The Punctuated Evolution of Chicago Economics

Lanny Ebenstein has already written biographies of Milton Friedman and F.A. Hayek, who figure centrally in Chicagonomics. He now turns his attention to the school of thought as a whole. His new book’s subtitle is “The Evolution of Chicago Free Market Economics” but it might better be called a study of the “punctuated evolution” of Chicago economics, because Ebenstein suggests a disjunction, in the late 1940s, between the early Chicago classical liberals and the latter Chicago neoliberals (neo-anarchists, in Ebenstein’s phrase).

The year 1946 is his point of punctuation—like the asteroid 65 million years ago that hit the earth and wiped out the dinosaurs. Except in this case it is several arrivals and departures that would change the course of Chicago economics: “[Jacob] Viner left in March. [Henry] Simons died in June. Friedman, [Aaron] Director, and [Allen] Wallis arrived in September.” The only addition I’d make to the list is the ascension, also in 1946, of T.W. Schultz to be department head. More on that later.

The first 100 or so pages give the pre-1946 history of Chicago economics; the last 100 are divided between continuing to tell the story of Chicago economics and commenting at length on the contemporary state of libertarian public engagement. Friedman and Hayek share the limelight in the second half of the book. Very few other economists at Chicago from the post-1946 era receive more than brief mention, and even those brief mentions are often those scholars’ recollections of Friedman.

Robert Lucas, for example, appears in the list of Chicago School winners of the Nobel Prize, and is quoted twice about Friedman. Gary Becker receives twice as many mentions as Lucas, but only one that is not either from the Nobel Prize list or Friedman-related—and that one is about how Becker viewed Viner’s teaching. The only contemporary Chicago economist who independently receives favorable mention is James Heckman, whom Ebenstein calls “perhaps the economist at the University of Chicago today who is doing the most important work in the classical liberal tradition.”

So is the evolution in retrograde? Or did we miss something in the story?

If you’re getting the impression that Chicagonomics is less about Chicago economics and more about the transformation of American free market economics from classical liberalism to libertarianism, you’re right. Given the author’s interest in Friedman and Hayek, it’s not surprising that they are the focus here; what is surprising is the criticism of both of them that is introduced here. They each come in for some hard questioning by Ebenstein, an adjunct scholar at the Cato Institute, particularly about the drift in their later work into a form that provided the rallying cries for the small-government-at-any-cost political movements associated with libertarianism (and, negatively, with the term neoliberalism) over the past 40 years.

Away from their classical moorings, Friedman’s and Hayek’s later work, along with that of other members of the Chicago School, “favors profound inequality in society”—a stance that Ebenstein argues classical liberals disagree with. Their later work, he says, also favors some of the policy frameworks that support inequality—from legitimizing monopoly to rejecting progressive taxation.

I will leave it to historians of classical liberalism and libertarianism to decide whether Ebenstein is right about this move in Friedman and Hayek. As a historian of Chicago economics, I can say that 1946 is indeed a key point in its history. I also have identified it as the start date for the Chicago School, albeit for different reasons.

After 1946, with Schultz in the chair, and Friedman and H. Gregg Lewis starting research workshops in money and labor economics, the Chicago economics educational and research setting was reorganized in a way that emphasized the development of economics as an applied policy science, rather than as a Knightian/Simonian blend of classical liberal philosophy with free market principles. Friedman was central to the shift, as his 1953 essay “The Methodology of Positive Economics” focused Chicago economists’ attention away from Knightian concerns. But George Stigler and Becker are also important, as their 1977 “De Gustibus Non Est Disputandum” article took Friedman’s point and ensured that the Chicago approach focused attention on the cost structure of individual decisions.

Buttressed by empirical methods that started with W. Allen Wallis but that emerged clearly in the early work of Zvi Griliches and Marc Nerlove and were continued later in the work of Nobel laureates Heckman and Lars Hanson, the Chicago approach was reinforced constantly in the workshops that all economics students and faculty participated in. Gradually, Chicago economics went on to become a central part of mainstream economics. But, ironically, as it did so it looked less and less like Friedman or Hayek.

That story is not told by Ebenstein, however. He does provide us with an interesting tale of the first 50 years of Chicago economics. From James Laurence Laughlin, the first economist hired and chair of the Department of Political Economy, to Thorstein Veblen, Wesley Mitchell, and eventually Jacob Viner and Frank Knight, the twin towers of economic theory at Chicago during the 1930s, Ebenstein weaves a story of the continuity of classical liberal perspectives (well, not Veblen, or some of the others) from the 1890s to the World War II period. In his story, then, Chicago’s uniqueness does not date from the 1940s but came right from the start, an island of classical liberal thought in the midst of the emergence of Progressivism elsewhere.

Ironically, Knight becomes something of a hero for Ebenstein. Despite not agreeing with all the tenets of classical liberalism, Knight stays within the older camp, unlike Hayek or Friedman. But the history of the university and department in Ebenstein’s story ends in the 1940s, when he moves to the larger canvas of the emergence of free market economics in the United States. To get a stronger sense of the connection between the two, you will need to consult the best book on that, which is Angus Burgin’s The Great Persuasion (2012).

To sum up, Ebenstein is right that there is a major shift in American free market thought from classical liberalism to libertarianism, although he is weak on the why and how of the story. (For example, how is it linked to changes in Progressivism?) He is also right that pre-1946 Chicago economics is different from post-1946 Chicago economics, although I would lay more emphasis on the methodological and institutional aspects rather than concentrating so much on Friedman and Hayek. I enjoyed his history of the early Chicago economics, and wish he had tried to synthesize more of the later history in the same manner.

Finally, the one thing I learned about Ebenstein’s own perspective is that he is a classical liberal, and quite disappointed that his two heroes abandoned ancient truths for cheaper modern versions.