Bronze-level articleChicago school

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The Chicago school of economics is a school that promotes a fusion of neoclassical ideas and monetarism. It is known as the foremost proponent of free market ideology in current politics as well as being a driver behind the "Washington Consensus" in globalization-related policy.[1] The school is so named because its most famous proponents taught at the University of Chicago. Chicago schoolers were heavily influenced by the even more rabidly laissez-faire Austrian school.[2] Milton Friedman was one of the first prominent economists to emerge from the school and is most (in)famously associated with it.

Libertarians often name-drop Chicago school economists in an attempt to prove that their politics have some "scientific" basis. However, among the hardcore economic types, there is often infighting among the Chicago school followers and the Austrians. This is most evident in the Ludwig von Mises Institute's accusations that the Cato Institute isn't really libertarian. The Chicago school economists, however, have been far more influential in actual policy circles and haven't produced high-profile activists within the Libertarian Party like the Austrians did with Murray Rothbard. This has led the Austrians and anarcho-capitalists to refer to the Chicago and Cato types as "Beltway libertarians."

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[edit] Methodology

Unlike its Austrian forebears, who used a verbal axiomatic system called praxeology, the Chicago school is known for its rigorous mathematical modeling. Of course, given that mathematical models also rely on axioms, the end result looks fairly similar to the Austrians anyway. Instead of "my verbal deductions tell me that we need more free markets," it's "my mathematical models tell me we need more free markets."

The "Assume a Can Opener" joke often applies:

A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Let's smash the can open with a rock." The chemist says, "Let's build a fire and heat the can first." The economist says, "Let's assume that we have a can-opener..."

The Austrians also had a tendency to frame their arguments in moralistic terms. The free market was not just the most efficient means of allocating resources, but also the most moral to many of them (which is why anarcho-capitalism is so closely associated with the school). Chicago schoolers tended to rely more on math and utilitarian arguments, which allowed their views to gain more mainstream traction and making them something like the less batshit crazy younger cousins of the Austrians. While the Austrians remained mostly outside of the academic establishment after the Great Depression, Chicago school thought became academic establishment in middle America, leading them to be dubbed the "freshwater economists" (as opposed to the "saltwater economists" of the coastal universities).

Milton Friedman helped establish the Chicago school as a driving force in economic thought when he criticized the Keynesians for being unable to deal with the stagflation of the 70s.[3] Keynesian solutions usually involve trading off higher inflation for lower unemployment, but with inflation already high, there was too much worry over further devaluing the dollar and pushing prices up to make fiscal stimulus a popular solution. As a monetarist, Friedman argued that contracting the money supply was necessary before the economy could stabilize. Fed Chairman Paul Volcker did just that.

Friedman gained even more pull when he became an advisor to Ronald Reagan, but his influence should have stopped at that point (and in most of the West, it did by the 90s). Reaganomics is credited with ending the recession and conservatives often attribute this to tax cuts, but you could make the argument that this was actually a vindication of Keynesian thought:

  1. Volcker stomped out inflation with high interest rates to intentionally create a recession.
  2. Volcker lowers rates again and runs an expansionary policy (monetary stimulus).
  3. Reagan enacts fiscal stimulus through massive deficit spending on defense ("military Keynesianism") and tax cuts (supply side economics, but Keynes also favored tax cuts during downturns).
  4. Raise taxes again when the economy gets going.[4] The tax increases were never enough. (Shh, just don't tell your Reagan-worshiping friends he wasn't a fiscal conservative.)

[edit] Chile: Boom for whom?

The coup in Chile that brought Augusto Pinochet to power is often seen as the beginning of an "economic miracle." Pinochet allowed a group of economists called the "Chicago Boys," who had trained at the University of Chicago under Milton Friedman, to retool the entire economy. The Boys believed Chile saw a period of greatly expanded growth under Pinochet thanks to the free market, with no major side-effects. The reality is not as black and white.[5][6]

[edit] Still getting it wrong after all these years

Chicago schoolers are known for a near-mystical belief in homo economicus, which ironically separates them from the Austrians who had already abandoned this concept as backward. The creator of the "efficient market hypothesis" (EMH), Eugene Fama, contended that markets were "informationally efficient." In other words, prices contained all the information available about a product or stock. The weak form of EMH contends that the price only contains publicly available information, while the strong form contends that prices reflect all information, even insider information. In the wake of the financial crisis, this has attracted virulent criticism from a new school calling itself behavioral economics.[7][8][9] Fama has continued to defend EMH, arguing that the information asymmetry in the lead-up to the crisis was too great for EMH to hold true. Like many theories in economics, if it only holds true in ideal conditions that are rarely or never realized, one wonders what good it is in the first place.

Some believed that the power of arbitrage made the market so efficient that it was impossible to ever beat the market (unless you're Warren Buffett). This led to another nerdy but widespread economist joke:

Two economists are walking down the street. One says: "Hey, there's a dollar bill on the floor." The other says: "Impossible. If it were real, someone would have picked it up by now."

[edit] See also

[edit] External links

[edit] Footnotes

  1. John Williamson. Did the Washington Consensus fail? Outline of speech at the Center for Strategic & International Studies Washington, DC. (Note the irony of this: Williamson was noting the failure of much of the Consensus in Latin America as early as 2002... in the course of six years it was more than just Latin America.)
  2. Austrian schooler F.A. Hayek taught at Chicago for some time, but he is not considered to be part of the Chicago school proper.
  3. Chicago Against the Tide, PBS documentary
  4. Ronald Reagan the Keynesian, Credit Writedowns (Others more wingnut than the Reagan-ites have made this argument as well, including Murray Rothbard.)
  5. Chile: A Lopsided Miracle, Businessweek
  6. How Chile cooled its ideological fever, Financial Times
  7. Efficiency and Beyond, The Economist
  8. Burton G. Malkiel. The Efficient Market Hypothesis and Its Critics. Princeton University, Apr. 2003.
  9. The Twilight of the Efficient Markets, Cosma Shalizi's review of The Myth of the Rational Market by Justin Fox
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