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The post–World War II (1939–1945) period saw the emergence at the University of Chicago of a significant alternative in economics to both the tradition of American institutionalism and the emerging traditions of Keynesianism and general equilibrium theorizing. Usually associated with the work of Milton Friedman (monetarism) and George Stigler, and their students Gary Becker and Robert Emerson Lucas, the Chicago approach to economics is also present in the agricultural and development economics of Theodore W. Schultz, D. Gale Johnson, and Zvi Griliches; the labor economics of H. Gregg Lewis, Al Rees, and Sherwin Rosen; the industrial economics of Lester Telser, Harold Demsetz, and Sam Peltzman; the law and economics of Aaron Director, Ronald H. Coase, and Richard Posner; the economic history of Robert Fogel and Deidre McCloskey; the international economics of Harry Johnson and Arnold Harberger; and the social economics of Kevin Murphy and Steven Levitt. Two themes tie together these various manifestations of the Chicago approach: in each of them, Marshallian price theory is taken seriously, and economics is understood to be an applied science.
At a time when the economics discipline was moving toward both formalized general equilibrium models and refined econometric techniques, Chicago economists continued the interwar tradition of price theory taught by Jacob Viner and Frank H. Knight. From 1930 to the mid1980s, graduate students read and reread a canon of books and essays by Viner, Knight, Henry Simons, Friedman, Stigler, Coase, and Becker to gain an intuitive appreciation for how economics could be applied to any social or economic problem. As Friedman’s 1953 essay “The Methodology of Positive Economics” made clear, the Chicago approach applied a small set of simple tools to economic problems because they retained their predictive success despite their generality. Chicago’s predilection for the application of price theoretic models to policy issues was also supported by the analytical egalitarianism of Becker and Stigler’s 1977 essay “De Gustibus Non Est Disputandum”: look for explanations of economic change in the set of cost constraints individuals face, because people across time and place are assumed to hold similar values and tastes.
The methodological underpinnings of the Chicago approach were driven home to graduate students and faculty alike every week in the workshops that met regularly in the University of Chicago’s Department of Economics, Graduate School of Business, and Law School. Starting in the mid-1940s, the workshops became the locus of most research and graduate training in economics at Chicago. After passing comprehensive examinations at the end of the first year, graduate students associated themselves with one or more workshops. Each workshop met weekly for critical examination of papers by faculty members, invited external guests, or senior graduate students. Most workshops functioned by “Chicago rules”: papers were distributed prior to the meeting, which was devoted to discussion, rather than presentation, in order to uncover the methodological, theoretical, or empirical problems in the paper. The collective enterprise embodied in the workshop model encouraged faculty and graduate students to pursue interesting applications of price theory in settings where it was commonly understood to not be applicable: antitrust and anticompetition policy, economic development, crime and habitual behavior, law, religion, corporate finance, the family, history, and politics. In all these areas, Chicago economics extended the reach of the discipline by showing that useful, empirically based criticisms of policy frameworks could be built upon basic price-theoretic analytical foundations (Reder 1987).
Chicago economics has not shied away from controversy, either internal or external. The circle around Knight sparred with institutionalists and empirical economists within and outside the department during the 1930s and 1940s. From 1939 to 1955, the University of Chicago was the home of the Cowles Commission, a leader in formal modeling and hence at odds with the Chicago School approach. Alfred Cowles brought Oskar Lange, Jacob Marschak, and Tjalling Koopmans to Chicago, and played an important role in the development of both econometrics and Walrasian general equilibrium theory. The creation of the Shadow Open Market Committee in the early 1970s provided a public forum for the longstanding dispute between Chicago monetarists and the Federal Reserve System’s general Keynesian orientation. Finally, the Chicago department’s long-standing relation with Latin American students became the center of controversy when a group of Chicago-trained economists became the architects of economic transformation in Chile under General Augusto Pinochet. The impact of Chicago-inspired reforms there contributed to the spread of the Chicago approach across the developing world, and became the center of a global debate over privatization and market-based reforms.
- Friedman, Milton. 1953. The Methodology of Positive Economics. In Essays in Positive Economics, 3–43. Chicago: University of Chicago Press.
- Reder, Melvin W. 1987. Chicago School. In The New Palgrave: A Dictionary of Economics, ed. John Eatwell, Murray Milgate, and Peter Newman, vol. 1, 413–418. New York: Stockton.
- Stigler, George J., and Gary S. Becker. 1977. De Gustibus Non Est Disputandum. American Economic Review 67 (2): 76–90.
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