The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles.
In the context of macroeconomics, it is connected to the "freshwater school" of macroeconomics, in contrast to the saltwater school based in coastal universities (notably Harvard, Columbia, MIT, and UC Berkeley). Chicago macroeconomic theory rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. The freshwater-saltwater distinction is largely antiquated today, as the two traditions have heavily incorporated ideas from each other. Specifically, New Keynesian economics was developed as a response to new classical economics, electing to incorporate the insight of rational expectations without giving up the traditional Keynesian focus on imperfect competition and sticky wages.
Chicago economists have also left their intellectual influence in other fields, notably in pioneering public choice theory and law and economics, which have led to revolutionary changes in the study of political science and law. Other economists affiliated with Chicago have made their impact in fields as diverse as social economics and economic history. Thus, there is not a clear delineation of the Chicago school of economics, a term that is more commonly used in the popular media than in academic circles. Nonetheless, Kaufman (2010) says that the School can be generally characterized by:
A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets.
The University of Chicago Economics department, considered one of the world's foremost economics departments, has been awarded 13 Nobel Prizes in Economics as of 2018 —more than any other university; and has also fielded more John Bates Clark medalists in economics than any other university.
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 Booth 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 outside the mainstream.
Besides what is popularly known as the "Chicago school", there is also an "Old Chicago" school of economics, consisting of an earlier generation of economists such as Frank Knight, Henry Simons, Lloyd Mints, Jacob Viner, Aaron Director and others. This group had diverse interests and approaches, but Knight, Simons, and Director in particular advocated a focus on the role of incentives and the complexity of economic events rather than on general equilibrium. Outside of Chicago, these early leaders were important influences on the Virginia school of political economy. Nonetheless, these scholars had an important influence on the thought of Milton Friedman and George Stigler, most notably in the development of price theory and transaction cost economics. A third wave of Chicago economics is led by macroeconomists Robert Lucas Jr. and Eugene Fama.
A further significant branching of Chicago thought was dubbed by George Stigler as "Chicago political economy". Inspired by the Coasian view that institutions evolve to maximize the Pareto efficiency, Chicago political economy came to the surprising and controversial view that politics tends towards efficiency and that policy advice is irrelevant.
Gary Becker (1930–2014) was a Nobel Prize-winner from 1992 and was 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 labor economics. His work partly inspired the popular economics book Freakonomics. He is considered one of the founding fathers of Chicago political economy.
Ronald Coase (1910–2013) was 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. 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.
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. 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.
Eugene Fama (born 1939) is an American financial economist who was awarded the Nobel Prize in Economics in 2013 for his work on empirical asset pricing and is the seventh most highly cited economist of all time. He has spent all of his teaching career at the University of Chicago and is the originator of the efficient-market hypothesis, first defined in his 1965 article as market where "at any point in time, the actual price of a security will be a good estimate of its intrinsic value". The notion was further explored in his 1970 article, "Efficient Capital Markets: A Review of Theory and Empirical Work", which brought the notion of efficient markets into the forefront of modern economic theory, and his 1991 article, "Efficient Markets II". Whilst his 1965 Ph.D. thesis, "The Behavior of Stock Market Prices", showed that stock prices can be approximated by a random walk in the short-term; in later work he showed that insofar as stock prices are predictable in the long-term, it is largely due to rational time-varying risk premia which can be modelled using the Fama–French three-factor model (1993, 1996) or their updated five-factor model (2014). His work showing that the value premium can persist despite rational forecasts of future earnings and that the performance of actively managed funds is almost entirely due to chance or exposure to risk are all supportive of an efficient-markets view of the world.
Robert Fogel (1926–2013), a co-winner of the Nobel Prize in 1993, is well known for his historical analysis and his introduction of New economic history, and invention of cliometrics. In his tract, Railroads and American Economic Growth: Essays in Econometric History, Fogel set out to rebut comprehensively the idea that railroads contributed to economic growth in the 19th century. Later, in Time on the Cross: The Economics of American Negro Slavery, 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.
Milton Friedman (1912–2006) stands as one of the most influential economists of the late twentieth century. A student of Frank Knight, he was awarded 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.
One of the great mistakes is to judge policies and programs by their intentions rather than their results.— Milton Friedman Interview with Richard Heffner on The Open Mind (7 December 1975)
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 (1992) 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.
The slogan that "money matters" has come to be associated with Friedman, but Friedman had also leveled harsh criticism of his ideological opponents. Referring to Thorstein 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.
Lars Peter Hansen (born 1952) is an American economist who won the Nobel Prize in Economics in 2013 with Eugene Fama and Robert Shiller for their work on asset pricing. Hansen began teaching at the University of Chicago in 1981 and is the David Rockefeller Distinguished Service Professor of economics at the University of Chicago. Although best known for his work on the Generalized method of moments, he is also a distinguished macroeconomist, focusing on the linkages between the financial and real sectors of the economy.
Friedrich Hayek (1899–1992) Hayek made contact with many at the University of Chicago in the 1940s, with Hayek's The Road to Serfdom playing a seminal role in transforming how Milton Friedman and others understood how society works. Hayek conducted a number of influential faculty seminars while at the U. of Chicago, and a number of academics worked on research projects sympathetic to some of Hayek's own, such as Aaron Director, who was active in the Chicago School in helping to fund and establish what became the "Law and Society" program in the University of Chicago Law School. Hayek, Frank Knight, Friedman and George Stigler worked together in forming the Mont Pèlerin Society, an international forum for libertarian economists. Hayek and Friedman cooperated in support of the Intercollegiate Society of Individualists, later renamed the Intercollegiate Studies Institute, an American student organisation devoted to libertarian ideas.
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 the term Knightian uncertainty was derived. Knight's perspective was iconoclastic, and markedly different from later Chicago school thinkers. He believed that while the free market could be 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.
Robert Lucas (born 1937), who won the Nobel Prize in 1995, has dedicated his life to unwinding Keynesianism. His major contribution is the argument that macroeconomics should not be seen as a separate mode of thought from microeconomics, and that analysis in both should be built on the same foundations. Lucas's works cover several topics in macroeconomics, included economic growth, asset pricing, and monetary Economics.
Richard Posner (born 1939) is known primarily for his work in law and economics, though Robert Solow describes Posner's grasp of certain economic ideas as "in some respects,... precarious". A federal appellate judge rather than an economist, Posner's main work, Economic Analysis of Law attempts to apply rational choice models to areas of law. 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.
A group of agricultural economists led by Ted Schultz and D. Gale Johnson moved from Iowa State to the University of Chicago in the mid-1940s. Schultz served as the chair of economics from 1946 to 1961. He became president of the American Economic Association in 1960, retired in 1967, though he remained active at the University of Chicago until his death in 1998. Johnson served as department chair from 1971-1975 and 1980-1984 and was president of the American Economics Association in 1999. Their research in farm and agricultural economics was widely influential and attracted funding from the Rockefeller Foundation to the agricultural economics program at the University. Among the graduate students and faculty affiliated with the pair in the 1940s and 1950s were Clifford Hardin, Zvi Griliches, Marc Nerlove, and George S. Tolley. In 1979, Schultz's was awarded the Nobel Prize in Economics for his work in human capital theory and economic development.
George Stigler (1911–1991) was tutored for his thesis by Frank Knight and was awarded the Nobel Prize in Economics in 1982. He is best known for developing the Economic Theory of Regulation, also known as regulatory 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" developed the theory of search unemployment.
Paul Douglas, economist and Democratic senator from Illinois for 18 years, was uncomfortable with the environment he found at the university. He stated that, "…I was disconcerted to find that the economic and political conservatives had acquired almost complete dominance over my department and taught that market decisions were always right and profit values the supreme ones… The opinions of my colleagues would have confined government to the eighteenth-century functions of justice, police, and arms, which I thought had been insufficient even for that time and were certainly so for ours. These men would neither use statistical data to develop economic theory nor accept critical analysis of the economic system… (Frank) Knight was now openly hostile, and his disciples seemed to be everywhere. If I stayed, it would be in an unfriendly environment."
While the efficacy of Eugene Fama's efficient-market hypothesis (EMH) was debated after the financial crisis of 2007–08, proponents emphasized that the EMH is consistent with the large decline in asset prices since the event was unpredictable. Specifically, if market crashes never occurred, this would contradict the EMH since the average return of risky assets would be too large to justify the decreased risk of a large decline in prices; and if anything, the equity premium puzzle implies that market crashes do not happen enough to justify the high Sharpe ratio of US stocks and other risky assets.
Economist Brad DeLong of the University of California, Berkeley says the Chicago School has experienced an "intellectual collapse", while Nobel laureate Paul Krugman of Princeton University says that some recent comments from Chicago school economists are "the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten", claiming that most peer-reviewed macroeconomic research since the mid-1960s has been wrong, preferring models developed in the 1930s. Chicago finance economist John Cochrane countered that these criticisms were ad hominem, displayed a "deep and highly politicized ignorance of what economics and finance is really all about", and failed to disentangle bubbles from rational risk premiums and crying wolf too many times in a row, emphasizing that even if these criticisms were true, it would make a stronger argument against regulation and control.
Finally, the school also has been criticized for training economists who advised the historically repressive Chilean military junta (and, to a lesser extent, other, similarly ultra-nationalist South American regimes) during the 1970s and 1980s. While they were credited with transforming Chile into Latin America's best performing economy (see Miracle of Chile) with GDP per capita increasing from US$693 at the start of 1975 (the year Milton Friedman met with Augusto Pinochet; ninth highest of 12 South American countries) to $14,528 by the end of 2014 (the second highest in South America), critics counter there was a corresponding increase in income inequality and that the reforms had a negative influence on the economic policies of Ronald Reagan and Margaret Thatcher. In the years since the reforms were introduced, the economic system implemented by the "Chicago Boys" (a label given to this group of economists) have mostly remained in place. A film titled Chicago Boys, which had a highly critical view of the economic reforms, was released in Chile in November 2015.
The 'new economic history', sometimes called economic history or cliometrics, is not often practiced in Europe. However, it is fair to say that efforts to apply statistical and mathematical models currently occupy the centre of the stage in American economic history.
Aaron Director (; September 21, 1901 – September 11, 2004), a professor at the University of Chicago Law School, played a central role in the development of the Chicago school of economics. Together with his brother-in-law, Nobel laureate Milton Friedman, Director influenced some of the next generation of jurists, including Robert Bork, Richard Posner, Antonin Scalia and Chief Justice William Rehnquist.Anglo-Saxon model
The Anglo-Saxon model or Anglo-Saxon capitalism (so called because it is practiced in English-speaking countries such as the United Kingdom, the United States, Canada, New Zealand, Australia and Ireland) is a capitalist model that emerged in the 1970s based on the Chicago school of economics. However, its origins date to the 18th century in the United Kingdom under the ideas of the classical economist Adam Smith.
Characteristics of this model include low levels of regulation and taxes and the public sector providing very few services. It can also mean strong private property rights, contract enforcement, and overall ease of doing business as well as low barriers to free trade.Calgary School
The Calgary School is a term used to refer to a group of academics and former students from the University of Calgary's Political Science, Public Policy, Economics, Law, and History departments in Calgary, Alberta, Canada. While many might consider themselves conservative, there are other themes that bind its members. These include support for strong provinces, limits to the power of the federal government, and greater Western influence in Ottawa.
The term, originally a play on the Chicago school of economics, was coined by American political scientist David Rovinsky.Chicago style
Chicago style may refer to several things:
The Chicago Manual of Style, a guideline for writing documents and news reports
Chicago school (architecture), a style of commercial buildings
Chicago school of economics, a school of thought among economists and academics
Chicago blues, a genre of blues music
Chicago-style dixieland, a genre of jazz music
Chicago-style pizza, several varieties of pizza
Chicago-style hot dog, an ingredient-laden variety of hot dogColumbia–Chicago School of Economics
The Columbia–Chicago School of Economics refers to a group of economists at Columbia University and the University of Chicago that helped to develop the empirical foundations of human capital theory, consequently revolutionizing the field of labor economics.
Leading members of the group include Jacob Mincer and Nobel Laureate Gary Becker.Frank Knight
Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates Milton Friedman, George Stigler and James M. Buchanan were all students of Knight at Chicago. Ronald Coase said that Knight, without teaching him, was a major influence on his thinking. F.A. Hayek considered Knight to be one of the major figures in preserving and promoting classical liberal thought in the twentieth century. Paul Samuelson named Knight (along with Harry Gunnison Brown, Allyn Abbott Young, Henry Ludwell Moore, Wesley Clair Mitchell, Jacob Viner, and Henry Schultz) as one of the several "American saints in economics" born after 1860.George Stigler
George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist, the 1982 laureate in Nobel Memorial Prize in Economic Sciences and a key leader of the Chicago School of Economics.H. Gregg Lewis
Harold Gregg Lewis (May 9, 1914 – January 25, 1992) was an American economist notable for his contributions in labor economics. He was considered a principal member of the monetarist, free-market-oriented Chicago school of economics.A native of Homer, Michigan, Lewis earned his bachelor's degree and Ph.D. from the University of Chicago. He stayed as a faculty member until 1975, when he moved to Duke University.Henry Calvert Simons
Henry Calvert Simons (; October 9, 1899 – June 19, 1946) was an American economist at the University of Chicago. A protégé of Frank Knight, his anti-trust and monetarist models influenced the Chicago school of economics. He was a founding author of the Chicago Plan for monetary reform that found broad support in the years following the 1930s Depression, which would have abolished the fractional reserve banking system, which Simons viewed to be inherently unstable. This would have prevented unsecured bank credit from circulating as a "money substitute" in the financial system, and it would be replaced with money created by the government or central bank that would not be subject to bank runs.
Simons is noted for a definition of economic income, developed in common with Robert M. Haig, known as the Haig–Simons equation.Jacob Mincer
Jacob Mincer (July 15, 1922 – August 20, 2006), was a father of modern labor economics. He was Joseph L. Buttenwiser Professor of Economics and Social Relations at Columbia University for most of his active life.Jacob Viner
Jacob Viner (; May 3, 1892 – September 12, 1970) was a Canadian economist and is considered with Frank Knight and Henry Simons to be one of the "inspiring" mentors of the early Chicago School of Economics in the 1930s: he was one of the leading figures of the Chicago faculty. Paul Samuelson named Viner (along with Harry Gunnison Brown, Allyn Abbott Young, Henry Ludwell Moore, Frank Knight, Wesley Clair Mitchell, and Henry Schultz) as one of the several "American saints in economics" born after 1860.Jesse Shapiro
Jesse M. Shapiro is an American economist. He is the George S. and Nancy B. Parker Professor of Economics at Brown University.Law and economics
Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.Merton Miller
Merton Howard Miller (May 16, 1923 – June 3, 2000) was an American economist, and the co-author of the Modigliani–Miller theorem (1958), which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic Sciences in 1990, along with Harry Markowitz and William F. Sharpe. Miller spent most of his academic career at the University of Chicago's Booth School of Business.Real business-cycle theory
Real business-cycle theory (RBC theory) is a class of new classical macroeconomics models in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.
According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear but rather reflect the most efficient possible operation of the economy, given the structure of the economy.
Real business cycle theory categorically rejects Keynesian economics and the real effectiveness of monetary policy as promoted by monetarism and New Keynesian economics, which are the pillars of mainstream macroeconomic policy.
RBC theory is associated with freshwater economics (the Chicago School of Economics in the neoclassical tradition).Theodore Schultz
Theodore William Schultz (; 30 April 1902 – 26 February 1998) was an American economist and chairman of the University of Chicago Department of Economics. Schultz rose to national prominence after winning the 1979 Nobel Memorial Prize in Economic Sciences.University of Chicago Law School
The University of Chicago Law School is a professional graduate school of the University of Chicago. It employs more than 200 full-time and part-time faculty and hosts more than 600 students in its Juris Doctor program, while also offering the Master of Laws, Master of Studies in Law and Doctor of Juridical Science degrees in law. It is consistently ranked among the top law schools in the world, and has produced many distinguished alumni in the judiciary, academia, government, politics and business.
The law school was conceived in 1902 by the President of the University of Chicago, William Rainey Harper, who requested assistance from faculty at Harvard Law School in setting up the new school. Harper and the law school's first Dean, Joseph Henry Beale, designed the school's curriculum with inspiration from Ernst Freund's interdisciplinary approach to legal education. The construction of the school was financed by John D. Rockefeller and the cornerstone was laid by President Theodore Roosevelt. The law school opened for classes in 1903.
In the 1930s, the law school's curriculum was transformed by the emergence of the law and economics movement. Economists Aaron Director and Henry Calvert Simons taught courses integrated with the antitrust curriculum taught by statesman Edward H. Levi, leading to the development of the Chicago school of economics and the Chicago School approach to antitrust law. The law school expanded rapidly in the 1950s under Levi's leadership and, in the 1970s and 1980s, many scholars with connections to the social sciences were attracted to the school's influence in law and economics, including Nobel laureates Ronald Coase and Gary Becker and the most cited legal scholar of the 20th century, Richard A. Posner.The law school's flagship publication is the University of Chicago Law Review. Students edit two other independent law journals, with another three journals overseen by faculty. The law school was originally housed in Stuart Hall, a Gothic-style limestone building on the campus's main quadrangles. Since 1959, it has been housed in an Eero Saarinen-designed building across the Midway Plaisance from the main campus of the University of Chicago. The building was expanded in 1987 and again in 1998. It was renovated in 2008, preserving most of Saarinen's original structure.William Landes
William M. Landes (born c. 1939) is an American economist who has written about the economic analysis of law. He is a fellow of the American Academy of Arts and Sciences, which cited him for his work in the field. Landes also is the original founder (with Richard Posner and Andrew Rosenfield) of Lexecon, a consulting firm.
Landes received his Ph.D. in Economics from Columbia University. He taught in the Economics Departments of Stanford University, Columbia University, the Graduate Center of the City University of New York and The University of Chicago before joining the faculty of the University of Chicago Law School, where he is emeritus.
Landes is also a board member of the Smart Museum of Art, which is located in the University of Chicago's Hyde Park Campus. The Elisabeth & William M. Landes Gallery within the Smart Museum of Art features works created between the 1880s and the late 1950s.
Landes is a collector of left-wing and homoerotic art.Wirtschaftsgeschichte
Max Weber's Wirtschaftsgeschichte (General Economic History in English) (1923) is a book of economic theory which was composed by his students from lecture notes and released three years after his death in 1920. In his General Economic History, Weber creates an institutional theory of the rise of capitalism in the west. Unlike in his earlier work, The Protestant Ethic and the Spirit of Capitalism, religion is given a minor role. The emphasis of the work lies instead on the place of the state and calculable law in allowing economic actors to predict exchange for gain.
Weber's institutional theory of capitalism was rediscovered in the early 1980s by writers like Randall Collins, Daniel Chirot, and Douglass C. North, who worked to replace theories based largely on Immanuel Wallerstein's "World Systems" theory. Though today read primarily by sociologists and social philosophers, Weber's work did have a significant influence on Frank Knight, one of the founders of the neoclassical Chicago school of economics, who translated Weber's General Economic History into English in 1927.
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