentiate ourselves from others. It was that if preferences were fixed, the aspirations of individuals were set in stone, and this upset his fundamental commitment to individual development and growth.
This dilemma is the subject of one of Knight’s first major articles after the publication of his most famous book Risk, Uncertainty, and Profit. In this essay ‘Ethics and the economic interpretation’ (1922) he argues:
Of the various sorts of data dealt with in economics no group is more fundamental or more universally and unquestioningly recognized as such than human wants. Yet one main purpose of the present discussion is to raise serious question as to the sense in which these wants can be treated as data, or whether even they are properly scientific data at all.
Last week I drew some comparisons between Friedrich Hayek and Knight. Here, too, that coupling comes to mind easily. After all the opening lines of Hayek’s most famous essay ‘The Use of Knowledge in Society’ are as follows:
What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences and if we command complete knowledge of available means, the problem which remains is purely one of logic (…) The reason for this is that the (’data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications, and can never be so given.
Both Knight and Hayek deny that the assumption of stable preferences can be the solid basis for economic science. Both, nonetheless, have a curious affinity for the so-called logic of choice that results from assuming the stability (and knowability) of preferences. On a slightly higher level of abstraction both Hayek and Knight are seeking a scientific economics, without accepting easy assumptions or simplifications. And like in last week’s conception we see a slightly different variation of the argument in Knight in Hayek. For Hayek the concern is primarily epistemic, we do not know the preferences of others, while for Knight the concern is primarily moral, individuals aspire to become better versions of themselves.
In fact, it is interesting to see Knight make this moral argument with such force in the article. The most striking formulation comes when he argues that this is not merely his own philosophical vision about what individuals should be, but an empirical fact:
Life is not fundamentally a striving for ends, for satisfactions, but rather for bases for further striving; desire is more fundamental to conduct than is achievement, or perhaps better, the true achievement is the refinement and elevation of the plane of desire, the cultivation of taste. And let us reiterate that all this is true to the person acting, not simply to the outsider, philosophizing after the event. (my emphasis)
It is clearly Knight’s conviction that preference satisfaction is not what life is about, or how we could measure welfare for that matter. Another argument that stands out in the essay is that he repeatedly uses the ‘de gustibus non est disputandum’ phrase that would come to be associated with postwar Chicago School of Economics. The paper of Gary Becker and George Stigler by that title is easily one of the five key papers from that school of thought.
Now it is of course a nice curiosity to be able to trace the phrase back to an essay from the early 1920s. But it is my firm conviction that the relation between the two papers is much deeper. The ‘De gustibus’ paper is easily understood as a characteristic formulation of economics imperialism, the infamous trick to formulate a rational-choice explanation for all human behavior. Both the introduction as well as the example of rational addiction provide ample ammunition for that kind of reading.
Through this Knightian lens, it is obvious that the article deals with some of the very same problems that occupied the grandfather of Chicago economics. Like Knight (and Veblen) Becker and Stigler treat a lot of preferences as social in nature, as they make clear in their discussion of ‘fashions.’ Consumption patterns change rapidly as individuals try to stay in fashion (by imitating others), while the desire to stay in fashion is stable.
The other application in the ‘De gustibus’ paper concerns taste formation, especially the higher tastes such as those for classical music (in their ironic way of writing Becker and Stigler combine this with a discussion of lower tastes, like drugs). The argument in the paper suggests that consumers build up consumption capital which makes it less costly to enjoy more complex goods like classical music. In doing so it not only captures Knight’s moral intuition that what we really strive for is better preferences, but it also suggests that with the development of consumption capital we become different kinds of individuals. An idea that the Chicago economists also toy with when they discuss education as human capital, Schultz calls it ‘investments in man.’ That of course, does not mean that the Knightian dilemma is fully resolved. After all, Becker and Stigler’s starting point is that humans at the most fundamental level only strive for a given set of basic goods (or better values like health, wealth, and experiences). On top of that foundation, they were able to develop an ingenious conceptual apparatus that could explain changing tastes, but that hardly resolves Knight’s foundational problems.
The Greek philosopher Zoilus at dinner, in a print by Justus van den Nijpoort (17th century). Source: Wikimedia Commons
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