Review of Lanny Ebenstein’s “Chicagonomics: The Evolution of Chicago Market Economics”, New York: St. Martin’s Press, 2015.
This book tells the story of the University of Chicago’s economists, from the university’s founding in 1891 with a large grant from John D. Rockefeller to the present day. Apparently it started recruiting by using its riches to hire a strong faculty, which was originally headed by James Laurence Laughlin. It portrays the interwar Chicago as full of classical liberals, who also had a program for combating the Great Depression that some of us would be tempted to call Keynesian, though without such theoretical structure as Keynes managed to create. (It embraced fiscal expansion.)
The author is very emphatic in distinguishing classical liberalism, which he insists has ample room for government, from libertarianism, defined as hostility to all government. Ebenstein clearly thinks of himself as a classical liberal, and—despite his affiliation to the Cato Institute—has only contempt for libertarians. Jacob Viner, who along with Frank Knight dominated the inter war period, was a prime example of a classical liberal. He advocated “use of the market, but recommended redistributive taxes and transfers to mitigate the worst inequalities of the laissez-faire system” (p.39), as well as the use of fiscal-monetary policy for stabilization.
1946 marked the transition between the old Chicago and the modern Chicago, with the departure of Viner to Princeton, the death of Henry Simons, and the arrival of Milton Friedman to the Economics Department. The first four years were mainly devoted by him to the battle with the Cowles Commission, but after 1950, with the arrival of Friedrich Hayek in Chicago (at the Committee on Social Thought), the “Chicago School” really took off. (The book debates whether there had been a prewar “Chicago School”, and concludes negatively.)
The book’s main claim is that in their younger days (defined as pre-retirement in 1976 in the case of Friedman and prior to being Nobelled in 1974 in the case of Hayek) both Friedman and Hayek should be considered classical liberals rather than libertarians. This is because their writings in this period, unlike their writings later in life, contain positive references to government. One may endorse this as the critical distinguishing feature between classical liberals, on the one hand, and libertarians in the contemporary sense, on the other, and yet wonder whether Ebenstein is not too generous to Chicago. This is said not because of the trivial point that any abrupt cut-off point is likely to have the odd reference that does not fit, but because Friedman and the Chicago School were already considered pretty reactionary when I was a graduate student (1960-63). The point is that classical liberalism as defined by Ebenstein is a fairly broad church, which can contain both Milton Friedman and myself, despite the fact that I would prefer vastly more redistributive taxation than Friedman. It is wrong to say that one has to be a conservative in all dimensions to be labeled as conservative in any: the fact that Hayek (and Friedman) criticized some conservative attitudes, like the opposition to science and the sympathy for evangelicals (p.166), does not make their attitude to income equality progressive. If one had to define a single criterion for deciding whether someone is “left” or “right” on the political spectrum, there is surely a strong case for choosing the attitude to equality (which is not, despite what Ebenstein says on pp.150-51, the same as uniformity). There is also the point that, as Ebenstein confesses, Friedman (and Hayek) described themselves as libertarians at one point. He argues that the meaning of the word has changed, and that now it simply means opposition to government; he does not tell us what Friedman and Hayek thought it meant when they used the term. Both favored low taxes and small government, even if they did not go as far as the Tea Party does today. Friedman and Hayek are hardly unique in having become more conservative (in the non-Hayekian sense, as meaning less sympathetic to government) as they aged, but that does not mean that formerly they were progressives.
The other weakness of the book strikes me as uncritical acceptance of the Chicago school’s claims as to their innovations. The ones listed are: their opposition to monopolistic and imperfect competition; the dominance of monetary over fiscal policy; the methodological precept that a theory should be judged by the validity of its predictions rather than the realism of its assumptions; and the criticism of Keynesian economics. On the first, we are told that Aaron “Director’s key insight was that monopolistic competition did not characterize the American economy” (p. 142). No reason for describing this as an “insight” rather than an “assertion” is given. There was a long, and rather pointless, dispute as to the relative potency of monetary and fiscal policy. With the benefit of hindsight, I think we can say that even though fiscal policy has a role in a recession as deep as that of 2008-09, the profession was deeply impressed by Friedman’s analysis of the (monetary) causes of the Great Depression, and has concluded that above all else we need to make sure that monetary policy avoids causing shocks. On methodology, Friedman’s victory was total. On Keynesian economics, I have never understood the reasons for the hostility; one can perfectly well draw monetarist conclusions from a Keynesian framework by introducing monetarist assumptions (as David Laidler used to do when he was temporarily exiled back to the UK by the Vietnam War), and Friedman’s attempt to provide an alternative framework (“A Theoretical Framework for Monetary Analysis”, April 1970 and “A Monetary Theory of Nominal Income”, April 1971, both in the Journal of Political Economy) was distinctly unimpressive. Meanwhile there are some outstanding contributions of the Chicago School, such as Gary Becker’s analysis of the family, that are overlooked.
Ebenstein writes that “prices, profits, and property….are the three essential knowledge-bestowing institutions that allow productive economic activity to occur” (p.147). It is easy to agree that all three are essential to the operation of a market economy, but if one thinks of a socialist economy, it is surely not true. Presumably one does not include consumer goods as property, in which case a fully socialized economy would not have private property. Or is he claiming that socialism just is not feasible? If prices are a guide to scarcity as in a market economy, then a socialist economy ought to keep a track of profits as a guide to whether to expand or contract activity in particular lines of business, although what it would do with net profits earned is a good question. But perhaps it is claiming too much for the rationality of socialist planners to imagine that prices might reflect scarcity, the usual socialist logic seems to be that they reflect costs.
Despite these criticisms, the book gives a sense of the magnitude of the debt that we all owe to Milton Friedman and his followers in Chicago. It is easy to forget it now, but we would be a lot poorer without their writings. One does not have to be an adherent of the Chicago School to appreciate its contributions.