Going off the rails | The Economist
How libertarians hijacked liberal economics
Chicagonomics: The Evolution of Chicago Free Market Economics. By Lanny Ebenstein; 278 pages; $29.99
SINCE its foundation in 1890, the University of Chicago has built a world-class reputation for economics. Since 1969 it has produced no fewer than 28 winners of the Nobel prize for economics, including Friedrich Hayek, Milton Friedman and George Stigler, far outnumbering any other institution. Its policy prescriptions—favouring freer markets and the strict control of the money supply—are seen as having dominated economic policy across the developed world since gaining favour under Ronald Reagan in America and Margaret Thatcher in Britain.
Since the financial crisis, however, the “Chicago school” of ideas has looked to be in retreat, at least in policy terms. The collapse of Lehman Brothers in 2008 brought the state back into economics on a grand scale in the form of bank nationalisations, fiscal stimulus and a huge increase in the money supply using quantitative easing. This year has also seen the spectacular rise of left-wing populists—from Syriza in Greece and Jeremy Corbyn in Britain to Bernie Sanders in America—blaming “neoliberal ideas” for problems such as real-wage stagnation and rising inequality.
“Chicagonomics”, a new book by Lanny Ebenstein, a prolific author on the history of economic thought, sets out to investigate the history of the Chicago school of economics, to see what can be learnt for today from its past. The author chronicles the intellectual history of what began life in the 1890s as the Department of Political Economy. Before the 1940s, Chicago’s professors were much closer to the liberalism of British political economists such as Adam Smith, Jeremy Bentham and John Stuart Mill than the libertarianism of Hayek and Friedman in the 1980s and early 1990s. Mr Ebenstein looks at the ideas of scholars such as Jacob Viner and Frank Knight, and concludes that while they favoured individual freedom, their policy prescriptions did not exclude government action. Both perceived Smith as justifying the state intervening in the economy at times, such as with the provision of infrastructure, education for the young and the funding of arts, culture and science.
By the 1940s, the use of redistribution to ensure that everyone had a basic standard of living was accepted by most Chicago economists. For instance, Henry Simons, when he worked at Chicago between 1939 and 1946, set out how redistribution, by diffusing economic power in a society, was necessary in a free society. Even Hayek, in his libertarian polemic of 1944, “The Road to Serfdom”, supported the use of environmental regulation and state-run social-insurance systems.
After they retired Hayek and Friedman became deeply libertarian. Mr Ebenstein says “the virtual neoanarchism that both preached” later on placed them “outside the classical liberal tradition”. Hayek argued that citizens should have the right to have their taxes refunded if they did not consume government services and Friedman railed “against government at almost any time”. Both enjoyed being in the limelight, even though their views did not fit with their earlier scholarly work. Mr Ebenstein bemoans the current popular perception of the Chicago school, as well as conservatives’ embrace of it, as based on these more extreme later utterances.
Mr Ebenstein does not go into it, but of course, left-leaning economists, as well as conservative ones, sometimes also trade in their academic lecterns for political soapboxes. Yet Mr Ebenstein’s book does a fine job of differentiating classical liberalism from libertarianism, a nuance now lost in a world where populists seek to brand all free-market thinking with the catch-all label “neoliberal”. For that reason alone, the book deserves to be read by all those with an interest in economic policy.
