The Chicago School of Economics refers to that group of economists associated with the University of Chicago and most closely identified with the work of Milton Friedman and George Stigler. Frank Knight and his protégé, Henry Simons, are commonly credited with having established this school of thought in the 1930s and 1940s. The Chicago School’s approach to economics, as it developed under Friedman and Stigler in the 1960s and 1970s, rests squarely on the conclusions reached earlier by the English classical economists that the rational allocation of economic resources required free and unhindered markets and that capitalism alone was consistent with political and social freedom. This conclusion stood in sharp contrast to the prevailing neo-Keynesian orthodoxy at midcentury, which regarded government intervention in the economy as essential to economic stability and progress and as necessary to ensure a fair distribution of wealth.

The members of the Chicago School not only underscored the importance of free markets in achieving economic progress, but also placed great emphasis on the effect of the money supply, which they viewed as the most crucial determinant of economic stability. The most important spokesman of these monetarist views is Milton Friedman, who, following Henry Simons, has concluded that an intimate connection exists between the money supply and the business cycle and that, to avoid either inflations or depressions in the economy, it is vital for central banks to keep the money supply stable. In 1963, Friedman, together with Anna Schwartz, published the Monetary History of the United States, 1867-1960, among whose findings was that the 1929 Depression was brought about by a severe contraction in the money supply. Indeed, Friedman came to refer to the 1929 Depression as the Great Contraction. Thus, Chicago School economists differentiated themselves from economists of the Austrian School, among them Mises and Hayek, who argued that inflations and depressions are based on the misinformation provided investors by interest rates set by central banks that do not in fact reflect the true time preferences of borrowers and lenders.

Another common characteristic of the members of the Chicago School is the emphasis they place in their academic work on empirical research. Their views on the importance of empirical testing of economic propositions once again distinguish them from the economists of the Austrian School, who regard economics as a science whose propositions derive from first principles. In this regard, the Chicago School, in the minds of many economists, has much in common with the German Historical School of the last decades of the 19th century, whose proponents claimed that the only acceptable epistemological approach to economic questions was a historical one. Led by Gustav Schmoller, the Historical School took issue with the claims of Carl Menger and the other members of the Austrian School, who, although not denying the value of some historical analyses, maintained that these studies properly belonged to economic history. Nor would the Austrians have accepted the notion that historical conclusions could say anything useful regarding the logical conclusions derived from economic axioms, which was the proper subject matter of economics. Thus, although a study of the effects of rent control in New York City in the decades following the Second World War might prove of interest and value to a historian, it ultimately can add nothing to the theoretical conclusion dictated by economic science that, should a ceiling be placed on the price of housing below its market price, there will be far more seekers than suppliers.

Although since the 1960s, Friedman and Stigler were its most prominent members, there are a number of other prominent economists associated with the Chicago School, among them no less than nine Nobel laureates who served as faculty members at Chicago when they received the prize and four other economists who shared their views: Friedman (1976), Theodore W. Schultz (1979), Stigler (1982), Merton H. Miller (1990), Ronald H. Coase (1991), Gary S. Becker (1992), Robert W. Fogel (1993), Robert E. Lucas, Jr. (1995), and Roger B. Myerson (2007) at Chicago; and Herbert Simon (1978), James Buchanan (1986), Harry Markowitz (1990), and Myron Scholes (1997) at other universities. The Chicago School’s success is truly a remarkable achievement for an award that was first conferred in 1969. Some have interpreted this seeming preference for neoclassical economics as reflecting the biases of the committee awarding the prize and particularly of its chairman between 1980 and 1994, Assar Lindbeck. Lindbeck, professor of economics at the University of Stockholm, served on the Nobel Prize selection committee from its inception until 1994 and, as a result of his own research, had reached conclusions similar to those of the economists at Chicago School. However, this fact does not explain why most of the prizes were awarded by unanimous vote and that economists with sharply divergent views were equally honored. Nor does it account for the fact that two of the University of Chicago’s nine Nobel Prizes were granted after Lindbeck retired from the committee.

The methodology and research interests of the Chicago School have left an indelible imprint not only on economics, but on a number of different areas in the social sciences.

The application of economic reasoning to a whole range of problems in law, sociology, history, and political science has had a far-reaching impact on the way social problems are currently investigated and has given rise to the Law and Economics movement and to Public Choice Theory. This procedure is best summarized by one of its most important practitioners, Gary Becker, who maintained: “The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it.” That almost any social problem is amenable to economic analysis (i.e., that is allows one to reach original and valid conclusions) does not, of course, preclude approaching these same problems in more traditional ways,  as some critics of what has been called the Chicago School’s “economic imperialism” have contended. It simply allows new and different insights into a particular set of social questions and permits conceiving of problems in terms of people attempting to maximize certain values. The economic approach of which Becker writes seeks not to dislodge the more traditional modes of analysis, but to supplement them. This approach, possibly more than anything else, is the defining characteristic of the modern Chicago School: its emphasis on price theory and its unrelenting application to problems of public policy. For all practical purposes, this approach was initiated by Friedman and extended and refined by Becker.

Libertarians are indebted to the proponents of the Chicago School for bringing to bear their analysis of economic phenomena on misguided political policies and for energizing political forces around the world in support of the free market.

Further Readings

Becker, Gary S. The Economic Approach to Human Behavior. Chicago: University of Chicago Press, 1976.

Ebenstein, Lanny. Milton Friedman: A Biography. New York: Palgrave Macmillan, 2007.

History of Economic Thought Website. Available at http://cepa.newschool.edu/het/schools/chicago.htm.

Miller, H. Laurence, Jr. “On the ‘Chicago School of Economics.’” The Journal of Political Economy 70 no. 1 (February 1962): 64–69.

Overtveldt, Johan van. The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business. Chicago: Agate, 2007.