The Chicago school is a stream of economic thought whose origins are in the department of economics and in the business school of the University of Chicago in the mid-twentieth century.
The Chicago school was characterized by rejecting the ideas of Keynesianism (which were in favor of state intervention), to promote the free market and the ideas of monetarism. Its main exponents were Milton Friedman and George Stigler, both awarded the Nobel Prize in economics.
Main ideas of the Chicago school
Economists at the Chicago school were convinced that the market economy is inherently stable and that disruptions (such as depressions or economic crises) would be the result of inadequate state intervention.
Indeed, Milton Friedman, one of its main representatives, said that what triggered the great depression of the 1930s was not a lack of investment as Keynes claimed , but a contraction of the money supply.
The Chicago school approach is characterized by a pro-market approach with an analysis that includes the following components:
- Theory of consumption: It is studied how individuals carry out their consumption decisions. For this, preferences (reflected in the utility curves) are related to the budget constraint.
- Theory of rational expectations: It assumes that individuals form their expectations rationally, that is, using the available information correctly. Given the above, rational expectations tend to be right and random errors.
- Criticism of Keynesianism: Criticism of state intervention to try to stabilize the economy.
- Marshaliana tradition: Study of specific, specific markets.
- Theory of human capital: Considers that one of the key factors in explaining productivity is the stock of human capital (the skills of workers, their training and experience).
The Chicago school did not limit itself to studying and making proposals in the purely economic sphere but rather expanded its analysis to legal and social issues such as the institution of marriage, slavery and demographic changes.
Economic measures proposed by the Chicago school
The Chicago school considered that state intervention generated inefficiency and hindered growth. Given the above, they proposed a series of measures in favor of the free market, highlighting the following:
- Deregulation: Eliminate or reduce regulations / restrictions imposed on the economic activity of private agents.
- Privatization: Transfer or sell state property to private. The latter would be more prepared to carry out an efficient administration of resources.
- Concessions: Perform concession contracts for private agents to manage state assets or structures.
- Elimination of subsidies and other aid: Eliminate subsidies or aid that may interfere with the free competition of companies.
- Reduce bureaucracy: Reduce and make the state apparatus more efficient.
Main exponents of the Chicago School
The Chicago school was led by two economists who received the Nobel Prize for their contributions to the field of Economics: Milton Friedman (Nobel Prize in Economics in 1976) and George Stigler (Nobel Prize in Economics in 1982).
Other relevant names that also won Nobel prizes are:
- Theodore Schultz (1979)
- Merton Miller (1990)
- Ronald Coase (1991)
- Gary Becker (1992)
Application of the theories of the Chicago School
The theories of the Chicago school became difficult to apply in democratic environments where workers and employers would strongly oppose that the grants (subsidies, benefits, minimum protection, etc.) that were given to them were reduced or eliminated.
Given the above, many of the policies were applied in countries with dictatorships, as was the case in Chile with the government of Augusto Pinochet.