|The dismal science|
|The Worldly Philosophers|
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. 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. Milton Friedman was one of the first prominent economists to emerge from the school and is most 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."
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 based upon verbal deductions tell me we need more free markets."
The message, however, has changed since the mid-1970s (curiously, this was around the same time the entire world went off the gold standard). While before the mid-1970s, the Chicago School just criticised Keynesianism and advocated more "neutral" intervention in the economy by the central bank (monetarism), now the Chicago School has become more radical, and doesn't even want the central bank to intervene either – putting it closer to the Austrian school in terms of its prescriptions. Their new Real Business Cycle theory literally argues that things like a mass outbreak of laziness (seriously!) cause recessions, the market reacts perfectly to the conditions arising at the time, and government intervention can't do anything good so governments should stop trying to fix the economy - we are in the best of all possible worlds. In other words, when monetarism became mainstream (although in practice Keynesianism was never entirely rejected), the Chicago School felt it had to push free markets even further and became more radical. Also, like the Austrians, the Chicago School has a habit of gaslighting – in their case, trumpeting the rather non-existent empirical validation of Real Business Cycle theory – rather like the Iraqi Information Minister insisting that Iraq was definitely going to win in the Iraq war, even as it was obvious that wasn't true.
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 criticised the Keynesians for being unable to deal with the stagflation of the 70s. 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:
- Volcker stomped out inflation with high interest rates to intentionally create a recession.
- Volcker lowers rates again and runs an expansionary policy (monetary stimulus).
- 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).
- Raise taxes again when the economy gets going. The tax increases were never enough. (Shh, just don't tell your Reagan-worshiping friends he wasn't a fiscal conservative.)
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. 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."
Chile, a boom for whom?
“”The so-called "monetarist experiment" which lasted until 1982 in its pure form, has been the object of much controversy, but few have claimed it to be a success... The most conspicuous feature of the post-1973 period is that of considerable instability... No firm and consistent upward trend (to say the least).
|— Amartya Sen, another Nobel Laureate Economist|
In 1970, when socialist leader Salvador Allende was democratically elected, Richard M. Nixon and his CIA director Richard Helms decided to "Make the [Chilean] economy scream!". Under the "not a nut or bolt would be allowed to reach Chile under Allende" economic policy, all aid was cancelled for Chile.
Two years later, in 1972, America/CIA sponsored a coup in Chile, to correct the population's mistake of having democratically elected a socialist. Allende was soon replaced by right-wing dictator Augusto Pinochet, who suppressed or "disappeared" Allende supporters. This was fine, however, since the majority of people who were executed were labor organizers, or people who actually wanted their votes to matter. Or their family members.
This is often seen as the beginning of the Chilean "economic miracle", as Chile became America's Chicago school laboratory.
Dictator 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 argued that Chile saw a period of greatly expanded growth under Pinochet thanks to the free market, and with no relevant adverse effects to boot! The reality of the situation, however, is not as black and white.
The "miracle" failed in the '82 monetarist crisis, forcing the government to severely intervene in the economy and to bail out several banks and enterprises. The rich became super rich, and the poor super poor.
The "freer" market experiment still continued till 1988, with further reductions of state expenditure on welfare - a strategy which failed at actually decreasing poverty and bringing equality. The situation was finally remedied in 1987 via a so-called "growth with equity" policy, where "aggressive social policies" enacted by the new democratically elected ruling party were implemented. As a result of these policies, poverty was brought down from 40% to 20%, which was in turn attributed at about 60% to free market forces and 40% to social policies by the World Bank.
- University of Chicago's economics department
- After the Blowup, The New Yorker
- How Did Economists Get It So Wrong?, The Krug
- Is Economics a Discipline?, Brad DeLong
- Market priesthood, Noahpinion
- The Chicago School is Eclipsed, The Week
- The Classical View of the Global Recession, Financial Times
- 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.)
- Austrian schooler F.A. Hayek taught at Chicago for some time, but he is not considered to be part of the Chicago school proper.
- Smith, Noah - RBC as gaslighting
- Chicago Against the Tide, PBS documentary
- Ronald Reagan the Keynesian, Credit Writedowns (Others more wingnut than the Reagan-ites have made this argument as well, including Murray Rothbard.)
- Efficiency and Beyond, The Economist
- Burton G. Malkiel. The Efficient Market Hypothesis and Its Critics. Princeton University, Apr. 2003.
- The Twilight of the Efficient Markets, Cosma Shalizi's review of The Myth of the Rational Market by Justin Fox
- Chile: A Lopsided Miracle, Businessweek
- How Chile cooled its ideological fever, Financial Times