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Chicago school of economics

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. Milton Friedman, and George Stigler are considered the leading scholars of the Chicago school.[1]

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.


As of 2022, the University of Chicago Economics department, considered one of the world's foremost economics departments, has been awarded 14 Nobel Memorial Prize in Economic Sciences—more than any other university—and has been awarded six John Bates Clark Medals.[2][3][4] Not all members of the department belong to the Chicago school of economics, which is a school of thought rather than an organization.

Criticisms[edit]

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."[72]


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.[73] 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.[74] 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.[75]


Finally, the school also has been 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 was invited to speak with Augusto Pinochet; ninth highest of 12 South American countries) to $14,528 by the end of 2014 (the second highest in South America).[76][77] In the years since the reforms were introduced, the economic system implemented by the "Chicago Boys" (a label given to this group of economists) has 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.[78]

Austrian school of economics

Chicago plan

Mainstream economics

Market monetarism

Perspectives on capitalism by school of thought

Colander, David and Craig Freedman. 2019. Where Economics Went Wrong: Chicago's Abandonment of Classical Liberalism. Princeton: Princeton University Press.

Emmett, Ross B., ed. The Elgar Companion to the Chicago School of Economics (Edward Elgar, 2010), 350 pp.;  978-1-84064-874-4

ISBN

Emmett, Ross B. (2008). "Chicago School (new perspectives)", , 2nd Edition. Abstract.

The New Palgrave Dictionary of Economics

Emmett, Ross B. (2009). Frank Knight and the Chicago school in American economics. Routledge

Friedman, Milton; Friedman, Rose (1998). . Chicago: University of Chicago Press. ISBN 0-226-26414-9.

Two Lucky People: Memoirs

Hammond, J. Daniel; Hammond, Claire H. (2006). Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945–1957. London: Routledge.  0-415-70078-7.

ISBN

Hamowy, Ronald (2008). "Economics, Chicago School of". In (ed.). The Encyclopedia of Libertarianism. Thousand Oaks, CA: Sage; Cato Institute. pp. 135–137. doi:10.4135/9781412965811.n85. ISBN 978-1412965804. LCCN 2008009151. OCLC 750831024.

Hamowy, Ronald

Hovenkamp, Herbert (1985). . Michigan Law Review. 84 (2). Michigan Law Review, Vol. 84, No. 2: 213–284. doi:10.2307/1289065. JSTOR 1289065. S2CID 153691408.

"Antitrust Policy after Chicago"

Johnson, Marianne. 2020. "Where Economics Went Wrong: A Review Essay." Journal of Economic Literature, 58 (3): 749–776.

Kasper, Sherryl (2002). The Revival of Laissez-Faire in American Macroeconomic Theory: A Case Study of Its Pioneers. Cheltenham: Edward Elgar.  1-84064-606-3.

ISBN

McCloskey, Deirdre N. (2010). Bourgeois dignity: Why economics can't explain the modern world. Chicago: University of Chicago Press.  978-0226556659.

ISBN

Miller, H. Laurence Jr. (1962). "On the 'Chicago School of Economics'". The Journal of Political Economy. 70 (1): 64–69. :10.1086/258588. S2CID 153950209.

doi

Nelson, Robert H. (2001). Economics As Religion: From Samuelson to Chicago and Beyond. University Park, PA: Pennsylvania State Univ. Press.  0-271-02095-4.

ISBN

Palda, Filip (2016). A Better Kind of Violence: Chicago Political Economy, Public Choice, and the Quest for an Ultimate Theory of Power. Kingston, ON: Cooper Wolfling Press.  978-0-9877880-7-8.

ISBN

Reder, Melvin W. (1982). "Chicago Economics: Permanence and Change". Journal of Economic Literature. 20 (1): –38. Reprinted in John Cunningham Wood & R.N. Woods (1990), Milton Friedman: Critical Assessments, pp. 343–393.

1

Shils, Edward, ed. (1991). Remembering the University of Chicago: teachers, scientists, and scholars. University of Chicago Press.

Stigler, George J. (1988). Chicago Studies in Political Economy. Chicago: University of Chicago Press.  0-226-77437-6.

ISBN

Stigler, George J. (1988). Memoirs of an Unregulated Economist. New York: Basic Books.  0-465-04443-3. Description & preview.

ISBN

Valdes, Juan Gabriel (2008). . Cambridge University Press. ISBN 978-0-521-06440-8.

Pinochet's Economists: The Chicago School of Economics in Chile (Historical Perspectives on Modern Economics)

Wahid, Abu N. M. (2002). Frontiers of Economics: Nobel Laureates of the Twentieth Century. Westport, CT: Greenwood Press.  0-313-32073-X.

ISBN

Thomas Sowell

The University of Chicago Department of Economics

Commanding Heights, PBS Documentary, Chicago Against the Tide

at the University of Chicago Special Collections Research Center

Guide to the University of Chicago Department of Economics Records 1912–1961