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John Adams Blog

The blog of The Antient and Honourable John Adams Society, Minnesota's Conservative Debating Society www.johnadamssociety.org

Saturday, October 29, 2005

Chicago School of Economics -- Defined

I found this historical perspective on the "Chicago School of Economics" which may be helpful for those interested in economics:

The "Chicago School" is perhaps one of the better known American "schools" of economics. In its strictest sense, the "Chicago School" refers to the approach of the members of the Department of Economics at the University of Chicago over the past century. In a looser sense, the term "Chicago School" is associated with a particular brand of economics which adheres strictly to Neoclassical price theory in its economic analysis, "free market" libertarianism in much of its policy work and a methodology which is relatively averse to too much mathematical formalism and willing to forego careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis. In recent years, the "Chicago School" has been associated with "economic imperialism", i.e. the application of economic reasoning to areas traditionally considered the prerogative of other fields such as political science, legal theory, history and sociology.
The "Chicago School" has had various phases with quite different characteristics. Nonetheless, the main consistent factor seems to be that it has always held a unique,distinct and influential place in the realm of economics at any time. In the modern day, under the "Chicago School" umbrella, we can count various further schools of thought which are discussed in more detail elsewhere: e.g. Monetarism in the 1960s, New Classical/Real Business Cycle macroeconomics from the 1970s until today, and more recently, the New Institutionalism, New Economic History and Law-and-Economics movements.
The University of Chicago was founded in 1892 by oil magnate John D. Rockefeller. Its initial economics department, under the leadership of the American apologist, J. Laurence Laughlin, counted radical American Institutionalists such as Thorstein Veblen, Wesley Mitchell and John Maurice Clark among its faculty. In this period, the department was like any other in the United States.
The "Chicago School" really began in the 1920s with the diumvurate of Frank H. Knight and Jacob Viner. They were, for the most part, theoreticians (Knight more in the Jevonian-Austrian tradition, Viner leaning towards the Marshallian). In an age when empiricism ruled most of American economics, Knight and Viner set up the economics department at Chicago as a bastion of counter-institutionalism and, as such, the department soon acquired something of a "siege" mentality. Also at Chicago during this time were the "Mathematical Trio" -- Oskar Lange, Henry Schultz and Paul H. Douglas -- economists with a particular bent for the theoretical approach of the Lausanne School. Younger faculty included monetary theorists Henry C. Simons and Lloyd Mints.
The characteristics of the early Chicago School of 1920-1950 differ considerably from the later Chicago School. They were highly suspicious of "positivistic" economic methodology and denounced economic imperialism, arguing for a confined role for economic analysis (esp. Knight). They were suspicious of the efficiency claims of laissez-faire economics, arguing for it only on a "non-consequential" basis. They welcomed active government policies to cure recessions (esp. Viner's recommendations on "reinflating" the economy, and Simons's "Chicago Plan" for counter-cyclical monetary policy), and counted a fully-fledged socialist in their ranks (Lange). Furthermore, most of the faculty was not averse to rigorous, theoretical general equilibrium reasoning, but were leading practitioners of the art (Lange, Schultz, Douglas).
However, like the later Chicago School, the early Chicago School was hostile to "alternative" economic paradigms. For the most part, they did not welcome the Keynesian Revolution in macroeconomics and denounced the Monopolistic Competition approach in microeconomic theory. To a good extent, the issues these "alternative" paradigms purported to solve, they felt could be handled reasonably well within the confines of Neoclassical theory.
The economics department underwent an upheaval during the 1940s. Schultz died with tragic suddenness, Viner left for Princeton, Lange left for political life in Poland and Douglas became a U.S. Senator. Knight, whose interests were moving away from economic theory, went into semi-retirement, handing the reigns of the department over to Simons, Mints and Director.
There was a new injection of blood during this period as the department tried to regain its bearings. The first lurch was towards Walrasian economics. Several students associated with the departed Lange and Schultz remained -- such as Yntema and Mosak -- and Chicago went on to welcome Jacob Marschak, Tjalling Koopmans and the the Cowles Commission right next door. The Walrasian period lasted until 1955, when it moved (was hounded off?) to Yale.
The 1940s also saw the appointment of development theorists H. Gregg Lewis and Bert F. Hoselitz. These appointments were accompanied by a group of agricultural economists, Theodore W. Schultz, D. Gale Johnson and Walter Nicholls, who had been left Iowa State in protest over one of the most famous violations of academic freedom. Apparently, the powers-that-be of Iowa, home of the American dairy industry, had pressured the university to force a young economist to recant a study in which he had concluded that margarine was no less nutritious than butter.
In the 1960s, the department began to congeal into a new shape, led by George J. Stigler and Milton Friedman. This is what became the "Second" Chicago School, which is perhaps the most famous and polemical one. Stigler and Friedman were avowed Marshallians, and eschewed the methodology of the now-departed Walrasians of the Cowles Commission. As the contemporary ditty went:
"I read my Marshall completely throughFrom beginning to end and backward tooI read my Marshall so carefullyThat now I am Professor at U of C".
The Stigler-Friedman period was characterized by faithful adherence to Neoclassical economics and maintained itself dead against the concept of market failures, reinforcing the Chicago School stance against imperfect competition and Keynesian economics. Through their influential journals -- notably, the Journal of Political Economy and the Journal of Law and Economics -- the research programme of the Chicago School was advanced and diffused. It was the Second Chicago School that is often accused of being the modern version of Manchester School liberalism (or, as some maintain, the more conservative tradition of American apologism).
In microeconomics, led by George Stigler, the guiding maxim in the Chicago approach was to preserve the Neoclassical paradigm whenever possible, never to doubt it. When there is no obvious solution to a particular problem, the recommended course was to extend the Neoclassical paradigm by incorporating new concepts into it that would make the subject matter amenable to economic analysis. Examples of extensions to the Neoclassical paradigm conceived by Chicago economists are search theory (due to George Stigler), human capital theory (due to Gary Becker and T.W. Schultz) and property rights/transaction cost theory (due to Ronald H. Coase).
The Chicago School's impulse for extension of Neoclassical price theory is largely responsible for the "imperialist" character of which it is often accused. Business and finance, previously the prerogative of practitioners and business schools, were brought into the economic spotlight by Chicago economists such as A.W. Wallis, Harry Markowitz, Merton H. Miller and Eugene F. Fama. Further afield, political science and institutional theory were brought into Neoclassical economics by Chicago School economists such as G.J. Stigler, R.H. Coase, James Buchanan, Armen Alchian and Harold Demsetz. Economic history were given a Neoclassical reading by Robert W. Fogel and Douglas C. North, while the Chicago Law School (esp. Richard Posner and William M. Landes) used economics to rethink swathes of legal theory. Perhaps most famously, sociological issues like addiction, family and even marriage were given a thoroughly economic interpretation in the hands of Gary S. Becker and Jacob Mincer.
[Naturally, not all the "Chicago School" economists are at the University of Chicago, e.g. Alchian, Mincer, North, etc., but it is not unreasonable to argue that they are part of that school of thought.]
[George P. Shultz, better known as the Secretary of Labor and subsequently of the Treasury under Richard Nixon and later Secretary of State under Ronald Reagan, Shultz was also professor of industrial relations and later dean of the Business School at Chicago during the 1960s.]
[It is revealing that the adamantly anti-imperialist Friedrich A. von Hayek, who was at Chicago during the 1950s, was confined to an appointment on an interdisciplinary "Committee on Social Thought", rather than the economics department proper. Walrasian theory, which has tended to be of more limited scope, has also had very little presence at Chicago over the past half-century: the only theorist to have successfully infiltrated the Chicago citadel was Hugo Sonnenschein, but then he came as president of the university. With the exception of the work of Lester Telser, the "alternative" paradigm of game theory has also been conspicuously absent until recently.]
In macroeconomics, the most renowned phase of the Chicago School has been that of "Monetarism" under the leadership of Milton Friedman, its best-known advocate. For the longest time, Chicago was the only school in America not swept by the Keynesian Revolution (the presence of Lloyd A. Metzler for a brief period on the faculty was exceptional). This does not mean that the old Chicago School was opposed to government intervention - indeed, Viner's policy conclusions are at times hard to distinguish from Keynes's. But in Friedman's Monetarism, it found a theoretical and empirical means by which to begin rolling back the Keynesian revolution. Although prominent in the 1960s, Friedman has always claimed that the main tenets of Monetarism can be found in the work of early Chicago School economists such as Henry Simons. (see our survey of Monetarism).
Monetarism has since given way to the more mathematically rigorous "New Classical" economics of Robert E. Lucas in the 1970s and 1980s. The quantitatively-oriented "Walrasian" flavor of New Classicism meant that the appointments of Robert Lucas, Thomas Sargent, Michael Woodford and Robert Townsend at Chicago met with quite some opposition from the older hands. Nonetheless, in its policy conclusions and rigorous adherence to Neoclassical theory, the New Classical school remains by most accounts the natural inheritor of the Chicago School mantle in modern macroeconomics.
Despite, or perhaps as a result of, its mischievous but always unique perspective, the University of Chicago has taken in a lion's share of Nobel Prizes in economics: Milton Friedman, T.W. Schultz, G.J.Stigler, R.H. Coase, G.S. Becker, M.H. Miller, R.W. Fogel and R.E.Lucas were all on the Chicago faculty when they received their awards. If we were to add Chicago-trained economists, the list of Nobelists would expand to include Hebert Simon, James Buchanan, Harry Markowitz and Myron Scholes.

I copied this information from http://cepa.newschool.edu/het/schools/chicago.htm (the History of Economic Thought Webpage).