Chicago school of economics

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People Adam Smith · David Ricardo Friedrich Hayek · George Stigler John Maynard Keynes Milton Friedman Thomas Friedman

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The Chicago school of economics describes a neoclassical school of thought within the academic community of economists, with a strong focus around the faculty of University of Chicago, some of whom have constructed and popularized its principles.

The Chicago school is associated with neoclassical price theory and libertarianism, and with the view that regulation and other government intervention is always inefficient compared to a free market. The school rejected Keynesianism in favor of monetarism until the 1980s, when it turned to rational expectations. It has impacted the field of finance by the development of the efficient market hypothesis. In terms of methodology the stress is on "positive economics" – that is, empirically based studies using statistics to prove theory.

Approximately 70% of the professors in the economics department have been considered part of the school of thought. The University of Chicago department, widely considered one of the world’s foremost economics departments, has fielded more Nobel Prize winners and John Bates Clark medalists in economics than any other university.

Terminology

The term was coined in the 1950s to refer to economists teaching in the Economics Department at the University of Chicago, and closely related academic areas at the University such as the Graduate School of Business and the Law School. They met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory. The 1950s saw the height of popularity of the Keynesian school of economics, so the members of the University of Chicago were considered outcast. Famed economist Friedrich Hayek was teaching there because that is the only place he could find employment at the time.^[1]

Scholars

Frank Knight

Main article: Frank Knight

Frank Knight (1885-1972) was an early member of the University of Chicago department. His most influential work was Risk, Uncertainty and Profit (1921) from which was coined the term Knightian uncertainty. Knight's perspective was iconoclastic, and markedly different from later Chicago school thinkers. He believed that while the free market was likely inefficient, government programs were even less efficient. He drew from other economic schools of thought such as Institutional economics to form his own nuanced perspective.

Friedrich von Hayek

Main articles: Friedrich Hayek and Austrian School

Friedrich von Hayek (1899-1992) was born in an aristocratic Viennese background and an early follower of Carl Menger. He was awarded the Nobel Prize in 1974. Though a faculty member at the University of Chicago, his faculty position was unpaid and he is usually categorized not as a member of the Chicago School, but rather the Austrian School of economics that included Menger, Ludwig von Mises, and Murray Rothbard. The Austrian School of Economics were an influence on the Chicago School.

Ronald Coase

Main articles: Ronald Coase and Law and economics

Ronald Coase (b. 1910) is the most prominent economic analyst of law and the 1991 Nobel Prize winner. His first major article, The Nature of the Firm (1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction costs. Rational individuals trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. His second major article, The Problem of Social Cost (1960), argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes. Coase used the example of an old legal case about nuisance named Sturges v. Bridgman, where a noisy sweetmaker and a quiet doctor were neighbours and went to court to see who should have to move.^[2] Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves house that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this.^[3] So the law ought to pre-empt what would happen, and be guided by the most efficient solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe.^[4] Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action.^[5]

George Stigler

Main article: George Stigler

George Stigler (1911-1991) was tutored for his thesis by Frank Knight and won the Bank of Sweden prize in Economics, commonly referred to as the Nobel Prize, in 1982. He is best known for developing the Economic Theory of Regulation^[6], also known as capture, which says that interest groups and other political participants will use the regulatory and coercive powers of government to shape laws and regulations in a way that is beneficial to them. This theory is an important component of the Public Choice field of economics. He also carried out extensive research into the history of economic thought. His 1962 article "Information in the Labor Market"^[7]

In his book, The Intellectual and the Marketplace^[8], he proposed "Stigler's Law of Demand and Supply Elasticities" that "all demand curves are inelastic, and all supply curves are inelastic, too." He referenced many studies that found most goods and services to be inelastic over the long run. From that and a proof by Alfred Marshall that "the third condition [for inelastic demand] is that only a small part of the expenses of production of the commodity should consist of the price", he also proposed that "since most or all specific costs of production are relatively small, and entrepreneurs do not bother with small costs, ... they do not bother with costs at all. Hence they do not maximize profits."

Milton Friedman

Milton Friedman made his name as the archetypal enemy of big government

Main articles: Milton Friedman and Monetarism

Milton Friedman (1912-2006) stands as one of the most influential economists of the late twentieth century. He was a student of Frank Knight and he won the Bank of Sweden Prize in Economics in 1976, among other things, for A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argues laissez-faire government policy is more desirable than government intervention in the economy. Governments should aim for a neutral monetary policy oriented toward long-run economic growth, by gradual expansion of the money supply. He advocates the quantity theory of money, that general prices are determined by money. Therefore active monetary (e.g. easy credit) or fiscal (e.g. tax and spend) policy can have unintended negative effects. In Capitalism and Freedom (1967) Friedman wrote,

"There is likely to be a lag between the need for action and government recognition of the need; a further lag between recognition of the need for action and the taking of action; and a still further lag between the action and its effects.^[9]

The slogan that "money matters" has come to be associated with Friedman, but Friedman has also levelled harsh criticism of his ideological opponents. Referring to Thorsten Veblen's assertion that economics unrealistically models people as "lightning calculator[s] of pleasure and pain", Friedman wrote,

"criticism of this type is largely beside the point unless supplemented by evidence that a hypothesis differing in one or another of these respects from the theory being criticized yields better predictions for as wide a range of phenomena."^[10]

Robert Fogel

Main article: Robert Fogel

Robert Fogel (b.1926), a co-winner of the Bank of Sweden prize in 1993, is well known for his historical analysis and his invention of cliometrics, a notation system for quantitative data. In his tract, Railroads and American Economic Growth: Essays in Econometric History (1964) Fogel set out to comprehensively rebut the idea that railroads contributed to economic growth in the 19th century. And in Time on the Cross: The Economics of American Negro Slavery (1974) he argued that slaves in the Southern states of America had a higher standard of living than the industrial proletariat of the Northern states before the American civil war. Fogel believes that slavery was morally wrong, but argues that it was not necessarily less efficient than wage-labour.

Gary Becker

Gary Becker is well known for applying economic theory to unusual areas, such as crime and discrimination. His work partly inspired the pop-conomics book Freakonomics.

Main article: Gary Becker

Gary Becker (b. 1930) is a Nobel prize winner from 1992 and is known in his work for applying economic methods of thinking to other fields, such as crime, sexual relationships, slavery and drugs, assuming that people act rationally. His work was originally focused in labour economics.

Richard Posner

Main article: Richard Posner

Richard Posner runs a blog with Gary Becker.

Richard Posner (b. 1939) is known primarily for his work in law and economics. A self-taught economist, Posner's main work, Economic Analysis of Law attempts to apply free market economic thought, based on simple models of rational choice to every area of law possible. He has chapters on tort, contract, corporations, labor law, but also criminal law, discrimination and family law. Posner goes so far as to say that the central

"meaning of justice, perhaps the most common is – efficiency… [because] in a world of scarce resources waste should be regarded as immoral."^[11]

Robert E. Lucas

Main article: Robert E. Lucas

Robert Lucas (b.1937) won the Bank of Sweden prize in 1995. Dedicating his life to unwinding Keynsianism, his major contribution was the argument that macroeconomics should not be seen as a separate mode of thought to microeconomics, and that analysis in both should be built on the same foundations.

Discussion

Some claim that Chicago School economists are associated with Washington Consensus,^[12][13] which John Williamson says is "disappointing".^[14] A significant body of economists and policy-makers argues that what was wrong with the Washington Consensus as originally formulated by Williamson had less to do with what was included than with what was missing.^[15] Economists overwhelmingly agree that the Washington Consensus was incomplete, and that countries in Latin America and elsewhere need to move beyond "first generation" macroeconomic and trade reforms to a stronger focus on productivity-boosting reforms and direct programs to support the poor.^[16]

Related topics

• Chicago Boys
• History of economic thought
• Milton Friedman Institute

References

Further reading

• Ebenstein, Alan O. (2001). Friedrich Hayek: A Biography. New York: Palgrave. ISBN 0312233442. 
• Friedman, Milton; Friedman, Rose (1998). Two Lucky People: Memoirs. Chicago: University of Chicago Press. ISBN 0226264149. 
• Hammond, J. Daniel; Hammond, Claire H. (2006). Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957. London: Routledge. ISBN 0415700787. 
• Hovenkamp, Herbert (1985). "Antitrust Policy after Chicago". Michigan Law Review 84 (2): 213–284. doi:10.2307/1289065. 
• Kasper, Sherryl (2002). The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers. Cheltenham: Edward Elgar. ISBN 1840646063. 
• Miller, H. Laurence, Jr. (1962). "On the 'Chicago School of Economics'". The Journal of Political Economy 70 (1): 64–69. doi:10.1086/258588. 
• Nelson, Robert H. (2001). Economics As Religion: From Samuelson to Chicago and Beyond. University Park, PA: Pennsylvania State Univ. Press. ISBN 0271020954. 
• Reder, Melvin W. (1982). "Chicago Economics: Permanence and Change". Journal of Economic Literature 20 (1): 1–38. doi:10.2307/2724657 (inactive 2008-06-30). 
• Stigler, George J. (1988). Chicago Studies in Political Economy. Chicago: University of Chicago Press. ISBN 0226774376. 
• Stigler, George J. (1988). Memoirs of an Unregulated Economist. New York: Basic Books. ISBN 0465044433. 
• Valdes, Juan Gabriel (2008): Pinochet's Economists: The Chicago School of Economics in Chile (Historical Perspectives on Modern Economics), Cambridge University Press, ISBN 0521064406
• Wahid, Abu N. M. (2002). Frontiers of Economics: Nobel Laureates of the Twentieth Century. Westport, CT: Greenwood Press. ISBN 031332073X. 

External links

• Thomas Sowell
• The University of Chicago Department of Economics
• Commanding Heights, PBS Documentary, Chicago Against the Tide