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Chicago school (economics)
Encyclopedia
The Chicago school of economics describes a neoclassical
school of thought within the academic community of economist
s, with a strong focus around the faculty of The University of Chicago
, some of whom have constructed and popularized its principles. It is at times referred to as freshwater school of economics, in contrast to the saltwater school
based in coastal universities (notably Harvard, MIT, and Berkeley). The University of Chicago department, considered one of the world's foremost economics departments, has fielded more Nobel Prize
laureates and John Bates Clark medalists
in economics than any other university.
Kaufman (2010) says the School is characterized by:
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
. Chicago economists applied rational expectations to other areas in economics like finance
, which produced the influential efficient market hypothesis
.
, and closely related academic areas at the University such as the Booth School of Business and the Law School
. They met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory. 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.
. Knight's perspective was iconoclastic, and markedly different from later Chicago school thinkers. He believed that while the free market could be inefficient, government programs were even less efficient. He drew from other economic schools of thought such as Institutional economics
to form his own nuanced perspective.
(1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction cost
s. Rational individuals
trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. 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. Coase used the example of an 1879 London legal
case about nuisance
named Sturges v Bridgman
, in which a noisy sweetmaker and a quiet doctor were neighbours; the doctor went to court seeking an injunction against the noise produced by the sweetmaker. Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain
that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this. So the law ought to pre-empt what would happen, and be guided by the most efficient
solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe. Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action.
and won the Nobel Prize in Economics in 1982. He is best known for developing the Economic Theory of Regulation, also known as 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. This theory is an important component of the Public Choice field of economics. He also carried out extensive research into the history of economic thought
. His 1962 article "Information in the Labor Market"
and he won the Nobel Prize in Economics in 1976 for, among other things, A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argued that laissez-faire government policy is more desirable than government intervention in the economy.
Governments should aim for a neutral monetary policy oriented toward long-run economic growth
, by gradual expansion of the money supply. He advocated the quantity theory of money
, that general prices are determined by money. Therefore active monetary (e.g. easy credit) or fiscal (e.g. tax and spend) policy can have unintended negative effects. In Capitalism and Freedom
(1967) Friedman wrote,
The slogan that "money matters" has come to be associated with Friedman, but Friedman had also leveled harsh criticism of his ideological opponents. Referring to Thorstein Veblen
's assertion that economics unrealistically models people as "lightning calculator[s] of pleasure and pain", Friedman wrote,
, a notation system for quantitative data. In his tract, Railroads and American Economic Growth: Essays in Econometric History (1964) Fogel set out to rebut comprehensively the idea that railroads contributed to economic growth in the 19th century. And in Time on the Cross: The Economics of American Negro Slavery
(1974) he argued that slaves in the Southern states of America had a higher standard of living than the industrial proletariat of the Northern states before the American civil war
. Fogel believes that slavery was morally wrong, but argues that it was not necessarily less efficient than wage-labour.
. His work partly inspired the popular economics book Freakonomics
.
Richard Posner (b. 1939) is known primarily for his work in law and economics
. A lawyer rather than an economist, Posner's main work, Economic Analysis of Law attempts to apply free market economic thought, based on simple models of rational choice to every area of law possible. He has chapters on tort, contract, corporations, labor law, but also criminal law, discrimination and family law. Posner goes so far as to say that
He has shifted his previous Chicago School focus and taken a Keynesian economic viewpoint since 2009.
should not be seen as a separate mode of thought from microeconomics
, and that analysis in both should be built on the same foundations. Lucas's works cover several topics in macroeconomics, included economic growth, asset pricing, and monetary Economics.
. Starting with his 1965 Ph.D. thesis, "The Behavior of Stock Market Prices", Fama concluded that stock prices are unpredictable and follow a random walk
pattern of movement. He solidified this idea in his 1970 article, "Efficient Capital Markets: A Review of Theory and Empirical Work", which brought the idea of efficient markets into the forefront of modern economic theory.
was teaching in another department at Chicago in the 1950s and had little intellectual interaction with the economics department. However he and Friedman did work together in supporting a national student organization devoted to libertarian ideas, the Intercollegiate Society of Individualists. Hayek is not considered a member of the Chicago School but rather the Austrian School
.
, which John Williamson
says is "disappointing". A significant body of economists and policy-makers argues that what was wrong with the Washington Consensus as originally formulated by Williamson had less to do with what was included than with what was missing. Economists overwhelmingly agree that the Washington Consensus was incomplete, and that countries in Latin America and elsewhere need to move beyond "first generation" macroeconomic and trade reforms to a stronger focus on productivity
-boosting reforms and direct programs to support the poor.
s and little government intervention (albeit within a strict, government-defined monetary regime), came under attack in the wake of the financial crisis of 2007–2010. The school has been blamed for growing income inequality in the United States. 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 recent comments from Chicago school economists are "the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten." Critics have also charged that the school's belief in human rationality contributed to bubbles such as the recent financial crisis, and that the school's trust in markets to self-regulate has offered no aid to the economy in the wake of the crisis.
In response to free market economists who put the blame for the economic crisis on government intervention in the mortgage market via Fannie Mae, Freddie Mac, and the Community Reinvestment Act
,
critics of the Chicago School point out that a bulk of residential mortgage lending during the peak bubble years (2004–06) was through commercial entities such as Countrywide Financial
that weren't subject to provisions of the CRA, and that Fannie Mae and Freddie Mac actually lost market share during the housing bubble. They also point out that assigning a key role in the crisis to Fannie Mae and Freddie Mac doesn't explain why other countries also had a similar real estate bubbles at the same time.
Economics (Edward Elgar, 2010), 350 pp.; ISBN 978-1-84064-874-4
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
school of thought within the academic community of economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s, with a strong focus around the faculty of The University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, some of whom have constructed and popularized its principles. It is at times referred to as freshwater school of economics, in contrast to the saltwater school
Saltwater school (economics)
In economics, the freshwater school comprises macroeconomists who, in the early 1970s, challenged the prevailing consensus in macroeconomics research. Key elements of their approach was that macroeconomics had to be dynamic, quantitative, and based on how individuals and institutions make...
based in coastal universities (notably Harvard, MIT, and Berkeley). The University of Chicago department, considered one of the world's foremost economics departments, has fielded more Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
laureates and John Bates Clark medalists
John Bates Clark Medal
The John Bates Clark Medal is awarded by the American Economic Association to "that American economist under the age of forty who is adjudged to have made a significant contribution to economic thought and knowledge"...
in economics than any other university.
Kaufman (2010) says the School is characterized by:
- "A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets.
Chicago macroeconomic theory rejected Keynesianism in favor of monetarism
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
until the mid 1970s, when it turned to new classical macroeconomics
New classical macroeconomics
New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics...
heavily based on the concept of rational expectations
Rational expectations
Rational expectations is a hypothesis in economics which states that agents' predictions of the future value of economically relevant variables are not systematically wrong in that all errors are random. An alternative formulation is that rational expectations are model-consistent expectations, in...
. Chicago economists applied rational expectations to other areas in economics like finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, which produced the influential efficient market hypothesis
Efficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...
.
Terminology
The term was coined in the 1950s to refer to economists teaching in the Economics Department at the University of ChicagoUniversity of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
, and closely related academic areas at the University such as the Booth School of Business and the Law School
University of Chicago Law School
The University of Chicago Law School was founded in 1902 as the graduate school of law at the University of Chicago and is among the most prestigious and selective law schools in the world. The U.S. News & World Report currently ranks it fifth among U.S...
. They met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory. 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.
Frank Knight
Frank Knight (1885–1972) was an early member of the University of Chicago department. His most influential work was Risk, Uncertainty and Profit (1921) from which was coined the term Knightian uncertaintyKnightian uncertainty
In economics, Knightian uncertainty is risk that is immeasurable, not possible to calculate.Knightian uncertainty is named after University of Chicago economist Frank Knight , who distinguished risk and uncertainty in his work Risk, Uncertainty, and Profit:- Common-cause and special-cause :The...
. Knight's perspective was iconoclastic, and markedly different from later Chicago school thinkers. He believed that while the free market could be inefficient, government programs were even less efficient. He drew from other economic schools of thought such as Institutional economics
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
to form his own nuanced perspective.
Ronald Coase
Ronald Coase (b. 1910) is the most prominent economic analyst of law and the 1991 Nobel Prize-winner. His first major article, The Nature of the FirmThe Nature of the Firm
The Nature of the Firm 4 Economica 386–405, is an influential article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market.-Summary:Given that...
(1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s. Rational individuals
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective. 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. Coase used the example of an 1879 London legal
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
case about nuisance
Nuisance
Nuisance is a common law tort. It means that which causes offence, annoyance, trouble or injury. A nuisance can be either public or private. A public nuisance was defined by English scholar Sir J. F...
named Sturges v Bridgman
Sturges v Bridgman
Sturges v Bridgman LR 11 Ch D 852 is a landmark case in nuisance. It decides that what constitutes reasonable use of one's property depends on the character of the locality...
, in which a noisy sweetmaker and a quiet doctor were neighbours; the doctor went to court seeking an injunction against the noise produced by the sweetmaker. Coase said that regardless of whether the judge ruled that the sweetmaker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain
Bargain
Bargain could mean some of the following:* The process whereby buyer and seller agree the price of goods or services. See bargaining.* An agreement to exchange goods at a price.* Such an agreement where one of the parties thinks the price is very favourable....
that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this. So the law ought to pre-empt what would happen, and be guided by the most efficient
Efficiency (economics)
In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another if it can provide more goods and services for society without using more resources...
solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe. Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analysing the costs of action.
George Stigler
George Stigler (1911–1991) was tutored for his thesis by Frank KnightFrank Knight
Frank Hyneman Knight was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates James M. Buchanan, Milton Friedman and George Stigler were all students of Knight at Chicago. Knight supervised...
and won the Nobel Prize in Economics in 1982. He is best known for developing the Economic Theory of Regulation, also known as 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. This theory is an important component of the Public Choice field of economics. He also carried out extensive research into the history of economic thought
History of economic thought
The history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
. His 1962 article "Information in the Labor Market"
Milton Friedman
Milton Friedman (1912–2006) stands as one of the most influential economists of the late twentieth century. He was a student of Frank KnightFrank Knight
Frank Hyneman Knight was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates James M. Buchanan, Milton Friedman and George Stigler were all students of Knight at Chicago. Knight supervised...
and he won the Nobel Prize in Economics in 1976 for, among other things, A Monetary History of the United States (1963). Friedman argued that the Great Depression had been caused by the Federal Reserve's policies through the 1920s, and worsened in the 1930s. Friedman argued that laissez-faire government policy is more desirable than government intervention in the economy.
Governments should aim for a neutral monetary policy oriented toward long-run economic growth
Economic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, by gradual expansion of the money supply. He advocated the quantity theory of money
Quantity theory of money
In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level....
, that general prices are determined by money. Therefore active monetary (e.g. easy credit) or fiscal (e.g. tax and spend) policy can have unintended negative effects. In Capitalism and Freedom
Capitalism and Freedom
Capitalism and Freedom is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It sold over 400,000 copies in the first 18 years and more than half a million since 1962. It has been translated...
(1967) Friedman wrote,
The slogan that "money matters" has come to be associated with Friedman, but Friedman had also leveled harsh criticism of his ideological opponents. Referring to Thorstein Veblen
Thorstein Veblen
Thorstein Bunde Veblen, born Torsten Bunde Veblen was an American economist and sociologist, and a leader of the so-called institutional economics movement...
's assertion that economics unrealistically models people as "lightning calculator[s] of pleasure and pain", Friedman wrote,
Robert Fogel
Robert Fogel (b.1926), a co-winner of the Nobel Prize in 1993, is well known for his historical analysis and his introduction of New economic history, and invention of cliometricsCliometrics
Cliometrics, sometimes called new economic history, or econometric history, is the systematic application of economic theory, econometric techniques, and other formal or mathematical methods to the study of history . It is a quantitative approach to economic history...
, a notation system for quantitative data. In his tract, Railroads and American Economic Growth: Essays in Econometric History (1964) Fogel set out to rebut comprehensively the idea that railroads contributed to economic growth in the 19th century. And in Time on the Cross: The Economics of American Negro Slavery
Time on the Cross: The Economics of American Negro Slavery
Time on the Cross: The Economics of American Negro Slavery is a book authored by Robert William Fogel and Stanley L. Engerman-Content:Time on the Cross directly challenged the long-held conclusions that American slavery was unprofitable, a moribund institution, inefficient, and extremely harsh for...
(1974) he argued that slaves in the Southern states of America had a higher standard of living than the industrial proletariat of the Northern states before the American civil war
American Civil War
The American Civil War was a civil war fought in the United States of America. In response to the election of Abraham Lincoln as President of the United States, 11 southern slave states declared their secession from the United States and formed the Confederate States of America ; the other 25...
. Fogel believes that slavery was morally wrong, but argues that it was not necessarily less efficient than wage-labour.
Gary Becker
Gary Becker (b. 1930) is a Nobel Prize-winner from 1992 and is 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. His work was originally focused in labour economicsLabour economics
Labor economics seeks to understand the functioning and dynamics of the market for labor. Labor markets function through the interaction of workers and employers...
. His work partly inspired the popular economics book Freakonomics
Freakonomics
Freakonomics: A Rogue Economist Explores the Hidden Side of Everything is a 2005 non-fiction book by University of Chicago economist Steven Levitt and New York Times journalist Stephen J. Dubner. The book has been described as melding pop culture with economics, but has also been described as...
.
Richard Posner
Law and economics
The economic analysis of law is an analysis of law applying methods of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.-Relationship to other disciplines and...
. A lawyer rather than an economist, Posner's main work, Economic Analysis of Law attempts to apply free market economic thought, based on simple models of rational choice to every area of law possible. He has chapters on tort, contract, corporations, labor law, but also criminal law, discrimination and family law. Posner goes so far as to say that
"[the central] meaning of justice, perhaps the most common is – efficiency… [because] in a world of scarce resources waste should be regarded as immoral."
He has shifted his previous Chicago School focus and taken a Keynesian economic viewpoint since 2009.
Robert E. Lucas
Robert Lucas (b. 1937), who won the Nobel Prize in 1995, has dedicated his life to unwinding Keynesianism. His major contribution is the argument that macroeconomicsMacroeconomics
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...
should not be seen as a separate mode of thought from microeconomics
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
, and that analysis in both should be built on the same foundations. Lucas's works cover several topics in macroeconomics, included economic growth, asset pricing, and monetary Economics.
Eugene Fama
Eugene Fama (b. 1939) is an American economist who has spent all of his teaching career at the University of Chicago. He is well known as the father of the Efficient Market HypothesisEfficient market hypothesis
In finance, the efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.There are...
. Starting with his 1965 Ph.D. thesis, "The Behavior of Stock Market Prices", Fama concluded that stock prices are unpredictable and follow a random walk
Random walk
A random walk, sometimes denoted RW, is a mathematical formalisation of a trajectory that consists of taking successive random steps. For example, the path traced by a molecule as it travels in a liquid or a gas, the search path of a foraging animal, the price of a fluctuating stock and the...
pattern of movement. He solidified this idea in his 1970 article, "Efficient Capital Markets: A Review of Theory and Empirical Work", which brought the idea of efficient markets into the forefront of modern economic theory.
Friedrich Hayek
Libertarian economist Friedrich HayekFriedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
was teaching in another department at Chicago in the 1950s and had little intellectual interaction with the economics department. However he and Friedman did work together in supporting a national student organization devoted to libertarian ideas, the Intercollegiate Society of Individualists. Hayek is not considered a member of the Chicago School but rather the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
.
Discussion
Some claim that Chicago School economists are associated with Washington ConsensusWashington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...
, which John Williamson
John Williamson (economist)
John Williamson, born 1937, is an economist and coined the term Washington Consensus. He is a critic of capital liberalization and the bipolar Exchange rate....
says is "disappointing". A significant body of economists and policy-makers argues that what was wrong with the Washington Consensus as originally formulated by Williamson had less to do with what was included than with what was missing. Economists overwhelmingly agree that the Washington Consensus was incomplete, and that countries in Latin America and elsewhere need to move beyond "first generation" macroeconomic and trade reforms to a stronger focus on productivity
Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input...
-boosting reforms and direct programs to support the poor.
Criticisms
The Chicago school, which advocates for unfettered free marketFree market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s and little government intervention (albeit within a strict, government-defined monetary regime), came under attack in the wake of the financial crisis of 2007–2010. The school has been blamed for growing income inequality in the United States. Economist Brad DeLong of the University of California, Berkeley
University of California, Berkeley
The University of California, Berkeley , is a teaching and research university established in 1868 and located in Berkeley, California, USA...
says the Chicago School has experienced an "intellectual collapse", while Nobel laureate Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...
of Princeton University
Princeton University
Princeton University is a private research university located in Princeton, New Jersey, United States. The school is one of the eight universities of the Ivy League, and is one of the nine Colonial Colleges founded before the American Revolution....
, says that recent comments from Chicago school economists are "the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten." Critics have also charged that the school's belief in human rationality contributed to bubbles such as the recent financial crisis, and that the school's trust in markets to self-regulate has offered no aid to the economy in the wake of the crisis.
In response to free market economists who put the blame for the economic crisis on government intervention in the mortgage market via Fannie Mae, Freddie Mac, and the Community Reinvestment Act
Community Reinvestment Act
The Community Reinvestment Act is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods...
,
critics of the Chicago School point out that a bulk of residential mortgage lending during the peak bubble years (2004–06) was through commercial entities such as Countrywide Financial
Countrywide Financial
Bank of America Home Loans is the mortgage unit of Bank of America. Bank of America Home Loans is composed of:*Mortgage Banking, which originates purchases, securitizes, and services mortgages. In 2008, Bank of America purchased the failing Countrywide Financial for $4.1 billion...
that weren't subject to provisions of the CRA, and that Fannie Mae and Freddie Mac actually lost market share during the housing bubble. They also point out that assigning a key role in the crisis to Fannie Mae and Freddie Mac doesn't explain why other countries also had a similar real estate bubbles at the same time.
See also
- Chicago BoysChicago BoysThe Chicago Boys were a group of young Chilean economists most of whom trained at the University of Chicago under Milton Friedman and Arnold Harberger, or at its affiliate in the economics department at the Catholic University of Chile...
- History of economic thoughtHistory of economic thoughtThe history of economic thought deals with different thinkers and theories in the subject that became political economy and economics from the ancient world to the present day...
- Perspectives on CapitalismPerspectives on capitalismThroughout modern history, a variety of influential perspectives on capitalism have shaped modern economic thought. Adam Smith was one of the first influential writers on the topic, with his book The Wealth of Nations, which is generally considered to be the start of classical economics which...
- Milton Friedman InstituteMilton Friedman InstituteBetween 2008 and 2011, the Milton Friedman Institute for Research in Economics was an academic center established at the University of Chicago as a collaborative, cross-disciplinary site for research in economics. The Institute aimed to support research applying the tools of economic analysis to...
Further reading
- Emmett, Ross B., ed. The Elgar Companion to the Chicago School of
Economics (Edward Elgar, 2010), 350 pp.; ISBN 978-1-84064-874-4
- Emmett, Ross B. (2008). "Chicago School (new perspectives)," The New Palgrave Dictionary of EconomicsThe New Palgrave Dictionary of EconomicsThe New Palgrave Dictionary of Economics , 2nd Edition, is an eight-volume reference work, edited by Steven N. Durlauf and Lawrence E. Blume. It contains 5.8 million words and spans 7,680 pages with 1,872 articles. Included are 1057 new articles and, from earlier, 80 essays that are designated as...
, 2nd Edition. Abstract. Reprinted in John Cunningham Wood & R.N. Woods (1990), Milton Friedman: Critical Assessments, pp. 343-393. Description & preview. - Valdes, Juan Gabriel (2008): Pinochet's Economists: The Chicago School of Economics in Chile (Historical Perspectives on Modern Economics), Cambridge University PressCambridge University PressCambridge University Press is the publishing business of the University of Cambridge. Granted letters patent by Henry VIII in 1534, it is the world's oldest publishing house, and the second largest university press in the world...
, ISBN 0521064406