The Chicago School

I had the good fortune to study economics at a time (1946-49) when and in a place (the University of Chicago) where the fundamentals of the discipline held center stage. And even more good luck brought me back to the University of Chicago for a long period (1953-91) during most of which that university was very likely the leading center of applied and policy economics. These experiences had a defining influence on my professional life and thinking. They helped create the vision and, if you like, the biases that I will be expressing here.

Perhaps a good starting point is Milton Friedman’s course in price theory, whose content is enshrined for all to see in his book of the same name. The question that many will ask is why an economist as profound, as versatile and as brilliant as Friedman would devote virtually the whole of a two-quarter sequence in graduate-level price theory to an extended exegesis on the subjects of supply, demand and markets. The answer is, because he thought they were so important as to take priority over the more esoteric and frilly topics he left out. I learned from that sequence, more than 50 years ago, that there was a great deal to be gained from revisiting supply and demand many times, at progressively subtler, deeper and richer levels. So much so that I have repeated the experience on my own, all through my professional life. Even after 50 years of this, I feel I am still learning, still deepening and enriching my understanding of those simple topics — supply, demand and markets.

I have elsewhere stated that I attribute to Friedman another purpose in making his course so totally fundamentals-oriented. In my opinion, he did not want us to learn price theory but to imbibe it — to make it part of our natural way of thinking, observing, and reacting to what we see.

That same spirit — of economics as a set of tools whose raison d’etre was to be used to help us understand and interpret what we see in the world around us — came to Chicago students not only from Friedman but from many other sources as well — T.W. Schultz, D. Gale Johnson and George Tolley in agricultural economics; George Stigler in industrial organization; Gary Becker in the economics of the family and of human behavior in general; Harry Johnson and Robert Mundell in international economics; H. Gregg Lewis, Sherwin Rosen and James Heckman in labor economics; Larry Sjaastad and myself in public finance and in the economics of developing countries; Robert Fogel and David Galenson in economic history. From whom in this entire group could you get any sense that economics was anything but a real-world science? Every one of these economists had a deep belief in and respect for economic theory — but in the sense that theory gained merit only by helping us to better understand and interpret (and maybe at times even predict) reality. Put another way — you can scan the economic stratosphere and heavens, and you’ll find plenty of postulates and theorems and lemmas, but not from any of this group of economists….

I mention all these things because I believe that this influence and impact came about largely because of the nature and type of training that characterized Chicago during the years in question – most particularly, its fierce concentration on fundamentals and its unrelenting real-world orientation. Deeply, almost with a religious fervor, I believe this is the way CEMA and the other leading centers of economic research and training in Latin America ought to focus their activities. If anybody is to engage in stratospheric and maybe astronomical economics, let it be large institutions in wealthy countries, which can better afford such a luxury.

-Arnold Harberger, Letter to a Younger Generation , (emphasis mine)