I wanted to do a follow up argument on the article about Milton Friedman to make some things clear. I think that overall, Milton Friedman was a positive influence on American economic policy. The Chicago School’s influence has been a net positive for the country. The Chicago School and the Austrian school agree on many things but, the differences are critical to economic understanding; they are not just some obscure disagreements by academia. I want to address these issues in order.
- The Chicago School has no concept of the Austrian Business Cycle Theory nor does it have any understanding of how booms and busts happen. In fact, according to the Chicago School, booms and busts should not happen at all because markets always level out naturally(which would likely be true if it was not for the Fed) according to their theory of “efficient market hypothesis” as can be seen here, here, and here. This is why all the Austrian Economists were able to see the bust of 2008 coming from miles away while the Chicago School economists did not have a clue even while it was happening. This can be seen in the first video in the previous article where the famous “Supply Sider”, Art Laffer, says that “no way a bust is coming”, the economy is good and monetary policy has been “great”. If Art Laffer’s statement does not make you question the Chicago School’s way of thinking then something is very wrong.
- The Chicago School’s cure for a depression is the exact same as that which the Keynesians’ and Ben Bernanke would come up with. Milton Friedman wrote that the problem during the Great Depression was that the Federal Reserve did not inflate enough. Well, Ben Bernanke has taken Milton Friedman’s message to heart and has put the printing presses into overdrive. Thank goodness we have such wise leaders running things or we would be in real trouble! Only recently have Chicago School economists started to question Ben Bernanke about low interest rates, not because they are inflationary but, because the inflation is extended for too long a time period, “mitigating its positive effects”.
- The Chicago School are inflationists to the very core and think that central banks should inflate at a steady rate of about 2% to 4% per annum. Not only are there many economic problems associated with this, such as a misallocation of resources but there are moral and practical implications as well. The moral implication is that inflation, even at 2%, redistributes wealth from the poor and the middle class to the rich. The practical implication is that trusting politicians and bankers with the moral fortitude to keep inflation at 2% is completely naive. Simply put, the short term political advantages to inflation are too tempting to pass up. This can be seen time and time again, especially in the last thirty years, where Greenspan inflated bubble after bubble because it was politically expedient.
- Lastly, the Chicago School is pretty much OK with central planning in a philosophical sense. Remember, their objections to government intervention into the free market are not out of a deep understanding of property rights, natural law, individual sovereignty or hostility to command and control economies but, because they generally think that most market intervention does not make the economy more efficient. The Chicago School’s obsession with “market efficiency” can be seen in all the other areas where they do support government involvement (like monopoly laws). This article expands upon it more but, basically if communist societies were more economically efficient, then the Chicago School economists would be theoretically in favor of them. Whether the idea of market efficiency is valid at all theoretically is a whole other question but, I think that Mises put that idea into the grave with his book Human Action.
Although the Chicago School has some positive influence in reducing regulation and promoting free trade, its deficiencies are now too glaring to ignore. It is also important to understand that the Chicago School rose to prominence not because of its intellectual merits but, because of the Keynesians’ complete inability to explain the stagflation of the 1970s. Long story short, the Chicago School was the only other game in town (the Austrian School was still obscure at the time).
In conclusion, I think that we are all very blessed to be living during a new revival of the Austrian School. So, if you liked reading Milton Friedman, you will love reading Mises, Hayek, and especially Rothbard.