On Inventing the Chicago School

Except for "A Political Credo," the essays in this volume have all been published before, mainly in professional jour­nals. [Henry C.] Simons' work has not as yet received the attention it merits either in semipopular discussions of public policy or among professional economists. The former is not surprising. Although Simons was passionately interested in practical af­fairs, he was not a popular writer, believing as he did that short-run issues are-resolved almost before they are discussed. He addressed himself to members of the economics profession in the belief that the first task of economists is to arrive at a "consensus of opinion" as the only possible method of in­fluencing both short-run and long-run public policy. The failure of professional economists to appreciate his true worth may in part be due to the fact that he was not a writer of books. It is hoped that this collection of his essays in combina­tion with his work on taxation will facilitate an examination of his work as a whole and contribute to a wider appreciation of his remarkable achievement.
Professor Simons occupied a unique position in American economics. Through his writings and more especially through his teaching at the University of Chicago, he was slowly establishing himself as the head of a "school." Just as Lord Keynes provided a respectable foundation for the adherents of collectivism, so Simons was providing a respectable foundation for the older faith of freedom and equality....There may once have been substantial merit in the notion that the free-market system would steadily gain in strength if only it were freed of widespread state interfer­ence. By 1934 it became evident that a combination of the negative attitude, which permitted the proliferation of monopoly power, and promiscuous political interference, which strengthened such power, threatened "disintegration and collapse" of the economic organization. And only the "wisest measures by the state" could restore and maintain a free-market system.--Aaron Director, "Prefatory Note" Economic Policy for a Free Society, by Henry C. Simons, Chicago (1948)

One fascinating rhetorical and institutional feature of Aaron Director's account is the the teleological meaning given to the life of Henry Simons [1899 – 1946]: while alive, "he was slowly establishing himself as the head of a "school."" But death cut short his ascent. What makes the rhetorical move so adroit is that it leaves the reader with the impression that during this ascent in the 1930s there was already a distinct "Chicago" school of economics. In recent scholarship (e.g. here) these sense has been strengthened because admirers of Frank Knight, James Buchanan, or Coase (sometimes grouped together) have emphasized a distinction between 'old  Chicago' and ''new Chicago' (often such a distinction is also used to try to track a development in the history of Chicago law and economics which can in certain but not all respects be mapped onto the old/new school of Chicago economics). As it happens  Simons started the tradition of Chicago school economists teaching in the Chicago law school -- and Aaron Director is a central example -- it is not a contingent fact that the two old/new Chicago schools (of economics and of law and economics) are intertwined in complex personal, institutional, and content fashion.

But, while certainly there were other notable broadly free market economists at Chicago in the 1930s (with Frank Knight and Jacob Viner being pre-eminent), the department was by no means homogeneous, including the formidable communist, Oskar Lange,  but also Henry Schultz and Paul Douglas (later Senator). And to the best of my knowledge it was not understood as a school at the time.* So, Director (the brother and law of Milton Friedman who had married Rose Director) here invents a school, backward projects it into the 1930s, and simultaneously leaves a vacancy at its head. Director makes no suggestion about the identity of the new leader of the school.

I had previously thought (in print) that the first person to describe a 'Chicago school of economics' had been a critic, Martin Bronfenbrenner (in 1950 here)--Bronfenbrenner was an eminent economist in his day. But I had missed the significance of Simons because he treated Knight as the intellectual godfather and Simons as a "publicist":

The so-called Chicago School of economic policy, whose intellectual parent is Frank H. Knight, but whose best-known publicist is Henry C. Simons, author of Economic Policy for a Free Society, believes these optimum conditions would, in fact, be realized quickly and painlessly in a free economy, despite the complications raised by economic progress and the possible multiplicity or instability of equilibrium conditions, if three conditions were satisfied. (1) Elimination of all seriously monopolistic  restrictions on the supply of goods and labor. (2) Monetary policy devoted to maintaining a stable price level, or, alternatively, a stable level of government expenditures, without any guarantee of full employment for products and resources which priced themselves out of their markets. (3) Mitigation of inequality by taxation (particularly the progressive personal income tax) rather than by interference with the pricing of goods and services.

Later this had become conventional wisdom. For example, writing in 1972, in the New York Times, Leonard Silk writes "It is Frank Knight who has come to be regarded as the founder and dominant influence in the development of the Chicago School" Simons is mentioned -- as an intellectual influence on Milton Friedman --, but he is not given the most prominent place. 

But I now realize the very idea of a school is itself a Chicago product, and presumably Director's vision.* Bronfenbrenner's treatment of Simons as a publicist is in contrast with Director, who claims that Simons was oriented  more toward if not articulating then building a consensus among fellow economists not the larger public. Admittedly by pairing Simons with Keynes (who was a popular and influential public figure), Director suggests that Simons could have become a publicist, too, (in the way that Friedman became one).

What is important to note in Director's treatment of Simons, is that the very purpose of such consensus is to influence policy (Stigler also notes it). In fact, it seems that on Director's presentation Simons thinks that such consensus is the only way economists qua economists could influence policy. This idea has roots in Sidgwick, J.N. Keynes (the father of), and Robbins, but it is to the best of my knowledge distinctive. 

I want to close with noting one other key difference between Bronfrenbrenner's presentation and Director's. Bronfenbrenner's presentation emphasizes the significance of mitigating economic inequality. While this may be surprising to recent debates about the Chicago, this is indeed quite present in Simons (and puts him in the tradition of Smith and Mill). In fact, Bronfenbrenner misses that attacking business monopolies has priority over attacking labor monopolies in Simons. Even so, in Bronfenbrenner one can see already the contours of the future trajectory of Chicago economics (even though it misses some of the methodological commitments). 

By contrast, Director associates the Chicago school with an idea that is now primarily attributed to the rival school of free market political economists, the Ordoliberals. For Director insists (correctly) that Simons was committed to the idea, prominently articulated (recall) by Walter Lippmann in (1938 the Good Society, that laissez-faire was bankrupt. Rather, what is required is the "wisest measures by the state" in order to "restore and maintain a free-market system." As George Stigler later (1974) noted this was extremely far from Knight's position. For Simons, that is to say, when the Chicago school was founded, liberty and properly functioning markets presupposed state activity of a certain (wise) type.+

*I don't mean to deny that in the 1930s Chicago had a reputation for free market ideas against the tide. And Chicago economists acted in (near) unison to propose the so-called Chicago plan to save and revive the banking system. (But the Chicago plan is, while sensible, certainly not a liberal project.)

+In future posts I hope to articulate the distinctive nature of the (early) Chicago conception of the state and its abandonment by 'new' Chicago.