chicago school of economics


  • 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.

  • Although he did not hold any position at the university afterwards, his later work is closely related to the thought of the Chicago school.

  • [7] Nonetheless, these scholars had an important influence on the thought of Milton Friedman and George Stigler who were the leaders of the second-generation Chicago school,
    most notably in the development of price theory and transaction cost economics.

  • [54] 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”.

  • His book The Road to Serfdom, published in the U.S. by the University of Chicago Press in September 1944 with the help of Aaron Director, played a seminal role in transforming
    how Milton Friedman and others understood how society works.

  • Main article: Richard Posner 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,…

  • 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.

  • [65] There were a number of Chicago academics who 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.

  • History and terminology 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, Harris School of Public Policy and the Law School.

  • [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.

  • 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.

  • [47] He is considered one of the founding fathers of Chicago political economy, and one of the most influential economists and social scientists in the second half of the
    twentieth century.

  • 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.

  • Second generation[edit] Milton Friedman[edit] The Nobel laureate Milton Friedman was affiliated with the University of Chicago for three decades; his ideas and his students
    made significant contributions to the development of Chicago School theory.

  • He drew from other economic schools of thought such as institutional economics to form his own nuanced perspective.

  • [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.

  • [61][62] The University Press continued to publish a large number of Hayek’s works in later years, such as The Fatal Conceit and The Constitution of Liberty.

  • 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.

  • He also carried out extensive research into the history of economic thought.

  • Other economists affiliated with Chicago have made their impact in fields as diverse as social economics and economic history.

  • His first major article, “The Nature of the Firm” (1937), argued that the reason for the existence of firms (companies, partnerships, etc.)

  • He is best known for developing the Economic Theory of Regulation,[40] 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.

  • Outside of Chicago, these early leaders were important influences on the Virginia school of political economy.

  • — 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.

  • [42] 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.

  • 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.

  • [5] The Chicago economists met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory.

  • [6] 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.

  • 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).

  • 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.

  • 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.

  • 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.

  • 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.

  • [9][10] A further significant branching of Chicago thought was dubbed by George Stigler as “Chicago political economy”.

  • [59] 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.

  • 1993, Robert Fogel, “for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.”

  • 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”.

  • Main articles: Eugene Fama and Efficient-market hypothesis 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 fourth most highly cited economist of all time.

  • His work was originally focused in labor economics.

  • He is regarded as a founder of the field Law and economics and established The Journal of Law & Economics in 1958.

  • Becker 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.

  • Besides what is popularly known as the “Chicago school”, there is also an “Old Chicago” or the first-generation 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.

  • Robert Fogel[edit] Main article: Robert Fogel 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,[57] and invention of cliometrics.

  • He believed that while the free market could be inefficient, government programs were even less efficient.

  • His work partly inspired the popular economics book Freakonomics.

  • This theory is an important component of the Public Choice field of economics.

  • [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.

  • [64] During 1950–1962, Hayek was a faculty member of the Committee of Social Thought at the University of Chicago, where he conducted a number of influential faculty seminars.

  • [37] In 1979, Schultz was awarded the Nobel Prize in Economics for his work in human capital theory and economic development.

  • His 1962 article “Information in the Labor Market”[41] developed the theory of search unemployment.

  • Referring to Thorstein Veblen’s assertion that economics unrealistically models people as “lightning calculator[s] of pleasure and pain”, Friedman wrote:[39] 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.


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