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Chicago school of economics

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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. It is at times referred to as freshwater school of economics, in contrast to the saltwater school based in coastal universities (notably Harvard, MIT, and Berkeley). Approximately 70% of the professors in the economics department have been considered part of the school of thought.[citation needed] The University of Chicago department, 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.

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 forgo careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis. The Chicago school is associated with neoclassical price theory and libertarianism in its support of lower taxation and private sector regulation, but differs from pure free-market economics in its support of government-regulated monetary policy.

The school rejected Keynesianism in favor of monetarism until the 1980s, when it turned to rational expectations. It has affected 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.

Contents

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 it was the only place he could find employment at the time.[1]

Scholars

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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

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 more associated with his time at the London School of Economics, as well as the Austrian school of economics that included Menger, Ludwig von Mises, and Murray Rothbard. The Austrian School of Economics was an influence on the Chicago School of thought.

Ronald Coase

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 1879 London legal case about nuisance named Sturges v Bridgman, in which a noisy sweetmaker and a quiet doctor were neighbours; the doctor went to court seeking an injunction against the noise produced by the sweetmaker.[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 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

George Stigler (1911–1991) was tutored for his thesis by Frank Knight and won the Nobel prize in Economics 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]

Milton Friedman

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 Nobel Prize in Economics in 1976 for, among other things, 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 argued that 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 advocated 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.[8]

The slogan that "money matters" has come to be associated with Friedman, but Friedman had 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."[9]

Robert Fogel

Robert Fogel (b.1926), a co-winner of the Nobel 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 rebut comprehensively 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 (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. His work partly inspired the popular economics book Freakonomics.

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 lawyer rather than an 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."[10]

Robert E. Lucas

Robert Lucas (b. 1937) won the Nobel 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. Lucas's works covered several topics in Macroeconomics, included Economic Growth, Asset Pricing, Monetary Economics, and so on.

Eugene Fama

Eugene Fama (b. 1939) is an American economist who has spent all of his teaching career at the University of Chicago. He is well known as the father of the Efficient Market Hypothesis. Starting with his 1965 Ph.D. thesis, "The Behavior of Stock Market Prices", Fama concluded that stock prices are unpredictable and follow a random walk pattern of movement. He solidified this idea in his 1970 article, "Efficient Capital Markets: A Review of Theory and Empirical Work", which brought the idea of efficient markets into the forefront of modern economic theory.

Discussion

Some claim that Chicago School economists are associated with Washington Consensus,[11][12] which John Williamson says is "disappointing".[13] 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.[14] 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.[15]

Criticism

The school has been blamed for growing income inequality in the United States.[16] Economist Brad DeLong of the University of California, Berkeley says the Chicago School has experienced an "intellectual collapse", while Nobel laureate Paul Krugman of the Princeton University, says that recent comments from Chicago school economists are "the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten,"[17] charging that the school has done nothing to help salvage the economy in the wake of the crisis.[18]

See also

References

  1. ^ Commanding Heights: Storyline | on PBS
  2. ^ Sturges v. Bridgman (1879) 11 Ch D 852
  3. ^ Coase (1960) IV, 7
  4. ^ Coase (1960) V, 9
  5. ^ Coase (1960) VIII, 23
  6. ^ "The Theory of Economic Regulation." (1971) Bell Journal of Economics and Management Science, no. 3,pp. 3–18.
  7. ^ See also, “The Economics of Information,” (1961) Journal of Political Economy, June. (JSTOR) developed the theory of search unemployment.
  8. ^ Friedman (1967) p.
  9. ^ Friedman (1953) I,V,30
  10. ^ Richard Posner, Economic Analysis of Law (1998) p.30
  11. ^ Sivalingam, G. (2005), Competition Policy in the ASEAN Countries, p. 6: Cengage Learning Asia, http://books.google.co.uk/books?id=IIgrjqPMjeEC 
  12. ^ Palley T. (2008). Breaking the Neoclassical Monopoly in Economics. Project Syndicate.
  13. ^ Williamson J. (2002). Did the Washington Consensus Fail?
  14. ^ See, as examples representative of a much more extensive literature, e.g., Birdsall and de la Torre. "Washington Contentious" (2003); Kuczynski and Williamson (eds.), "After the Washington Consensus" (2003).
  15. ^ See, e.g., Birdsall and de la Torre, "Washington Contentious" (2003); de Ferranti and Ody, "Key Economic and Social Challenges for Latin America" (2006): http://www.brookings.edu/views/papers/20060803.pdf
  16. ^ [1]
  17. ^ [2]
  18. ^ [3]

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. 

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