RIP Chicago School of Economics: 1976-2008
Posted By Barry Ritholtz On December 23, 2008 @ 7:03 am In Markets | 40 Comments
Some <1> time ago, I asked if “Milton Friedman was the next economist whose once lauded reputation may soon slide ?”
Turns out it happened much quicker than expected. A long Bloomberg piece, <2> Friedman Would Be Roiled as Chicago Disciples Rue Repudiation, discusses the tarnishment of the Chicago school of thought.
Its long overdue. From the efficient-market theories, to the concept of man as rational profit maximizers, much of the edifice that is was the Chicago school of economics is based on a foundation that is false, disproven or otherwise questionable.
I first encountered the Chicago theory in law school. The Chicagoists somehow read into law a market efficiency component that was never there. I recoiled against it — not because of the libertarianism, which I embraced. Rather, it seemed a backdoor way to circumvent democracy, and force into the legal system rules that were never debated, voted on, or agreed to by a representative government. I found the extremist legal theories of Judges like Richard Posner and Frank Easterbrook intellectually repulsive. They were undemocratic, anti-representative government. When I told a professor that the law and economics movement was an attempt at a political coup, he laughed and said, try to stop it.
I disliked the neoclassical price theory. It was authoritarian, a worship of a form of mob rule outside of the usual legal channels. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable. Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable (I know, radical, huh)
If there is one silver lining in the entire collapse, its that this group of intellectual charlatans have been revealed as utterly wanting. Oh, there will be some pushback by the Chicagoans. (Watch the comments for the cute little protests from law students who never practiced a day in their lives, and the biz school kiddies who never executed a single trade).
Anyway, here’s an excerpt from today’s Bloomberg:
“When Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed — whose remedies, ironically, entail countermeasures of nationalization,” Marshall Sahlins, an emeritus professor of anthropology, said during the debate, speaking in a room adorned with murals of female students parading through the campus in medieval gowns. Sahlins, 77, noted a few weeks later socialist and capitalist countries alike are regulating or nationalizing financial institutions in a rebuff to Friedman.
Off campus, the global meltdown is stirring anti-Chicago economists, who were voices in the wilderness during decades of lax government oversight of markets. Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.
‘Bears the Blame’ “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.
University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.
“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.
Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge. Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.”
That’s the phrase that best sums up the Chicago School: “Divorced from Reality.”
Chicago School repudiation? Good riddance!
http://www.ritholtz.com/blog/2008/12/chicago-repudiation/print/Bloomberg article.........
Friedman Would Be Roiled as Chicago Disciples Rue Repudiation
Dec. 23 (Bloomberg) -- John Cochrane was steaming as word of U.S. Treasury Secretary Henry Paulson’s plan to buy $700 billion in troubled mortgage assets rippled across the University of Chicago in September.
Cochrane had been teaching at the bastion of free-market economics for 14 years and this struck at everything that he -- and the school -- stood for.
“We all wandered the hallway thinking, How could this possibly make sense?” says Cochrane, 51, recalling his incredulity at Paulson’s attempt to prop up the mortgage industry and the banks that had precipitated the housing market’s boom and bust.
.......
University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.
“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.
Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge.
Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a3GVhIHGyWRM&
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