Chicago School/Chicago Boys Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The Chicago School was a group of highly influential economists affiliated with the University of Chicago in the last century. The heyday of this group was in the 1950s when economists teaching in the economics department joined forces with professors in other academic areas in the graduate school of business and the law school to set up a group outlook on economic issues based on monetary theory. More than two-thirds of the members of the faculty agreed on the ideas of the Chicago school of thought. These ideas rest on two pillars: (1) enhancing the Marshallian price theory tradition and (2) developing and applying empirical methods for more rigorous testing of theoretically derived hypotheses.

In the public perception, the Chicago School is frequently associated with antitrust economics, but Edward Chamberlain, among others, made an earlier reference to the “Chicago School of Anti-Monopolistic Competition.” Two of the leading researchers of this group were awarded the Nobel Prize in Economics: George J. Stigler (1982) and Milton Friedman (1976). Indeed, the track record of winners of the Nobel Prize in Economics affiliated with the University of Chicago is impressive: in addition to Stigler and Friedman, and up to 2008, the list comprises Paul A. Samuelson (1970), Kenneth J. Arrow (1972), Friedrich A. von Hayek (1974), Tjalling Koopmans (1975), Herbert A. Simon (1978), Theodore W. Schultz (1979), Lawrence Klein (1980), Gérard Debreu (1983), James M. Buchanan, Jr. (1986), Trygve Haavelmo (1989), Harry M. Markowitz (1990), Merton H. Miller (1990), Ronald Coase (1991), Gary S. Becker (1992), Robert W. Fogel (1993), Robert E. Lucas, Jr. (1995), Myron S. Scholes (1997), Robert A. Mundell (1999), Daniel L. McFadden (2000), James J. Heckman (2000), Edward C. Prescott (2004), and most recently, Roger B. Myerson (2007).

Principles

Most of the latter economists contributed to fields other than the antitrust issue. Interestingly, Friedrich A. von Hayek was affiliated with the University of Chicago from 1950 to 1962, but he is acclaimed as one of the most prominent members of the Austrian School. Besides his doctrines, he rejected the empirical evaluation of hypotheses and is, therefore, in conflict with the Chicago School’s most important principles, namely

taking a polar position among economist opinions to advocate an individualistic market economy,
emphasizing the relevance and usefulness of the neoclassical theory,
describing both an ideal market and the real markets by expressing the features mathematically,
seeing and applying economic principles to various aspects of human life, and
insisting on rigorous empirical testing of all hypotheses.

Particularly the latter principle was not commonly accepted among economists at that time, but was emphasized as a frequently neglected element of Positive Economics by Milton Friedman. This empirical testing, in combination with a sophisticated use of mathematics for describing the markets as well as the (aggregated) behavior of agents within these markets, provided members of the Chicago School with a clear advantage in the competition of scientists. By avoiding economic value judgments and establishing operationally meaningful theorems, Positive Economics advanced the dominating research paradigm, although Normative Economics had prominent supporters, notably the Keynesian School. Thus, the Chicago School’s credos that competitive markets are the best way to organize economic activities, that most types of governmental regulations are harmful to economic development, and that the monetary system, particularly the amplitude of money supply, has a substantial impact on a nation’s economic conditions, are not an opinion that is integrated into economic analysis, but rather the result of applying formal and empirical methods to issues of interest.

However, the results are grounded in the idea of a market, as described in The Wealth of Nations by Adam Smith, including the legitimacy of self-interest as well as the allocation of resources and distribution of income by market mechanisms. Self-interest is a productive force because it provides clear and agreeable guidelines for the behavior of agents in the markets. Contrastingly, if self-interest triggers or enforces regulations of market mechanisms, efficiency will be reduced. By emphasizing the efficiency of market mechanisms, a second value proposition is identified. Both mathematical-formal analysis and empirical testing are restricted to the consequences of decisions made or the market mechanisms under consideration. From an economics point of view, these procedures, which are not based on value judgments, enable a comprehensive understanding of market mechanisms. However, this is a teleological position, disregarding the deontological contents of economic analysis. In terms of philosophy of science, this is a value proposition, but it is not an economics value proposition.

A different thread to the Chicago School is made up by the methodology predominating in the “good old” Chicago School’s analysis. In the neoclassical tradition, they simplified the analysis with the “as if ” assumptions as if they were true. Moreover, their analysis is at the core of a mechanistic conception of economic relations and interactions. Evolutionary simulation casts doubt on this mechanistic conception, and particularly the complexity of real markets is counter to traditional formalism. In addition, the basic assumption of striving for rational decisions in market interactions is being challenged.

Nevertheless, besides its success in economic research, the Chicago Tradition has had a substantial impact on political decisions affecting national and international markets. During the Reagan administration, the economic policy of the United States was broadly in line with the Chicago School’s doctrines. Moreover, Thatcherism in the United Kingdom, transforming the British economy from one of the weakest into one of the strongest in Europe, attributes its success to seizing the results and suggestions of the Chicago School. Currently, many of the nations in the European Union are privatizing governmental services, such as the postal service, and aim to shift from governmental pension systems to private pension schemes, as advised by Milton and Rose Friedman in their book Free to Choose.

The Chicago Boys

The most prominent impact of the Chicago School has been the policy of the Chicago Boys in Chile. The Chicago Boys were a group of students at the Universidad Católica de Chile, who enthusiastically worked on Milton Freedman’s Capitalism and Liberty ideas. In 1957–70, about 25 of them prepared their doctoral degrees at the University of Chicago, mainly under the supervision of Arnold Harberger in the Latin American Finance Workshop and Milton Friedman in the Money and Banking Workshop. During the Pinochet era, the following Chicago Boys made a substantial impact on Chilean economic policy: Pablo Baraona (Minister of Economy, 1976–79), Alvaro Bardón (Minister of Economy, 1982–83), Sergio de Castro (Minister of Finance, 1977–82), Jorge Cauas (Minister of Finance, 1975–77), Martín Costabal (Budget Director, 1987–89), Sergio de la Cuadra (Minister of Finance, 1982–83), Maria Teresa Infante (Minister of Labor, 1988–90), Miguel Kast (Minister of Planning, 1978–80), Juan Ariztía Matte (Private Pension System Superintendent, 1980–90), Juan Carlos Méndez (Budget Director, 1975–81), José Piñera (Minister of Labor and Pensions, 1978–80, Minister of Mining, 1980–81), and Emilio Sanfuentes (Economic advisor to Central Bank). Another prominent Chicago Boy is Hernán Büchi (Minister of Finance, 1985–89), who studied for his Ph.D. at Columbia University, but agreed with the Chicago School’s doctrine and came second in the 1989 Chilean presidential election.

The Chicago Boys attained economic prosperity (the Chilean miracle) in comparison to other Latin American countries and became renowned for the coherence of their political decisions. However, their success was criticized because of income inequality and for admitting foreign companies to reduce profits and related national tax burdens to zero by calculating transfer prices departing from market prices.

The Tradition

The Chicago School is an economic tradition, but one that has also contributed to related disciplines, particularly sociology and law. Not surprisingly, the University of Chicago hosts one of the most prestigious law schools. These are the rules that are still guiding the excellent research process of the Chicago School: (1) they apply their analysis to all parts of (economic) life; (2) they leave no place for prestige, rank, past honor, or personal sensitivities in their economics workshop system; (3) they require strong discipline and methodological rigor. Since these rules are said to be still effective at the University of Chicago Graduate School of Business, this breeding ground will continue to contribute in two ways to contemporary economics and international management. On the one hand, they are likely to come up with path-breaking models. On the other hand, the results of the “good old” Chicago School highly impacts recent discussions of supernational institutions and organizations, including the International Monetary Fund and the World Trade Organization, supporting international trade, environmental protection, and healthcare.

Bibliography:

Duhs, “Elegance in Economics,” International Journal of Social Economics (1994);
Frank, “Natural Selection, Rational Economic Behavior, and Alternative Outcomes of the Evolutionary Process,” Journal of SocioEconomics (2003);
Friedman, “The Methodology of Positive Economics,” Essays in Positive Economics (University of Chicago Press, 1953);
and R. D. Friedman, Free to Choose: A Personal Statement (Harcourt, 1980);
Laurence Miller, “On the ‘Chicago School of Economics,’” Journal of Political Economics (1962);
Raza Mir, Ali Mir, and Mehdi Hussain, “Re-Examining Imbeddedness: A Critical Analysis of Global Strategic Management,” Academy of Strategic Management Journal (2006);
Nerlove, “Transforming Economics: Theodore W. Schultz, 1902–1998. In Memoriam,” Economic Journal (1999);
Van Overtveldt, The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business (Agate B2, 2007);
A. Posner, “Theories of Economic Regulation,” Bell Journal of Economics (1974);
Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics (1971);
Stiglitz, Making Globalization Work (Penguin Books, 2006).

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