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 forego careful general equilibrium reasoning in favor of more results-oriented partial equilibrium analysis. In recent years, the "Chicago School" has been associated with "economic imperialism", i.e. the application of economic reasoning to areas traditionally considered the prerogative of other fields such as political science, legal theory, history and sociology.
The "Chicago School" has had various phases with quite different characteristics. Nonetheless, the main consistent factor seems to be that it has always held a unique,distinct and influential place in the realm of economics at any time. In the modern day, under the "Chicago School" umbrella, we can count various further schools of thought which are discussed in more detail elsewhere: e.g. Monetarism in the 1960s, New Classical/Real Business Cycle macroeconomics from the 1970s until today, and more recently, the New Institutionalism, New Economic History and Law-and-Economics movements.
The University of Chicago was founded in 1892, funded primarily by the oil magnate John D. Rockefeller. It was the brainchild of the energetic young William Rainey Harper, then a professor of Hebrew and Biblical Study at Yale, who persuaded Rockefeller and the Baptist community in the Midwest to revive an older Baptist theological seminary in Chicago, which had gone defunct in 1886. But Harper had in mind the modern "German-style" research university model (as pioneered at Johns Hopkins). The University of Chicago was chartered in 1890, and its doors opened in October 1892. Armed with Rockefeller money and a charter which gave him near-monarchical authority, President Harper plundered other universities for faculty - nine university presidents were lured away to take up positions at Chicago, the Chicago science faculty was virtually transplanted wholesale from Clark University.
Economics formed a separate "Department of Political Economy" from the start - the first separate economics department in an American university. Harper had originally hoped to lure Richard T. Ely (then unhappy at Hopkins), but Ely's salary demands were too high, so Harper turned instead to raiding Cornell. Harper placed economics under Ely's ideological opposite, the American apologist, J. Laurence Laughlin, then at Cornell, who brought along a coterie of younger Cornell men with him to Chicago - junior associate Adolph C. Miller, students Thorstein Veblen and Robert Hoxie, and philosopher William Caldwell (who also lectured in economics). Harvard graduate William Hill was brought in as instructor in 1893, and went on to launch Chicago's program in agricultural economics. Sociologist Albion W. Small and philosopher John Dewey were two other notable figures in the early Chicago years.
Over Laughlin's objections, Harper also brought on board Ely's student, Edward W. Bemis as professor of economics in the extension division. Nonetheless, a strident socialist, Bemis was shown the door in 1895, notionally for incompetence, but also for Bemis's public criticism of railway owners (many of whom were university trustees and donors) in the aftermath of the Pullman strike. Pennsylvania heavyweight Edmund J. James was brought in 1896 as professor public administration and to take over the Chicago extension program.
Bemis's allegations of mistreatment did not seem to apply to Thorstein Veblen, who was arguably even more radical. Veblen was saddled from the start with editing the house journal, the Journal of Political Economy, launched in late 1892. Veblen went on to write some of his most important works while at Chicago. Despite his radicalism, his notorious distaste for teaching and his scandalous romantic dalliances - "women liked him, and he did not object" - Veblen was valued by Laughlin, Dewey and other faculty members. Nonetheless, it was Veblen's extra-curricular activities that eventually led Harper, over Laughlin's objections, to demand Veblen's resignation in 1906. Among notable early Chicago students who came under Veblen's spell was labor economist Richard F. Hoxie (who stayed on until his suicide in 1916), Wesley Clair Mitchell (graduating in 1899, he stayed on as instructor until 1903) and Herbert J. Davenport (graduating in 1898, Davenport joined the Chicago faculty in 1900, but disappointed after Veblen's departure, himself left in 1908). Alvin S. Johnson arrived in 1910, but was lured shortly after to Stanford..
By the example of the pre-existing Divinity School, president Harper dreamed of setting up professional schools to complement arts and sciences. Consonant with this objective, Laughlin led the way in the creation of the "College for Commerce and Politics" in 1898. Initially, it was merely a set of interdisciplinary courses designed for the final two years of undergraduate students intending to take a career in business. It would eventually evolve into the Chicago Graduate School of Business. This was followed up by the establishment of the University College of Teachers in 1898 (with E.J. James as dean, until his departure in 1902), the Law School in 1902 and, later on, the School of Social Service Administration in 1919 .
Harper died in 1907, and was succeeded as president of the University of Chicago by the political scientist Harry Pratt Judson. Laughlin remained in charge of Chicago economics, bringing in economic historian Chester W. Wright in 1907 and Leon C. Marshall in 1909 (who took up the deanship of the Business School). Despite his personal affection for early Institutionalists like Veblen and Hoxie, Laughlin himself had been dogmatically (Neo)classical (relying strictly on J.S. Mill and A. Marshall), and maintained something of a feud with Institutionalist bastions like Columbia and Wisconsin. In this respect, the Chicago School's ferocious attachment to Neoclassicism could be said to start with Laughlin - if Laughlin himself had fully committed to marginalist revolution, rather than continued flirting with Ricardianism. Nonetheless, an attachment to economic theory was instilled in students like Davenport (who would go on to mentor Knight at Cornell). But Chicago's eclecticism in the Laughlin years pointed in no specific direction.
The departure of Veblen, Davenport, Johnson and Hoxie's death hit Laughlin hard - like an embittered King Arthur who couldn't hold on to his young knights, Laughlin retired in 1916, leaving the department in the hands of Leon Marshall. The young Jacob Viner was brought in 1916, and while many mark this as the passing of the torch, Viner did not stay - instead, Viner followed his old Harvard master Taussig to Washington in 1917. Viner would return to Chicago in 1919, but by this time the luminary figure at Chicago was John Maurice Clark. Clark had arrived in 1915, and taken over the theory courses after Laughlin's retirement. Under Clark's influence, Chicago took a more conventional Institutionalist turn, like many other departments in the United States. After nearly a decade, John Maurice Clark left Chicago in 1926, returning to Columbia. The appointments of public finance specialist Simeon E. Leland in 1927 and economic historian John U. Nef in 1928 seemed to reinforce the Institutionalist direction Clark had started. But Clark's successor, Frank H. Knight was to change everything.
First Chicago School
The "Chicago School" really began in the 1920s with the diumvirate of Frank H. Knight (appointed in 1926) and Jacob Viner (appointed permanently in 1919) taking the helm after Clark's departure. They were, for the most part, theoreticians (Knight more in the Jevonian-Austrian tradition, Viner leaning towards the Marshallian). In an age when empiricism ruled most of American economics, Knight and Viner set up the economics department at Chicago as a bastion of counter-institutionalism and, as such, the department soon acquired something of a "siege" mentality. Also at Chicago during this time were the "Mathematical Trio" -- Oskar Lange, Henry Schultz and Paul H. Douglas -- economists with a particular bent for the theoretical approach of the Lausanne School. Younger faculty included monetary theorists Henry C. Simons and Lloyd Mints.
The characteristics of the early Chicago School of 1920-1950 differ considerably from the later Chicago School. They were highly suspicious of "positivistic" economic methodology and denounced economic imperialism, arguing for a confined role for economic analysis (esp. Knight). They were suspicious of the efficiency claims of laissez-faire economics, arguing for it only on a "non-consequential" basis. They welcomed active government policies to cure recessions (esp. Viner's recommendations on "reinflating" the economy, and Simons's "Chicago Plan" for counter-cyclical monetary policy), and counted a fully-fledged socialist in their ranks (Lange). Furthermore, most of the faculty was not averse to rigorous, theoretical general equilibrium reasoning, but were leading practitioners of the art (Lange, Schultz, Douglas).
However, like the later Chicago School, the early Chicago School was hostile to "alternative" economic paradigms. For the most part, they did not welcome the Keynesian Revolution in macroeconomics and denounced the Monopolistic Competition approach in microeconomic theory. To a good extent, the issues these "alternative" paradigms purported to solve, they felt could be handled reasonably well within the confines of Neoclassical theory.
The economics department underwent an upheaval during the 1940s. Schultz died with tragic suddenness, Viner left for Princeton, Lange left for political life in Poland and Douglas became a U.S. Senator. Knight, whose interests were moving away from economic theory, went into semi-retirement, handing the reigns of the department over to Simons, Mints and Director.
There was a new injection of blood during this period as the department tried to regain its bearings. The first lurch was towards Walrasian economics. Several students associated with the departed Lange and Schultz remained -- such as Yntema and Mosak -- and Chicago went on to welcome Jacob Marschak, Tjalling Koopmans and the the Cowles Commission right next door. The Walrasian period lasted until 1955, when it moved (was hounded off?) to Yale.
The 1940s also saw the appointment of development theorists H. Gregg Lewis and Bert F. Hoselitz. These appointments were accompanied by a group of agricultural economists, Theodore W. Schultz, D. Gale Johnson and Walter Nicholls, who had left Iowa State in protest over one of the most famous violations of academic freedom. Apparently, the powers-that-be of Iowa, home of the American dairy industry, had pressured the university to force a young economist to recant a study in which he had concluded that margarine was no less nutritious than butter.
Second Chicago School
In the 1960s, the department began to congeal into a new shape, led by Milton Friedman (who joined in 1946) and George J. Stigler (a graduate, who returned to Chicago in 1957) This is the core of what became the "Second" Chicago School, which is perhaps the most famous and polemical one. Stigler and Friedman were avowed Marshallians, and eschewed the methodology of the now-departed Walrasians of the Cowles Commission. As the contemporary ditty went:
"I read my Marshall completely through
From beginning to end and backward too
I read my Marshall so carefully
That now I am Professor at U of C".
The Stigler-Friedman period was characterized by faithful adherence to Neoclassical economics and maintained itself dead against the concept of market failures, reinforcing the Chicago School stance against imperfect competition and Keynesian economics. Through their influential journals -- notably, the Journal of Political Economy and the Journal of Law and Economics -- the research programme of the Chicago School was advanced and diffused. It was the Second Chicago School that is often accused of being the modern version of Manchester School liberalism (or, as some maintain, the more conservative tradition of American apologism).
In microeconomics, led by George Stigler, the guiding maxim in the Chicago approach was to preserve the Neoclassical paradigm whenever possible, never to doubt it. When there is no obvious solution to a particular problem, the recommended course was to extend the Neoclassical paradigm by incorporating new concepts into it that would make the subject matter amenable to economic analysis. Examples of extensions to the Neoclassical paradigm conceived by Chicago economists are search theory (due to George Stigler), human capital theory (due to Gary Becker and T.W. Schultz) and property rights/transaction cost theory (due to Ronald H. Coase).
The Chicago School's impulse for extension of Neoclassical price theory is largely responsible for the "imperialist" character of which it is often accused. Business and finance, previously the prerogative of practitioners and business schools, were brought into the economic spotlight by Chicago economists such as A.W. Wallis, Harry Markowitz, Merton H. Miller and Eugene F. Fama. Further afield, political science and institutional theory were brought into Neoclassical economics by Chicago School economists such as G.J. Stigler, R.H. Coase, James Buchanan, Armen Alchian and Harold Demsetz. Economic history were given a Neoclassical reading by Robert W. Fogel and Douglas C. North, while the Chicago Law School (esp. Richard Posner and William M. Landes) used economics to rethink swathes of legal theory. Perhaps most famously, sociological issues like addiction, family and even marriage were given a thoroughly economic interpretation in the hands of Gary S. Becker and Jacob Mincer.
[Naturally, not all the "Chicago School" economists are at the University of Chicago, e.g. Alchian, Mincer, North, etc., but it is not unreasonable to argue that they are part of that school of thought.]
[George P. Shultz, better known as the Secretary of Labor and subsequently of the Treasury under Richard Nixon and later Secretary of State under Ronald Reagan, Shultz was also professor of industrial relations and later dean of the Business School at Chicago during the 1960s.]
[It is revealing that the adamantly anti-imperialist Friedrich A. von Hayek, who was at Chicago during the 1950s, was confined to an appointment on an interdisciplinary "Committee on Social Thought", rather than the economics department proper. Walrasian theory, which has tended to be of more limited scope, has also had very little presence at Chicago over the past half-century: the only theorist to have successfully infiltrated the Chicago citadel was Hugo Sonnenschein, but then he came as president of the university. With the exception of the work of Lester Telser, the "alternative" paradigm of game theory has also been conspicuously absent until recently.]
In macroeconomics, the most renowned phase of the Chicago School has been that of "Monetarism" under the leadership of Milton Friedman, its best-known advocate. For the longest time, Chicago was the only school in America not swept by the Keynesian Revolution (the presence of Lloyd A. Metzler on the faculty was exceptional - Metzler being brought in by T.W. Schultz as the "house Keynesian" to balance Friedman). This does not mean that the old Chicago School was opposed to government intervention - indeed, Viner's policy conclusions are at times hard to distinguish from Keynes's. But in Friedman's Monetarism, it found a theoretical and empirical means by which to begin rolling back the Keynesian revolution. Although prominent in the 1960s, Friedman has always claimed that the main tenets of Monetarism can be found in the work of early Chicago School economists such as Henry Simons. (see our survey of Monetarism).
Monetarism has since given way to the more mathematically rigorous "New Classical" economics of Robert E. Lucas in the 1970s and 1980s. The quantitatively-oriented "Walrasian" flavor of New Classicism meant that the appointments of Robert Lucas, Thomas Sargent, Michael Woodford and Robert Townsend at Chicago met with quite some opposition from the older hands. Nonetheless, in its policy conclusions and rigorous adherence to Neoclassical theory, the New Classical school remains by most accounts the natural inheritor of the Chicago School mantle in modern macroeconomics.
Despite, or perhaps as a result of, its mischievous but always unique perspective, the University of Chicago has taken in a lion's share of Nobel Prizes in economics: Milton Friedman, T.W. Schultz, G.J.Stigler, R.H. Coase, G.S. Becker, M.H. Miller, R.W. Fogel and R.E.Lucas were all on the Chicago faculty when they received their awards. If we were to add Chicago-trained economists, the list of Nobelists would expand to include Hebert Simon, James Buchanan, Harry Markowitz and Myron Scholes.
Laughlin's Chicago (1892-1915)
Post-War Chicago of the 1945-1960
Resources on the Chicago School
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