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Chicagonomics: The Evolution of Chicago Free Market Economics

Chicagonomics: The Evolution of Chicago Free Market Economics

by Lanny Ebenstein

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Chicagonomics explores the history and development of classical liberalism as taught and explored at the University of Chicago. Ebenstein's tenth book in the history of economic and political thought, it deals specifically in the area of classical liberalism, examining the ideas of Friedrich Hayek and Milton Friedman, and is the first comprehensive history of economics at the University of Chicago from the founding of the University in 1892 until the present. The reader will learn why Chicago had such influence, to what extent different schools of thought in economics existed at Chicago, the Chicago tradition, vision, and what Chicago economic perspectives have to say about current economic and social circumstances.

Ebenstein enlightens the personal and intellectual relationships among leading figures in economics at the University of Chicago, including Jacob Viner, Frank Knight, Henry Simons, Milton Friedman, George Stigler, Aaron Director, and Friedrich Hayek. He recasts classical liberal thought from Adam Smith to the present.

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Product Details

ISBN-13: 9781466891128
Publisher: St. Martin's Publishing Group
Publication date: 10/06/2015
Sold by: Macmillan
Format: NOOK Book
Pages: 336
Sales rank: 1,008,736
File size: 2 MB

About the Author

LANNY EBENSTEIN is a Lecturer in the Department of Economics at UCSB, teaching the history of economic and political thought. From 1990 to 1998, Dr. Ebenstein was an elected member of the Santa Barbara Board of Education. He has written ten books on the history of economic and political thought, including the first biographies of Friedrich Hayek and Milton Friedman. His work is frequently cited in publications from a wide range of disciplines and perspectives, and has been translated into a number of foreign languages. He lives in Santa Barbara, CA.

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The Evolution of Chicago Free Market Economics

By Lanny Ebenstein

St. Martin's Press

Copyright © 2015 Lanny Ebenstein
All rights reserved.
ISBN: 978-1-4668-9112-8


Rockefeller's University and the Department of Political Economy

During the last decade of the nineteenth century and to the present, the University of Chicago has established itself as the world's leading research institution. More Nobel Prize recipients are or have been affiliated with it as students, researchers, or teachers than with any other institution in the world, particularly in Nobel Prizes in Economics and Physics. Milton Friedman said in tongue-in-cheek advice to would-be laureates: "Go to the University of Chicago."

The university emerged as fully developed as any institution of higher learning and research ever has. Founded in 1891, it opened its doors in 1892. Its first president was William Rainey Harper, a Bible scholar and canny academic administrator who enjoyed the strong support of the university's primary benefactor and founder, John D. Rockefeller, the president of Standard Oil Company.

Rockefeller was born in 1839 in Richford, New York. His family was well-off and he attended high school when few did. He wrote in a school essay in 1854 of "cruel" southern masters who worked slaves "beneath the scorching sun. ... How under such circumstances can America call herself free?" He voted for Abraham Lincoln for president in 1860. He founded Standard Oil in 1870. After an extremely controversial career during the next two decades as he became the wealthiest man in America, he began to turn his focus to philanthropic endeavors. A devout Christian, he thought that among the most productive contributions he could make would be to medical research, science, and education. At the time, there was not the breach between science and religion that now exists. Indeed, the deeply religious often were among those who supported scientific research most.

This was an era of college development and establishment. The later 1800s was one of the waves of expansion in American higher education. Rockefeller had been interested in founding a major college or university affiliated with his faith for a number of years when he was contacted by the Baptist Union Theological Seminary in Chicago in 1877 to revive a college that previously had been located there. Central in Rockefeller's decision to establish a major institution of higher education and research in Chicago was Harper, then thirty-one and a scholar of the Old Testament at Baptist Union. Rockefeller immediately fell for the younger man. He said later of Harper that, as a "friend and companion, in daily intercourse, no one could be more delightful than he." In 1887, Harper wrote Rockefeller that there was "no greater work to be done on this continent than ... establishing a University in or near Chicago."

Why the interest particularly in Chicago? Chicago is the quintessentially American city. Not founded by the English, Dutch, French, or Spanish, Chicago incorporated in 1837. By 1890, it was the second-largest city in the nation, following New York, with a population of more than one million. Site of the famous World's Fair of 1893 celebrating the 400th anniversary of Columbus's first trip to the Americas, Chicago would become even more famous during the twentieth century through the University of Chicago, which is located on part of the World's Fair show grounds. Rockefeller feared that to found a university in the East would lead it to stick to conventional intellectual ways. In Chicago, on the other hand, he thought that an institution would "strike out upon lines in full sympathy with the spirit of the age."

Rockefeller gave the University of Chicago $35 million in its early years, which would be equivalent to $1 billion or more today. He was concerned that it should not appear that he was involved in the university in any way with respect to academic management. He rarely visited the campus, did not sit on the board of trustees, and adopted a hands-off policy on academic matters. It nevertheless could not have been the Gilded Age that the wealthiest man in the country could give vast sums to a new institution without it attracting great interest, and attack.

In the public mind, the University of Chicago was Rockefeller's university. Early cartoons showed the school with Rockefeller dropping wads of cash on it. Rockefeller biographer Ron Chernow notes that "reams of press coverage presented the university as Rockefeller's hobbyhorse. In 1903, Life magazine ran a cartoon of Ye Rich Rockefeller University, showing a lady holding aloft a lamp marked Standard Oil, her robes checkered with dollar signs." Together with Robert Maynard Hutchins, who was the university's president and chancellor from 1929 to 1951, and Friedman, who was on the faculty from 1946 to 1976, Rockefeller was one of the three individuals most associated with the University of Chicago in the public mind in its history to date.

Located in south Chicago near downtown and Lake Michigan, the university opened its doors on October 1, 1892. No ceremonies were held to mark the occasion. The university started classes as if it had already been in operation. Harper was instructed and given the funds by Rockefeller to create a great university ab initio. Hutchins biographer Harry Ashmore said: "Free of the tradition that imposed parochial collegiate obligations upon its elder brothers to the east, and of the political considerations that shaped the more recently founded state institutions, Chicago was modeled on European centers of higher learning that placed primary emphasis on scholarly research. Its declared mission was to advance the frontiers of human knowledge."

American higher education was tiny at this time compared to what it would become, particularly after World War II. In 1900, only about 4 percent of 18-to-21-year-olds in the United States were in college. Harvard and Yale had merely about 1,500 students each. One of the major purposes of colleges was to prepare men for the ministry. There were several hundred colleges in the United States in the late 1800s — mostly local and very small state institutions, agricultural colleges, teachers colleges, technical institutes, and general education colleges that were state-sponsored, denominational, or private. Almost none had graduate programs and thus they were not referred to as (or even named yet) a "university." In 1850, there were only eight graduate students in the entire country. This grew to 5,700 in 1900, 47,000 in 1930, and 224,000 in 1950.

Harper created an extraordinary faculty with Rockefeller's money. Chicago could offer higher salaries than almost any other institution of higher education. It was explicitly a "university" — one of the first in the nation. Mortimer Adler, perhaps Hutchins's closest associate, remarked in 1941 in a popular magazine article titled "The Chicago School" (with no reference to economics) that the University of Chicago was "popularly thought of as one of America's youngest institutions. In truth it is one of the oldest, if we discriminate between an undergraduate college and a university, a place for graduate study and research." Adler went on to note that only Johns Hopkins University and Clark University preceded Chicago as universities in the United States. In the second half of the nineteenth century, many Americans pursued graduate studies in Germany because there were so few opportunities at home.

The University of Chicago emphasized graduate programs and research from the start. Harper developed a comprehensive institutional program — the University of Chicago Press was founded, libraries were emphasized, departments were encouraged to start journals, and top faculty were recruited from around the nation. Chernow writes that Harper "raided so many Ivy League faculties ... that his ransacked rivals complained of foul play." Nine college presidents were on the first faculty. Additionally, the University of Chicago did not discriminate against Jews. Though the only available data are from a somewhat later period and pertain to undergraduates rather than graduate students, close to one-third of Chicago undergraduates during the 1930s were Jewish. As a result of quotas limiting Jews elsewhere, this was "the sociological fact that made the College of the University of Chicago unique in the country," according to university historian William McNeill. The university was coed from the beginning, which was the emerging direction in higher education. African Americans and Asians were not prevented from enrolling, but constituted less than 2 percent of enrollment by the early 1930s.

Adler also noted that in 1895, Harper said:

It is not enough that instructors in a university should merely do the class and lecture work assigned them. This is important, but the university will in no sense deserve the name, if time and labor are not also expended in the work of producing that which will directly or indirectly influence thought and life outside the University. ... The true university is the center of thought on every problem connected with human life and work, and the first obligation resting upon the individual members who compose it is that of research and investigation.

As Adler then said: "Steadfast devotion to and brilliant performance of this mission brought Chicago fair renown in the first ten years of its existence."

The first chair of what originally was the Department of Political Economy was James Laurence Laughlin. An outstanding teacher, he believed that the goal of education should be "acquisition of independent power and methods of work ... rather than specific beliefs." He was a strong proponent of the gold standard. He provided significant academic, practical, and popular support for the Federal Reserve Act of 1913. He had close links with the Republican Party.

According to Chicago school of economics historian Johan Van Overtveldt: "Laughlin's foundation of economics were the classical views of Adam Smith, David Ricardo, and above all, John Stuart Mill." Laughlin received his PhD from Harvard, where he taught from 1878 to 1888, establishing himself as a staunch opponent of government intervention in the economy and as a proponent of laissez-faire. He founded a Political Economy Club at Harvard — among its members was Sumner.

Laughlin edited an abridged version of Mill's Principles of Political Economy in 1884. This edition of Mill's Principles contributed to Mill's interpretation in the United States as almost a strictly conservative economist. In Britain, on the other hand, through the Fabian Society and for other reasons, the more socialist of Mill's views became more emphasized. The importance of Principles of Political Economy, which was first published in 1848 and the sixth and final edition of which appeared in 1868, should be properly estimated. Though Mill tends to be remembered today more for On Liberty and Utilitarianism, he perhaps exerted his greatest influence in the nineteenth century through Principles of Political Economy. It was and is one of the great classics in world economics literature.

In his abridged edition of Mill's work, Laughlin stressed the importance of Smith's Wealth of Nations. Laughlin prepared a "Sketch of the History of Political Economy" which he used to introduce Mill's Principles. Laughlin here said that a "connected and comprehensive grasp of principles was the great achievement of Adam Smith," and that the Wealth of Nations had been the "basis of all subsequent discussion and advance in political economy." He said further that a "new period in the history of political economy ... begins with Adam Smith." With respect to Mill's work, he wrote that it "remains one of the most lucid and systematic books yet published which covers the whole range of the study" of political economy and that the Principles was the "best systematic treatise" of the subject.

In several respects, Laughlin's edition of Mill's work looked to the future of the discipline of political economy rather than to the past. The book was prepared for an American audience, and it was specifically geared toward college students. Interestingly, Laughlin's work introduced twenty-four charts of a statistical nature to elucidate and expand Mill's views to concern American circumstances. Regarding the then-nascent mathematization of economic theory, Laughlin had little positive to say. In his introduction, he remarked concerning Mill and others that "Professor W. Stanley Jevons put himself in opposition to the methods of the men just mentioned, and applied the mathematical process to political economy, but without reaching new results." The relatively nonmathematical presentation of economic theory — as distinct from the presentation of statistical data — has remained a distinctive hallmark of most of the Chicago economists considered here.

According to Laughlin, Smith held that a "plan for the regulation of industry by the Government was indefensible, and that to direct private persons how to employ their capital was either harmful or useless. He taught that a country will be more prosperous if its neighbors are prosperous." A free market requires a large private sector. A free market, however, is not inconsistent with, and indeed has usually coincided with, a substantial role for government. The free market and a large, but not all-encompassing, government role have historically gone hand in hand in democratic societies during the industrial and more recent eras.

With Rockefeller setting the reputation of the University of Chicago among the general public and Laughlin as the head professor in the Department of Political Economy for its first twenty-four years, it is little wonder that Chicago developed a conservative reputation in the emerging academic discipline of economics. Like many of his outstanding successors at Chicago (though from a different perspective), Laughlin emphasized the importance of money in economic activity. He perceptively observed in his historical introduction to Mill's Principles of Political Economy that it is "worth notice that the first glimmerings of political economy came to be seen through ... discussions on money, and the extraordinary movements of gold and silver" to Europe as a result of Spanish and Portuguese colonization of the Americas.

Laughlin taught in and chaired the Department of Political Economy at Chicago until 1916, and continued scholarly and public activities until his death in 1933. He stood aloof for a number of years from the fledgling American Economic Association, which helped create an early professional separation between Chicago and the rest of the profession that continued at different times in different ways, although this is no longer the case. Among the influential economists he gathered or who emerged at Chicago during his tenure were Thorstein Veblen, Wesley Clair Mitchell, John M. Clark, and Jacob Viner — all of whom became leading American economists during the first half of the twentieth century.

Laughlin strongly advocated a business school at Chicago and founded the Journal of Political Economy. He was a Christian, and remarked in his early economics textbook, The Elements of Political Economy (1887): "Christian character lies at the basis of industrial progress. To obtain self-mastery, to learn how to adapt one's powers to a given end, to regard the higher and unseen good of the future as above the lower and seen enjoyment of the present ... — this will enable one to reach a place far above that from which one started out in life." According to historian of economic thought Richard Ebeling, Laughlin "set the tone for much of the department for the next hundred years."

The use of the name "Department of Political Economy" rather than "Department of Economics" merits notice. Though treatises on politics have existed since at least Plato's Republic, major works on economics did not really come into existence until the 1600s or so. Thomas Hobbes put forward in his great Leviathan (1651) that the purpose of social life and community order is "commodious living" — essentially the utilitarian standard of happiness. John Locke, too, in his revolutionary Second Treatise of Civil Government (1689), grounded the purpose of social order in personal happiness, provided the best justification of private property to this day, and enunciated the labor theory of value, among other contributions. But Hobbes's and Locke's works were mostly on politics.

As nation-states emerged in the sixteenth through nineteenth centuries, and, vitally, the spirit of the age became more secular, individualist, industrial, and urban, consideration of economic topics proceeded apace. The word "economics" derives from two Greek words — eco, meaning house, and nomos, meaning law. Economics originally referred to the art of household management. In time, the term took on a more general connotation, and in 1767 the first work in English to use "political economy" in its title appeared, Sir James Steuart's Inquiry into the Principles of Political Economy. Nine years later, Smith's The Wealth of Nations was published.


Excerpted from Chicagonomics by Lanny Ebenstein. Copyright © 2015 Lanny Ebenstein. Excerpted by permission of St. Martin's Press.
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Table of Contents



1. Roots in the Eighteenth and Nineteenth Centuries

2. Rockefeller's University and the Department of Political Economy

3. Jacob Viner as Classical Liberal

4. Frank Knight to Chicago

5. Chicago and Austrian Economics in the 1930s

6. Henry Simons on Progressive Taxation

7. Cowles Commission and Keynesians

8. The Postwar Chicago School of Economics

9. Chicago Economists in Academia

10. Law, Economics, and Political Philosophy

11. Hayek at Chicago: Philosopher of Classical Liberalism

12. Friedman as Economist and Public Intellectual

13. The 1980s Crescendo and Contemporary Libertarianism


Appendix. Friedman on Hayek Interview

Samuelson on Friedman Letter

Bibliographical Essay



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