What are the main points on which the Austrian and Chicago schools of economics differ?
From Skousen’s Vienna & Chicago, they differ on anti-trust (Chicago thinks anti-trust laws are needed), gold (although Friedman later recanted on this, the Chicago school generally supports the Fed), methodology (the Chicago School is staunchly positivist) and on the causes of the Great Depression and business cycles. These are the main differences, but Chicago is drawing closer to the Austrians quite a bit (especially on anti-trust.) Chicago is not what it, used to be, which is both good and bad - good in that it’s drawing closer to the Austrians, bad in that its overall positive influence is now waning; I definitely prefer it to modern Keynesionomics.
Positivist?How do you prove anything in economics? I could see you might be able to disprove certain things, but proving them?
Also, is Friedman the best reading for an introduction to Chicago school theories? If so, which of his books would be best to start with? I’m interested in reading Friedman and Keynes’ arguments even if I don’t end up agreeing with them. If nothing else it would give a bit of context to the arguments that Mises, Hayek and Rothbard put forward since I imagine they were often writing in answer to arguments put forward by prominent economists from other schools (including the classic economists).
My suggestion is to buy or borrow Vienna & Chicago, as it has a large number of sources in it you can draw from. Friedman is by no means the best or only source, but he is the school’s main representative, alongside Knight and Stigler. It’s also a good read, even if weak on methodology.
Economics involves many proofs (Geoffrey Plauche’s article in the reading list on methodology is necessary reading on this IMO.) Simply not of the positivist sort. Chicagoans are logical positivists or even Popperians by and large. Friedman’s Essays in Positive Economics are as good as any a source to discover why they believe this. Hollis’ and Nell’s Rational Economic Man demolishes this, of course.
About the differences between the two schools, it is interesting to see what the opinion of Hayek was. He criticised Friedman and monetarists a lot. In fact, Hayek said that “Essays in Positive Economics” was one of the most dangerous books on economics, followed by the General Theory by Keynes. Also, Hayek specially criticised monetarism because their economic analysis was focused on different aggregate measured, such as the general price level. They didn’t analyse macroeconomic issues (e.g. business cycles) through relative prices, i.e, the way capital and consumer goods’ prices vary (also, I think that chicagoans hadn’t learnt about the Austrian capital theory, which is one of the main reasons why Keynes and Hayek disputed so much) . By starting from that premise, their analysis was totally flawed. Remember that, during 1920’s, the general price level remained stable. So, the economists who focused on the general price level couldn’t make out what Mises and Hayek did.
Also, Chicago school treats human beings as ‘homo economicus’, an agent who seeks to maximize his utility function, which is restricted to a sort of material constraint.
Below, I’ll put some interesting quotes by Hayek (italics) and Friedman (blue):
“Milton and I agree on almost everything except monetary policy. But it creates an awful problem in the Mont Pelerin Society with the constant danger of the society splitting up into Friedmanite and Hayekite groups. And to avoid this, I try to avoid discussions of monetary theory.”
- Friedrich A. von Hayek (1985) – “Interview by Mark Skousen”
“Chicago school thinks essentially in ‘macroeconomic’ terms. They try to analize in terms of aggregates and averages, total quantity of money, total price level, total employment.” “You cannot build a theory on the basis of statistical information, because it´s not aggregates and averages which operate upon each other, but individual actions.”
- Friedrich A. von Hayek (1945), The Road to Serfdom, Reason y Alan Ebenstein (2001), Friedrich Hayek: A Biography, St. Martin´s Press.
“I am an enormous admirer of Hayek, but not for his economics. I think Prices and Production was a very flawed book. I think his capital theory is unreadable. On the other hand, The Road to Serfdom is one of the great books of all time. His writings in [political theory] are magnificent, and I have nothing but great admira-tion for them.”
- Milton Friedman - “50th anniversary edition of Hayek´s bestseller The Road to Serfdom”
“I never could understand why they were so impressed [at LSE] with the lectures that ended up as Prices and Production, and still can´t. As of that point, he [Hayek] had not freed himself from the methodological views of von Mises. And those methodological views have at their center that facts are nor really relevant in determining, in testing, theories. They are relevant to illustarate theories, but not to test them, because we base economics on propositions that are self-evident.”
- Milton Friedman - "Friedman-Ebenstein Interview” (1995), en Alan Ebenstein (2001), Friedrich Hayek: A Biography, St. Martin´s Press.
“The Hayek-Mises explanation of the business cycle is contradicted by the evidence. It is, I believe, false.”
- Milton Friedman - “The ‘Plucking Model’ of Business Fluctuations Revisited, Economic Inquiry” (1993)
Finally, look what Rothbard wrote:
"Rothbard’s law …(says) that people tend to specialize in what they are worst at. Henry George, for example, is great on everything but land, so therefore he writes about land 90% of the time. Friedman is great except on money, so he concentrates on money"
I just got done taking “mathematical economics” last semester which is basically the core neoclassical or chicagoian methodological course. The methodology is often referred to as “comparative statics”. The actual details are pretty boring and it would take a while to explain. Suffice it to say that the whole technique throws all human elements of economic behavior (purposeful action) clear out the window.
People are to be essentially looked at as mechanical atoms that take on maximizing behavior. This is why the importance of assumptions are completely thrown out the window. In fact, I’d say probably the most emphasized, repeated, and drilled portion of the class was that “assumptions do not matter!”. We spent a good quarter of the semester on Friedman’s essay and then had to write a paper and get tested on it.
Basically, there are two super important rules to mathematical economic methodology: 1.) that they generate refutable or falsifiable hypotheses and 2.) discern the extent to which those hypotheses are confirmed or refuted by empiral analysis (econometrics). It’s basically an attempt to mimic physics, although economics has the unfortunate burden of uncontrollable experiments, haha. It’s rather comical actually. I’d say my professor ranks among the top of those who could at least make a decent attempt at defending neoclassical methodology. Consequently, we probably spent about 50% of the class just learning how to defend against the various arguments aimed at their dubious methodology.
OK, thanks Inquisitor and Martinf! Much appreciated. I think I’ll start with some earlier works (maybe some of the classics such as Smith and then move to Principles, as you suggested in another thread Inquisitor) and probably Mises before breaking out the Hayek, Friedman and Skousen.
Woah, sooo much reading to do!
That is a fine quick explaination. I had a friend, always used the paltroonish joke “to assume is to make an -ass- out of -u- and -me-”, another line he had “fc 'em if they can’t take a joke”.
I think there can be a symbiosis of apostiori and apriori. I see a lot of folks claim cassic-lib, like Friedy and Bill F bucky calling themselves libertarian. The science of human action is one of apriori, that does not imply that the imperical method can not find a way to elucidate the causel relationships of subjective value. I just don’t think that it follows that if you treat folks atomisticly that you find the case for freedom, praxeology lets us know that laisez-faire serves actors wants more efficiently than any other attempts. Atomism is a poor vice toward individualism.
I think it sucks that they can use government violence to their aid. Y’know play lets see how this works on a group of folks, or all folks. Oops, that wasn’t cool , we can fix it more, really. I hate the car metaphore. So government is behind the wheel, but she can only drive while looking through the rear view mirror. I hope she has motored this route quite often, oh first time, or this time y’all think we will make it.
Jimmy,
My advice is not to read what Austrians say about the Chicago School. Just read the books themselves and compare, that is what I did. Read Hayek’s “Prices and Production” and Von Mises’ “Human Action” then read Risk, Uncertainty and Profit by Frank Knight and then Friedman’s "Essay’s on Positive Economics"
Both sides then to exaggerate the faults of each other.
Regards,
Chicago guy