The financial crisis and current recession have revitalized critics of the Chicago School of Economics. The School now bears the blame for providing a seeming intellectual foundation for the idea that markets are self-adjusting and the best role for government is to do nothing.
The Chicago School crystallized during the tenure at the University of Chicago of such eminent economists as Frank Knight, Jacob Viner, Henry Simons, and Lloyd Mints. Its leadership subsequently included such outstanding theorists as Milton Friedman, George Stigler, Gary Becker and Robert Lucas, respectively Nobel Laureates in 1976, 1982, 1992 and 1995.
Three Distinguished Features
There are three key, separate features of the School. First, the Chicago School of Economics is distinguished by its methodological approach to the study of positive economics as an empirical science. Second, Chicago School economists are distinguished by their normative preference for laissez faire as an economic system and for extolling liberty as the highest moral value. Third, the Chicago School has a distinctive culture in their conduct of research and teaching that is highly regarded by the profession. I shall discuss all three features in the next three articles. Today, I shall focus on the emergence of the Chicago School in the period spanning the 1940s at the University of Chicago.
Not all members of the Chicago faculty nor all Chicago-trained economists are “Chicagoans,” and a substantial number of Chicagoans have never been in residence at Chicago. Many Chicagoans are not ardent supporters of laissez faire and are not committed 19th century classical liberals even though they adopt Chicago’s methodological approach to positive economics.
The School is a voluntary association and is open to any member of the economics profession. Affiliation with the University of Chicago is not a condition for becoming included in the School. But the Chicago view is dominant at the University, and the faculty there has been the energizing, central influence in the life of the School. For this reason, the Chicago name is not a misnomer. The birth and continued existence of the School is explained by the ability and personality of its leadership and the strong appeal it has to many economists.
Since the late 1930s, the dominant characteristic of the Chicago economist’s professional environment has been the frequency and intensity with which he engages in substantive discussion about on-going research. Seminars, workshops, and discussion groups exist elsewhere, but at Chicago the number is very large and the discussions intense. Faculty members of the Economics Department meet weekly for lunch, where the conversation is not social chit chat, but intensely focused on economics and academics. Service in university administration and great distinction in government service are regarded as at best partial substitutes for continuing research productivity.
The University of Chicago was the first major university (with the possible exception of Johns Hopkins) that was not established primarily as either a finishing school for the children of the upper classes, or as a seminary for training clerics. From its founding in 1890, Chicago was a center of learning devoted to advancing and transmitting knowledge. The vision of its first president, William Rainey Harper, led to the assembling at the University of Chicago of an exceptionally able and dedicated faculty in the objective pursuit of knowledge and science in the broadest sense.
The roots of the Chicago approach to economics can be found in the 1930s when there were differing ideas as to the proper course for the discipline in general and the department in particular. Frank Knight, Jacob Viner, Henry Simons and Lloyd Mints can be considered the forerunners of what became the Chicago tradition. But there were also John U Nef, Chester Wright, Simeon Leland, and H A Millis. This second group, some of whom were men of great distinction, were hardly Chicago economists or even economists at all. They represented the institutionalist tradition in American economics which was still very strong at the time.
There was yet a third group, small but highly influential: the quantitative economists, or pioneer econometricians, including Paul Douglas, Henry Schultz, and Oscar Lange. These men had a very important impact on the development of Chicago economics.
The appointment of Oscar Lange to the Chicago faculty in 1938 came at a time when the “old” Chicago department experienced three shocks that effectively transformed it: the arrival of the Cowles Commission in 1939; the death of Henry Schultz in 1938; and the election of Paul Douglas to public office in 1939. These events generated pressure for rebuilding the department. In addition, there was a pre-existing concern over the failure to keep up with new developments in theory.
The selection of Lange reflected an interest in developing Keynesian economics, mathematical economics, and the economics of market socialism. Lange had a fully developed perspective of economics which constituted a socialist alternative to the “Chicago View.” His work on the use of the price system to allocate resources in a socialist economy was widely considered to be the most authoritative response to an attack by Ludwig Von Mises and F A Hayek on the economic efficiency of socialism. His work Price Flexibility and Employment (1944) was intended as a challenge to the Chicago View; and Friedman’s highly critical review (1946) of Lange’s work was a response.
Lange played a leading role in rebuilding the department during 1940-45, insisting on the appointment of up-to-date theorists who were very different from the existing faculty, but he left academic life in 1945 for a political career in Poland, a move that was encouraged by Stalin. Lange eventually became Deputy Chairman of the Council of State. If the socialist Lange had remained at Chicago it is not absurd to suppose that the Chicago School might have died or taken root elsewhere, perhaps at Columbia University.
The originators of the Chicago tradition are often said to be Knight and his students Mint and Simons. Knight’s contributions to economic thought, however, are only tangentially related to the Chicago tradition. While he famously debated A C Pigou about social costs and contributed to the argument for toll roads, contending that privately owned roads would set tolls to reduce congestion to its efficient level, his real contribution was that of sage and oracle, rather than initiator of research programs.
Knight had many admirers among the Chicago graduate student body, but only a few students. Fortunately, some of these were extremely able; notably, Friedman, Stigler, Allen Wallis and James Buchanan (Nobel Laureate 1986). It was mainly through his personal impact on a few influential students that Knight affected the subsequent course of Chicago economics. The personal affection and mutual esteem in which Knight and his protégés held one another facilitated the collaborative efforts of the latter.
These protégés formed an informal affinity group in the mid-1930s that was critical to the future development of the Chicago School. The principal members of this group were Milton Friedman and his wife Rose Director Friedman (the first woman to graduate with a PhD in economics from Chicago), George Stigler, Allen Wallis, Aaron Director (brother of Rose) and Henry Simons. Like the profession at large, Knight’s students absorbed his ideas, but did not use them as points of departure for their own work. Knight contributed to the formation of their minds, but did not influence the direction of their research or participate in it.
Passing the Baton
Another influence in the Chicago School was Jacob Viner, whose intellectual style was far closer than Knight’s to that of the present-day Chicago economist. Viner was a careful, empirically oriented researcher and this had a great impact on the later group of Chicago economists. Ironically, Viner was not really conscious of a developing school of thought at Chicago as revealed in a letter he wrote to Don Patinkin: It was not until after I left Chicago in 1946 that I began to hear rumors about a ‘Chicago School’ which was engaged in organized battle for laissez faire and the ‘quantity theory of money’ and against ‘imperfect competition’ theorizing and ‘Keynesianism.’…. [It was only after 1951 that] I was willing to consider the existence of a ‘Chicago School’ (but one not confined to the economics department and not embracing all of the department) and that this ‘School’ had been in operation, and had won many able disciples, for years before I left Chicago.
Apparently Viner did not actively seek to keep his students near him, as Knight did. Viner was very busy and extensively involved in governmental affairs. Paul Samuelson, who was an undergraduate student at Chicago, recalled how he had difficulty gaining access to speak to Viner and had to be content with speaking to the professor through a narrow slit of a half opened door while standing outside his office.
The true “baton passer” of the initial Chicago group, therefore, was Knight, who was encouraged in this role by his students. The preface to Knight’s The Ethics of Competition, dated March 1, 1935, states that “the idea of publishing a collection of Knight’s articles suggested itself to a small group who had attended a dinner on the occasion of Professor Knight’s forty-ninth birthday, November 7, 1934, but not until all arrangements had been made and the selection of the contents completed was Professor Knight informed of the project.” The signers were Milton Friedman, Homer Jones, George Stigler and Allen Wallis.
Ten Years of Conflict
The younger members of the Chicago group (Friedman, Stigler, and Wallis), were extremely good expositors and very effective advocates, qualities which Knight did not share. Their skill and energy, coupled with Knight’s prestigious support, made them an effective and cohesive group — at Chicago and elsewhere — in promoting their common ideas. The older members of the group (Lloyd Mints, Aaron Director and Henry Simons), were also effective promoters of the group’s ideas. Director was a very persuasive advocate of ideas and an extraordinarily effective intellectual catalyst.
Henry Simons is best known for a series of essays of which A Positive Program for Laissez-Faire (1948) is the most famous. His teaching of Economics 201 and his Syllabus for these courses may have made an even greater contribution to the development of Chicago economics than his published writings.
In 1939, Chicago had another neoclassical presence: the Cowles Commission for Research in Economics, funded by Alfred E Cowles III, scion of one of the Chicago Tribune’s owners. Cowles’s postwar staff at Chicago included nine future Nobel laureates, among them Kenneth Arrow and Tjalling Koopmans. The Cowles group promoted an economics more scientific than the theoretical type that dominated the field at the time, but the group was very statist minded. It came into conflict with Knight and his students and the struggle was most intense over research methodology. The battle engendered a great deal of bitterness and the Cowles Commission finally departed for Yale in 1953.
Robert Maynard Hutchins, who was president (1929-1945) and chancellor (1945-1951) of the University of Chicago, was very disturbed by the government’s influence on the University’s scientific-research funding after World War II. He wanted specifically anti-statist thinkers and hired, among others, Aaron Director at the Law School, Milton Friedman in economics, Allen Wallis in the Business School, and Hayek at the Committee on Social Thought (the economics department refused to appoint Hayek).
Robert Maynard Hutchins, who was president (1929-1945) and chancellor (1945-1951) of the University of Chicago, was very disturbed by the government’s influence on the University’s scientific-research funding after World War II. He wanted specifically anti-statist thinkers and hired among others, Aaron Director at the Law School, Milton Friedman in economics, Allen Wallis in the Business School, and Hayek at the Committee on Social Thought (the economics department refused to appoint Hayek).
Hutchins had opposed the war, but after the attack on Pearl Harbor he offered the government the resources of the University. Millions of dollars in government contracts poured in. The Manhattan Project which developed the atomic bomb was only one of many projects operating on the University campus during the war years. But by 1944, Hutchins again began preaching for peace, and the atomic bomb made his message all the more urgent. After the war he joined in the efforts of the Committee to Frame a World Constitution to push for a world government.
Hutchins was a strong advocate of academic freedom, and as always refused to compromise his principles. Faced with charges in 1935 by drugstore magnate Charles Walgreen that his niece had been indoctrinated with communist ideas at the University, Hutchins stood behind his faculty and their right to teach and believe as they wished, insisting that communism could not withstand the scrutiny of public analysis and debate. He later became friends with Walgreen and convinced him to fund a series of lectures on democracy. When the University faced charges of aiding and abetting communism again in 1949, Hutchins steadfastly refused to capitulate to red-baiters who attacked faculty members. Hutchins could say, with a straight face: I do not need to tell you what the public thinks about universities. You know as well as I that the public is wrong.
Ascendance of the School
The intellectual environment fostered by Hutchins at the University of Chicago valued independent thinking and was not fearful of political authority. This appealed to many outstanding scholars and undoubtedly contributed to the rise of the Chicago School of Economics.
The School’s rebuilding process was delayed by World War II, at the end of which Viner left to go to Princeton. The institutionalist wing of the department was greatly reduced by the retirement of Millis (in 1940) and the departure of Leland for Northwestern University in 1946.
The key to the development and eventual dominance of the “Chicago View” came when Friedman took over the intellectual leadership of the Department. His vigor in debate and the content of his arguments set the tone and public image of Chicago economics for at least a quarter century. The remarkable success of the Chicago School during the third quarter of the last century was due in large part to the fact that it was able to take a leading role both in scientific research and in providing a rationale for political conservatism.
Two economists, T W Schultz (Nobel Laureate 1979) and D Gale Johnson, also provided much needed organizational leadership in building the department during this period. Schultz joined Chicago in 1943 after being fired from Iowa State College for testifying in Congress in favor of abolishing farm price support programs, which earned him the wrath of Iowa farmers who mounted pressure for his removal. He brought with him his student D G Johnson (Ph. D. supervisor of Justin Yifu Lin, now chief economist at the World Bank.). T W Schultz and Johnson in turn chaired the Department of Economics for over 30 years, during which time the Chicago School flourished and successfully recruited many talented faculty and students. It still has by far the largest group of Nobel laureates and Clark medalists on the faculty and among graduates.
During this period Friedman’s professional activity peaked. He began to combine economic research with advocacy of specific proposals for socio-economic reform (negative income tax, substitution of publicly subsidized private schools for public schools, making participation in social security voluntary, abolishing licensure for doctors, volunteer army in lieu of the draft). All of these reform proposals involved either increased use of the price system, substitution of private for public production, replacement of legal compulsion by voluntary-financially induced-private co-operation, or a mixture of all three. The force of Friedman’s ideas was very strong not only at Chicago but also beyond.