(Drivebycuriosity) - Scarcity belongs to the greatest problems of live. We are short of many things: money, capital, time, space, medicine, hospitals, computer chips, etc. Economics is the science of how to overcome scarcity; economists focus on efficiency, rationality & cost-benefit considerations. The most rigorous economists could be find at the University of Chicago, known as Chicago School of Economics, the most famous of them is Milton Friedman.
Johan van Overtveldt`s describes in "The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionized Economics and Business" how Chicago`s economists influenced science, politics & economy ( amazon).
Advocates For Limited Government
What makes "Chicago" special? Contrary to the followers of John Maynard Keynes, the Keynesians, Chicago economists strongly believe in the power of markets and they advocate for a limited government. They use the tool of economic theory to explain many aspects of live and they claim that the market system possesses inherently more power diffusion than any
alternative system. Milton Friedman, the most famous Chicago economist, declared: "Chicago" stands for belief in the efficacy of the free market as a means of organizing scarce resources. Robert Mundell, who was Professor of Economics and Editor of the Journal of Political Economy at the University of Chicago, describes the credo of Chicago economists: They apply economics for every nook and
cranny of human experience.
Milton Friedman and other "Chicagoans" popularized the Chicago price theory - the analysis of rational human choice under conditions of scarcity. Friedman & Co. taught that human behavior is shaped by price signals, because people want more of what was cheap and less of what of what was dear, or would prefer (by same risk, stress, time etc) a higher income to a lower one. Therefore
the price system - the free interaction of buyers and sellers - could
produce better social outcomes than the decisions of politicians and
regulators.
Chicago largely shaped the economics of regulation and deregulation and criticized government interventions in economic processes. Chicago economist George Stigler noticed that the regulatory process is dominated
by specific interest groups—“the industry,” who try to use it to their own advantage. Stigler`s "capture theory" is diametrically
opposed to the traditional view that regulation is primarily instituted
by a benevolent political authority in order to protect the public.
Vanishing Monopolies
Consequentially "Chicago" influenced the discussion about antitrust and monopolies and defended huge corporations against the claim that "big is bad". Chicago economist Yale
Brozen explained: If firms grow very big, it must be because of superior
management, economies of scale (average costs fall when a firm gets bigger), or the production of better products
that satisfy a major portion of buyers at a lower cost to them. Any attempt at
monopolistic or collusive behavior requires restriction of output and sacrifice of market share. If those companies tried to exert market power
and raise their prices substantially, others would enter the market. And Chicago economist Richard Posner observed: Too often antitrust suits were brought by or on behalf of
inefficient competitors against their deservedly more successful rivals.
Milton Friedman claimed that - government intervention aside - monopolies tend to vanish and competition to revive. He also criticized the idea that companies are responsible for social issues, today known as DEI (Diversity, Equity & Inclusion): "There is one and only one responsibility of business - to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game. A corporate executive only had direct responsibility to his employers. To divert resources to other goals would be unethical, spending someone else´s money for a great social interest".
Chicago`s skepticism about the role of the government included taxation. Chicago economist Arthur Laffer explained the consequences of tax hikes with a simple chart. His famous Laffer Curve showed that tax receipts would first increase as the rate
of taxation is pushed up. At a certain point, however, the disincentive
effects of taxation become dominant, so as the rate of taxation
continues to rise, tax receipts actually start to fall.
New Areas
Chicago economists expanded economics to new areas. Gary Becker, a student of Milton Friedman, epitomized the Chicago School economics philosophy by applying core economic tools—like cost-benefit analysis and rational choice—to a vast range of human behaviors previously considered outside economics, such as discrimination, the allocation of time within a family, using the economic
approach to explain the decisions to have children and to educate them,
and the decisions to marry and to divorce and more ( econlib).
Becker focused on decisions
of households, how you and I respond to economic incentives. Becker's
Nobel Prize lecture (1992) is entitled "The Economic Way Of Looking At Life". Becker belonged to
the pioneers of human capital theory and pointed out - what again
seems like common sense but was new at the time -: Education is an
investment. Education adds to our human capital just as other
investments add to physical capital" (econlib
).
According to Becker households are producers as well as consumers; they
produce commodities by combining inputs of goods and time according to
the cost-minimization minimization rules of the traditional theory of
the firm. In his book "Human Capital" Becker declared that the decision to invest in human capital (e.g., education, training, and health) can be analyzed in the same way as any other investment. People investment in their human capital when the benefits outweigh the costs.
Does Crime Pay?
According to Becker crime only happens because it “does pay.” Criminals respond to incentives as professors and others in choosing their occupations. Potential criminals consider the cost as well as benefits from crime in deciding whether to become criminals. Becker assumed that a better education (investment in human capital) reduces crime by raising earnings from legal activities. Otherwise a greater likelihood of apprehending and punishing criminals also reduces crime by raising the cost to potential criminals of engaging in crime.
Becker inspired his students to explore religious sects - for instance signaling one`s devotion to the
deity - or looked at cheating among Sumo wrestlers. Chicago influenced economists to study
non-traditional topics, such as suicide, addiction, riots, warfare,
charity and more.
Margaret
Reid, another Chicagoan, wrote a dissertation about "The Economics
of Household Production". She defined household
production as unpaid activities performed by and for the members of the
household. To estimate in dollar terms the market value of household
production, Reid guessed the opportunity cost, the earnings foregone because of household production.
Chasing Too Few Goods
Milton Friedman became famous for his work about the role of money and popularized the quantity theory of money. Together with Anna Schwartz he wrote the monumental study "A Monetary History of the United States". Friedman/Schwartz blamed the 1930s depression mainly on the Federal Reserve because the authority allowed a roughly one-third reduction in the stock of money that was the key element explaining the severity of the Great Depression of the 1930s.
Merton Miller, who was on the faculty of the University of Chicago's Booth School of Business from 1961 until his retirement in 1993, agreed: "The central banks of the world, have the power, though not always the will or the wisdom, to stop in its tracks any downward cascading financial spiral. Our own Federal Reserve System failed miserably on that count in the early 1930s, but at least learned some important lessons in the process that have made the prospect of a recurrence of the 1930s for the U.S. virtually unthinkable".
Friedman famously claimed that "inflation
is always and everywhere a monetary phenomenon", based on the quantity theory of money. He declared "too many
dollars chasing too few goods cause a general rise of prices". The
recent inflation wave, caused by a deluge of money generated by
government checks & massive bond purchases by the Federal Reserve,
Friedman´s helicopter money, confirms him again.
Friedman dismissed the counter-cyclical policy, advocated by the Keynesians, where the central bank reduces interest rates to stimulate the economy in a recession and hikes interest rates to fight inflation and an over-heating economy. He justified his critique with the evidence the central bank measures often overshoot, partly because the economy responds with unpredictable time lags. Instead he postulated a monetary growth rule where the central bank attempts a relatively stable growth rate of the money volume.
Chicagoan Robert Lucas refined Friedman`s thesis. He stated that anticipated changes in money growth have very different effects from unanticipated changes. Anticipated monetary expansions raise inflation, but they do not stimulate employment and production because workers demand higher wages. Unanticipated monetary expansions, on the other hand, can stimulate production as, symmetrically, unanticipated contractions can induce depression, because they can trick workers and investors.
Pariah Of The Left
In their heydays Chicago economists, above all Milton Friedman, influenced the politics in the West and laid the intellectual roots of the Reagan and Thatcher revolutions of the 1980. Friedman also argued for "strengthening of free-market economies in the less-developed nations, the removal of obstacles to private international trade, and the fostering of a climate favorable to private international investment".
Unfortunately Friedman and other Chicago economists - the so-called Chicago Boys - became a pariah of the left after they visited Chile, where they advised the government and convinced dictator Pinochet to set on market forces instead of government controls and taught the Chilean administration how to reduce Chile`s red-hot inflation by slowing the growth of money.
Gary Becker may have put the Chicago spirit best. He said in the banquet speech for his Nobel Prize: "Economics surely does not provide a romantic vision of life. But the widespread poverty, misery, and crisis in many parts of the world, much of it unnecessary, are strong reminders that understanding economic and social laws can make an enormous contribution to the welfare of people".
