Chicago school of economic thought, Key Econimist of chicago School of thought

Chicago School of
Economic Thought
“A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in
the usefulness and insight of neoclassical price theory, and a normative position that favors and
promotes economic liberalism and free markets”.



Research & Complied by:
NOMAN KHAN
Std. ID: 57154
Micro Economics
MBA (Evening Programme)
Submitted to:

Mr. Qazi Salman

Course: Micro Economics
Class ID: 57074
Semester: Spring 2013

PAF KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY
NURSERY BRANCH KARACHI
7 th May, 2013
Chicago Economics School of Thoughts

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Chicago School of Economic Thought

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Chicago School of
Economic Thought


Research & Complied by

NOMAN KHAN
Submitted to:

Std. ID: 57154
MICROECONOMICS
MBA (Evening Programme)

Mr. Qazi Salman
Course: Micro Economics
Class ID: 57074
Semester: Spring 2013
PAF KARACHI INSTITUTE OF ECONOMICS AND TECHNOLOGY
NURSERY BRANCH KARACHI

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(INTENTIONALLY LEFT BLANK)


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This Project assignment is thankfully dedicated to
my beloved wife and children for providing me
peace of mind and conducive environment
for research & compilation of  work
&
specially Karachi Electric Supply Company (KESC).
for  their excessive interruptions was not there,
this report could have been more precise, and
Completed one week earlier...
Thank You!!

Noman Khan
Stud. ID: 57154
PAF KIET
Nursery Br. Karachi

Please do not hesitate to contact if you have any query – all suggestions hare welcomed
Noman Khan
0333‐3274654


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ACKNOWLEDGEMENT
I, first of all, would like to express my gratitude to the Almighty Allah who
gave my resources, expertise and many more to initiate and complete the
project assignment happily on time, also would like to bless all those people
who provided support, specially my family, who offered me peace of mind to
concentrate and focus on the subject assignment.
I also would like to thanks my Institute (PAF KIET) and the instructor Mr.
Qazi Salman who thought me Economics which is new for me and i was
studying this dismal science subject very first time, and it’s proved to be an
understandable without any extra efforts. Instructor kind support took this
long & difficult journey converted into a destination.
It would not better, to cover up the unconditional support of my Office
for provision of best quality resources, and tools after office hour to complete
it effectively and efficiently, and support of related websites, books, and
articles, related to the concerned school of thought.

Noman Khan


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TABLE OF CONTENT

Dedication

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Acknowledgement ………………………………………………………………………………………………………………….. vi
Table of Content

A.
B.
C.
D.
E.

F.
G.
H.
I.
J.

………………………………………………………………………………………………………………….. vii

Economics school of thought:
Chicago school of thought:
History of Chicago SoT:
Main Ideas:

Key Economist :

E.1. Frank Knight:

E.2. Ronald Coase:
E.3. George Stigler:
E.4. Milton Friedman:
E.5. Robert Fogel:

E.6. Gary Becker:

E.7. Richard Posner:
E.8. Robert E. Lucas:
E.9. Eugene Fama:

E.10. Friedrich Hayek:

Key theories / laws:
Impact of the school in society:
Quotable quotations:

Conclusion:

References:

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CHICAGO ECONOMICS SCHOOL OF THOUGHT

A. ECONOMICS SCHOOLS OF THOUGHTS:

A.1 Schools of thought (SoT) define as “the viewpoint or belief or system of beliefs acknowledged as
convincing by some group or school". In economics, a school of thought can be thought of as a
belief or system of beliefs held by some cluster of economists. Each SoT differs by the set of
economic phenomena they wish to explain, the economic practices used, and the assumptions
used in order to explain those economic phenomena.

A.2 Here the word "school" does not mean to be a terrestrial place but it is a thought or belief of
economists. However most often the economists belong to certain schools of thought that have
been linked to the specific universities / schools, such as the Austrians School of Economics,
University of Chicago etc.

A.3 There are variety of approaches (school of thoughts) exist in the economics theory, various
economics classify the various SoT in variety of phases: Economic thought may be divided into
three following phases but the methodical economic theory has been developed mainly from the
establishment of the last phase i.e, “modern” era.
Pre modern period “start form Chinese civilization, and Greco Roman
Early‐modern period of mercantilist & physiocrate thoughts
Modern period start from 1776 from great economist Adam Smith till to the classical
economies era 1930,

B. CHICAGO SCHOOL OF THOUGHT:
B.1 The Chicago school of economics having a thought of neoclassical school inside the hypothetical
community of economists, they usually have a strong focus around the faculty of the University of
Chicago, some of whom have constructed and popularized its principles.

B.2 In the macroeconomics background, it is linked to the freshwater school of macroeconomics, in
contrast to the saltwater school based in coastal universities. Chicago macroeconomic theory
forbidden the Keynesianism until the mid‐1970s in favor of monetarism, when it turned to new
classical macroeconomics heavily based on the concept of rational expectations. The freshwater‐
saltwater distinction is largely antiquated today, as the two traditions have heavily incorporated
ideas from each other. More specifically, without having to give up the Keynesian focus traditional
sticky and imperfect competition in New Keynesian economics, elected to incorporate the insights
of rational expectations, was developed as a response to new classical economics.

B.3 Chicago economists have also left their intellectual influence in other fields, notably in
pioneering public choice theory and law and economics, which have led to revolutionary changes

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in the study of political science and law. Other economists affiliated with Chicago have made their
impact in fields as diverse as social economics and economic. Thus, there is not a clear delineation
of the Chicago SoT, a terminology that is frequently used in the public and electronic and print
media especially in educational groups. Nevertheless, the Chicago SoT is characterized mostly by
Kaufman in 2010 in this way:

C.

HISTORY OF CHICAGO SCHOOL OF THOUGHT

C.1 Major conceptual protector of traditional economics and capitalism, it has been one of the most
influential bodies of economic thought in recent times. This monetarist school is connected with
the economics department at the University of Chicago, especially during 1970s and particularly
with professor (1948‐79) Milton Friedman (1912‐2006) who won Nobel Prize in economics in
1976 for his theory of normal rate of joblessness. His colleagues went on to win seven more
Nobels, including George Stigler (1911‐91) in 1982 for deregulation theory, Merton Miller (1923‐)
in 1990 for financial economics, Ronald Coase (1910‐) for Coase's theorem in 1991, Gary Becker
(1930‐) for application of microeconomics to non‐market behavior in 1992, and Robert Lucas
(1937‐) for the theory.

C.2 Its basic beliefs of this SoT are:
(1)

Free (open) markets are best allocate resources in an economy than any government,

(2)

Market Failure is caused by the Monopolies that are created by government, attempt to
regulate an economy,


(3)

Governments should avoid trying to manage aggregate demand and, instead,


(4)

There should be a minimal government intervention (monopolies); economic freedom and
free trade, tax cutting and tax reforms will serve and relief the market / economy in the best
way.


(5)

Should focus on maintaining a steady and low rate of growth of money supply.


(6)

Inflation adjustment and inflation targeting in another main idea of this SoT.

For further details please visit:
http://www.businessdictionary.com

C.3 The hierarchy of various Economics SoT in chronological order from 1500 to 2010 can also be
shown in the following family tree of economics:


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C.4 Most of the economics belief and have a consensus on the classification of various SoT that there
are two major school of thoughts exist in society of economics one is Classical SoT and other is
neo‐classical SoT, classical SoT initiate right from the Adam Smith era 1776 whereas Neo‐classical
era start form 1930, whereas Chicago SoT is actually belong to the neoclassical school of thought.
From 1950 till late 70s, Keynes' view and its theory were considered as the main factor in the
economy, after that era, in late 1970, Friedrich Hayek's view that the state / government should
have a minimum role in the economy and market, this thought got popularity in the world of
business. This inspiration of F. A. Hayek's concepts and of the Chicago SoT was the real cause of
end of Keynesian thoughts and Chicago SoT appears as a right wing of mainstream of economics.
The classification of wings is given below:


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D. MAIN IDEAS OF CHICAGO SoT:
D.1 As we have described earlier that the Chicago SoT strictly tracks the neoclassical price theory and
libertarianism and they disbelieved the concept of Keynesianism, Chicago SoT more belief on the
monetarism concept of Friedman's, and Robert Lucas’s rational expectations theory. It also
disregards government laissez‐faire regulation of business, and dominant many ideas and
approaches. The main ideas of this SoT are given below:
Free (open) markets are best allocate resources in an economy,
There should be a minimal government intervention (monopolies); economic freedom and free
trade, tax cutting and tax reforms will serve and relief the market / economy in the best way.
Inflation adjustment and inflation targeting in another main idea of this SoT.
Monetarist of this SoT belief that supplies and demand of money must be kept in equilibrium in
free market.
The ideology of Globalization and International trade / finance was come out in this era, in
which Chicago SoT played an important contribution.
Privatization & marketization
Variables like output and wages in macro‐economic should be considered collectively for the
entire economy because both are interdependent to each other.
E.

KEY ECONOMIST OF CHICAGO SoT:

E.1 Frank Knight:
Frank Knight (1885–1972) was an early member of this SoT and one of the
faculty members of University of Chicago department. Knight have a great
contribution in macroeconomics and his has a most significant work
was over “Risk, Uncertainty and Profit” in 1921 from which the
term “Knightian uncertainty” was invented. Knight's perception was
revolutionary, and noticeably different from later Chicago school thinkers.
He believed on free market and less intervention of government that while
the free market could be inefficient, government programs were even less
efficient.
E.2 Ronald Coase:
The Noble Prize‐winner, Ronald Coase (b. 1910) is the most projecting
economic analyst of law and for this contribution he won this prize in
1991. His first article in 1937 “The Nature of the Firm”, argued that the
existence of firms like companies, partnerships, etc. are the causes of the
existence of transaction costs. Rational individuals trade through mutually
agreed contracts on free markets until the costs of transactions mean that
using corporations to produce things is more cost‐effective.

Ronald has second major article is “The Problem of Social Cost” published in 1960, that argued if
we lived without transaction costs, people in the world would bargain with one another to create
the same allocation of resources, regardless of the way a court might rule in property disputes.


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The base of this phenomenon was legal court case about nuisance named Sturges v Bridgman,
filed in 1879 in London, in which a noisy sweet‐maker was functioning next to the quiet clinical
activity place of a doctor; the doctor filed the case to court in search of an injunction against the
noise produced by the sweet‐maker. Ronald Coase said that regardless of whether the judge ruled
that the sweet maker had to stop using his machinery, or that the doctor had to put up with it,
they could strike a mutually beneficial bargain that reaches the same outcome of resource
distribution.

Coase beliefs that the only one solution exist for prevention of this dispute that is transaction
costs. The concept is that government legislation and regulation are not as essential or effective
for helping people as lawyers and government planners believe. Coase and others like him wanted
a change of approach, to put the burden of proof for positive effects on a government that was
intervening in the market, by analyzing the costs of action.

E.3 George Stigler:
George Stigler (1911–1991) was a follower of Frank Knight and worked on
his thesis under the nose of Knight and developed “Economic Theory of
Regulation”, also known as capture, and won the Nobel Prize in 1982. His
theory says those interest groups and other political participants will use
the regulatory and coercive powers of government to shape laws and
regulations in a way that is beneficial to them. This theory is an important
component of the Public Choice field of economics.

Stigler also conducted an extensive research and study on the history of economic thought and
published an article in 1962 of "Information in the Labor Market" that developed the theory
of search unemployment.

E.4 Milton Friedman:
Milton Friedman (1912–2006) is one of the most influential economists of
the late twentieth century in this SoT. He was also a student of Frank
Knight along with above mentioned George; Friedman won the Nobel
Prize in 1976 for his contribution in Economics. His article “A Monetary
History of the United States” publicized in 1963 in which he emphasized
that the Great Depression had been caused by the Federal Reserve's
policies through the 1920s, and worsened in the 1930s. Friedman argued
that laissez‐faire government policy is more desirable than government
intervention in the economy.

There is a famous slogan we usually use in daily life i,e. "money matters" associated with
Friedman, but he had also leveled punitive criticism of his ideological opponents. Referring
to Thorstein Veblen's assertion that economics unrealistically models people as "lightning
calculator(s) of pleasure and pain", Friedman wrote.


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E.5 Robert Fogel:
Robert Fogel (b.1926), a co‐winner of the Nobel Prize in 1993 in the field of
Economics, he has a lot of involvement by setting a new standards of
Economics in which he is best known for his introduction of “New
economic history”, “historical analysis”, “invention of cliometrics”, and “a
notation system for quantitative data”.
Fogel also set out to rebut systematically the idea that railroads contributed
to economic growth in the 19th century by his two abstracts namely
“Railroads and American Economic Growth: Essays in Econometric History”,
and “Time on the Cross: The Economics of American Negro Slavery” in 1964 & 1974 respectively.
He argued that slavery was morally wrong, but argues that it was not necessarily less efficient
than wage‐labor, he proved analytically that before the American civil war, slaves in the Southern
states of America had a higher standard of living than the industrial proletariat of the Northern
states.
E.6 Gary Becker:
Gary Becker (b. 1930) is best known for his work for applying economic
methods of thinking to other fields of society such as sexual relationships,
criminality, slavery and drugs, assuming that people act rationally. This
value addition in Society of Economics and very well focused‐work on labor
economic put him a Nobel Prize‐winner in 1992.

There are some quotations that are named with Gary Becker, as stated
bellow:

E.7 Richard Posner:
Richard Posner (b. 1939) is basically a legal advisor and lawyer rather than
an economist and is known primarily for his work in law and economics.
Posner's main works is not only about corporations, contract, tort, labor
law, but also detail discussion on criminal law, discrimination and family
law. He attempts to apply rational choice models to areas of law, that
reflect in “Economic Analysis of Law”.

Posner goes so far as to say that:
"{The central} meaning of justice, perhaps the most common is – efficiency… (Because) in a world
of scarce resources waste should be regarded as immoral."

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E.8 Robert E. Lucas:
Robert Lucas (b. 1937), was another assert of Chicago SoT who got the
Nobel Prize earlier in 1995. he was ranked consistently in top 10 great
economist in research papers in the field of Economics.  His contribution in
Macroeconomics and its several tools / topics included asset pricing,
economic growth, and monetary Economics. Lucas given the concept of
integration of Micro & Macroeconomics, he belief that
macroeconomics must not be considered as an isolated mode of thought
from microeconomics, and that analysis in both should be built on the
same foundations.
E.9 Eugene Fama:
Eugene Fama (b. 1939) is an American economist who is well identified as
“the father of the hypothesis”, his theoretical and empirical work on
“Random walk theory” as well as “Portfolio theory” give him a distinguish
place in the world of economics. He has expended his entire teaching
career at the University of Chicago. Fama is also famous for his Ph.D.
thesis in 1965 "The Behavior of Stock Market Prices", he concluded that
stock prices are unpredictable and uncertain and follow an unplanned
walk pattern of movement.

He solidified this idea in his 1970 article, "Efficient Capital Markets: A Review of Theory and
Empirical Work", this concept of Price behavior of stock Market & efficient market latter caused
the establishment of modern economic theory.
E.10 Friedrich August Hayek:
Friedrich August Von Hayek, the Liberal economist usually known as F. A.
Hayek was a major political thinker of the 20th century was the instructor
of another area of study (committee of social thought) at Chicago
University during 1950s and he had a little knowledgeable interaction
with the economics department and he was not considered a Chicago
School member but the Austrian School. Nevertheless he and Milton
Friedman worked together to devoted the libertarian and democratic
ideology.

F. A. Hayek collectively got the Nobel Prize for his pioneering work with Gunnar Myrdal in “the
theory of money and economic fluctuations” and “the interdependence theory of economic, social
and institutional phenomena".

For further details please visit the link:

http://en.wikipedia.org/wiki/Chicago_school_of_economics


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F.

KEY THEORIES / LAWS:
There are various theories developed under the umbrella of Chicago SoT. Some of them are
described below:
THEORY

S/N

CONTRIBUTOR

1.

Theory of natural rate of unemployment

Milton Friedman (1912‐2006) in 1976

2.

Deregulation theory

George Stigler (1911‐91) in 1982

3.

The economic theory of regulation

George Stigler (1911–1991)

4.

Quantity theory of money

Milton Friedman (1912–2006)

5.

Modern economic theory

Eugene Fama (b. 1939)

6.

Rational choice theory

Gary Becker (b. 1930)

7.

Modern public choice theory

Knut Wicksell (1851 – 1926) in 1896

8.

Game theory

John von Neumann (1903 – 1957

9.

Friedman's k‐percent rule

Milton Friedman (1912–2006)

10. Efficient‐market hypothesis (EMH)
11. Random walk theory

Jules Regnault (1834 ‐1894),
Louis Bachelier, (1870 –1946)
Eugene Fama (b. 1939)

G. CONTRIBUTIONS / IMPACT  OF THE SCHOOL IN THE SOCIETY:
The Chicago SoT strictly tracks the neoclassical price theory and libertarianism and they
disbelieved the concept of Keynesianism, Chicago SoT more belief on the monetarism
concept of Friedman's, and Robert Lucas’s rational expectations theory. It also disregards
government laissez‐faire regulation of business, and dominant many ideas and approaches.
Milton Friedman, The most influential economist of Chicago SoT, who has more than 30
books on Monetary beliefs with his name, pressed specific initiative and emphasis on de‐
regulation that is the key to economic success, that contained by three U. S. presidents
Nixon, Reagan, Ford, and also encompassed by British prime minister Margaret Thatcher.


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The economists Chicago SoT, Ronald Coase, G. Stigler, and J. M. Buchanan were the inventor
of Political science and institutional theory, while in neoclassical economics; economic
history was set by Robert Fogel.
Detailed economic interpretation on various sociological matters such as marriage,
addiction, and family issues were given by Gary Becker. His most well‐known effort was
“Path‐breaking analysis” of "human capital", who impact a lot to serve the society, in which
he emphases on the government to expenditure on three important area, he said, "deals
with expenditures on people for education, training, health & safety, that in a broad sense
raise productivity."
Chicago SoT contribution was to demonstrate the market power, externalities, and the
people choices, in “public policy” as well as in economic sciences. Chicago school also had a
strong top management commitment and a lot of self‐confidence that we had the right
concept for the well‐being of the society and the rest of the profession was wrong.
Economists of Chicago SoT had also left their intellectual impact not only in Economics but in
other area of study, particularly on “Pioneering public choice theory” and law, which has
given the direction to the ground‐breaking changes in the Law study and political science.
Other economists affiliated with Chicago have made their impact in fields as diverse as social
economics and economic history.

H. QUOTABLE QUOTATIONS:

H.1

Frank Knight:

H.2

Ronald Coase:


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H.3

Milton Friedman:

H.4

Gary Becker:

H.5

Robert Lucas:

H.6

Eugene Fama:

H.7

Friedrich Hayek:


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I.

CONCLUSION:

For further details please visit the link:
http://www.econedlink.org/lessons/index.php


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Chicago school of economic thought, Key Econimist of chicago School of thought

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