Are we just like Milton Friedman? Where Austria and Chicago differ

posted by
August 2, 2016
Ludwig von Mises Institute
Posted in Commentary

"In this special episode of Contra Krugman, recorded live at Mises University, Bob Murphy and Tom Woods are joined by three other professors: Peter Klein (Baylor University), Lucas Englehardt (Kent State University), and Mark Thornton (Mises Institute). Recorded at the Mises Institute in Auburn, Alabama, on 30 July 2016." [Flash audio or MP3] (posted 08/02/16)  

Tags: , ,

  • dL

    The first generation Austrian school laid the foundation for the marginalist revolution and neoclassical economics. However, because of the socialist calculation debates–and the fact that neoclassical general equilibrium theory could principle make the case for state socialism–the strains of the Austrian school represented by Mises and Hayek post WW I are considered heterodoxical.

    Neoclassical economics even to this day has no consensus dynamic theory. The heterodoxical Austrian school places methodological individualism at the core of its dynamic theory. However, this a rationalist approach, not an analytical approach(read: mathematical). The rationalist approach has two bifurcated strains, loosely reperesented by Mises and Hayek. The Mises rationalist approach is called praxeology. The Hayek strain is not quite so easily uniformly labeled. The only consistent property of it is a rejection of Mises’ hardcore a priori approach.

    The relationship of the Austrian School(austrain economics !== libertarianism) to libertarianism is the 2nd generation school’s critique of state socialism. Mises with the calculation problem. Hayek with the knowledge problem. Although these two critiques are often referred to interchangeably, they are not the same thing.

    To interject my own opinion. Too many people conflate Austrian economics with libertarianism. Subscribing to the methodology of Austrian economics is certainly not a necessary condition to be a libertarian. And as Lew Rockwell and Hans Hoppe aptly demonstrate, neither is it a sufficient one.

    The Chicago school in contrast is firmly in the tradition of neoclassical economics(a strong analytical models backed by empirical observation). Indeed, from the later stages of the Carter administration to the early stages of the Obama administration, the Chicago school ruled the roost so to speak. Generally, the Chicago school underlies what was known in the 1990s as the “Washington Consensus.” Today, that consensus is often derisively referred to as “neo-liberalism.”

    The Chicago school is often erroneously equated with laissez-faire capitalism. That’s because of its identification with Milton Friedman. But that is not accurate. The Chicago school represents a competing methodology to macroeconomic theory. The 2nd generation represented by Friedman stressed a monetarist approach to macroeconomic output. An approach that directly competed with the keynesians. The 3rd generation of Chicago School emphasized rational expectations and efficiency, treating everything almost as an efficient market.

    Although it is not accurate to equate the Chicago School with laissez faire capitalism, it is more than fair to equate with with a resurgence of “classical liberalism.” The Chicago school policy wise more or less stood for: strong international institutional control for a correct approach to monetary policy, fiscal policy and free trade would spread liberalism and liberal ideas across the globe.

    Unfortunately, the post-911 world killed the idea and the 2008 bailouts buried the carcass. The Chicago school is dead man walking. What it stands for today is the use of market institutions for the control of the political digital economy by the post 911 security apparatus. The fundamental flaw of the Chicago school–which is now apparent–was its naive treatment of political economy. In a real sense, it had no treatment of political economy(sharing the same general flaw of neoclassical economics). 3rd generation chicago school treated public choice and corruption as an efficient market.

    PostScript: IMHO, both Austrian economics and the Chicago school are relics of the 20th century. They are insufficient for a libertarian methodological approach to the contemporaneous problems of political economy.

Our Sponsors