Page 3 of 3 COMMENT Friedman's misplaced monument
By Henry C K Liu
In 1856, Democratic Senator Stephen A Douglas, of Lincoln-Douglas debates fame,
who introduced the anti-slavery Freeport doctrine that permitted the new
territories to exclude slavery in the name of popular sovereignty, offered a
grant of 10 acres of land to Presbyterians "for a site for a University in the
City of Chicago". The elitist Presbyterians declined and the offer fell by
default to the populist First Baptist Church of Chicago, which believed that
God's grace is for everyone and not just predestined individuals.
The Baptist trustees relied on the subscriptions of wealthy Chicagoans to
finance the building of the university. However, the Great Fire of 1871 and the
Panic of 1873 rendered worthless a large proportion of the subscriptions that
had been secured
without conditions. These calamities left the university heavily in debt, which
it never managed to pay back. The commencement on June 16, 1886, marked the end
of the first University of Chicago.
To keep the university alive, Baptist trustee Thomas Goodspeed asked John D
Rockefeller, also a devout Baptist, who had never visited Chicago, for
financial support. At the time, Rockefeller was thinking of creating a great
Baptist university in New York. After negotiations between New York and Chicago
through the intermediation of Baptist clergyman Frederic Taylor Gates and
Jewish scholar William Rainey Harper, Rockefeller opted for Chicago. Gates was
a key advisor in convincing Rockefeller of his need for philanthropy to develop
a social purpose for his enormous wealth and to rebuild the public image of his
name by supporting projects and institutions devoted to the public good.
With the Interstate Commerce
Act of 1887 and of the impending Sherman Antitrust
Act of 1890, Chicago had the advantage of being
far from Wall Street and would avoid talks of a
special relationship between moneyed interests and
the new university. The Chicago School of
economics and the proposed Milton Friedman
Institute seem to have totally overcome such
sensitivity.
In 1890, Rockefeller agreed to
donate $600,000 (the equivalent of $14 million in
2008 dollars - much less than what is being sought
now for the Milton Friedman Institute) if local
Chicagoans could come up with another $400,000.
Goodspeed turned to Chicago banker and
philanthropist Charles Hutchinson to lead the
Chicago elite to match the Rockefeller condition
and the new university was born. Merchant Marshall
Field donated land for a new campus in Hyde
Park.
Harper was appointed president and
opened the new University of Chicago on October 1,
1892. He was an academic prodigy who earned a PhD
from Yale when he was aged 18. Schooled in Hebrew
and biblical studies, Harper commanded linguistic
competence in Aramaic, Arabic, Syriac and
Akkadian. As the first president of the new
university, he foresaw a glorious future for the
University of Chicago, which would be destined to
rival Ivy League schools such as Harvard and Yale,
not by copying them but by leap-frogging over
them. Only in 1897 did Rockefeller make his first
visit to the university, which eventually grew
into one of the world's greatest. It also marked
the beginning of a massive program of Rockefeller
philanthropy in education around the
globe.
The final decades of the 19th century were a turbulent period for the US
economy. Serial financial panics and agricultural crises appeared along with
the emergence of monopolies that acted as midwives to the birth of the
industrial economy. The concentration of ownership through predatory finance,
while facilitating spectacular growth, caused public resentment due to
widespread fraud, financial manipulation and labor abuse. Agrarian crusades and
trade unionism were met with unspeakable violence from capitalists and
management who hired goons as private security force who literally take the law
into their own hands. Populist reformers such as Henry George, bimetal
monetarists, Progressives, and even Silverite Republicans became active and
sought advice from progressive economists for conceptual support of their
political positions.
The new University of Chicago, charged with Harper's vision of overtaking the
eastern academic power centers, started an aggressive program of poaching young
rising stars from leading institutions, a strategy since copied by all
universities of financial means. As practically all economists of
respectability at the time were in various degree Apologists who defended the
new industrial capitalism, blemish and all, the university in 1892 invited
arch-conservative economist J Laurence Laughlin to form its first economics
department. Laughlin had studied under Charles Dunbar at Harvard, later dropped
out of academia to make a small fortune in insurance, then returned to teach at
Cornell for two years before he received the call from the University of
Chicago.
Laughlin set a tradition for the university by expanding intellectual space and
appointed several institutionalists, notably his former student at Cornell,
Thorstein Veblen, to head Chicago's Journal of Political Economy. Theory of the
Leisure Class, a classic critique of consumerism, was written by Veblen
in Chicago.
Laughlin, himself an avid free-marketeer, along with Frank Taussig at Harvard,
Arthur T Hadley and social Darwinist William Graham Sumner, both at Yale,
refused to become members of the American Economic Association, which had been
conceived by the "new school" as the US equivalent of the German Verein fur
Sozialpolitik, making the association a stronghold of the emerging
institutionalists by default. Laughlin's establishment reputation rests on his
work in monetary economics, as a vocal opponent to bimetallism and an energetic
promoter of central banking.
The American Apologists employed religious and moral arguments to defend the
status quo of industrial capitalism as the working of "eternal laws of
economics", God-given and moral, even if not altogether just. Any attempt to
interfere with it, such as anti-trust legislation or legalized unions, was
unnatural if not outright immoral, and would eventually spell self destruction
for the human specie by destroying its survival instinct. Veblen, with Henry J
Davenport and Frank H Knight, had a grand time making fools of the Apologists
with their own nonsensical utterances.
Frank H Knight, known as the "Grand Old Man" of Chicago, commanded as much
respect as Joseph Schumpeter at Harvard. Jointly with Jacob Viner, Knight
presided over the Department of Economics at the University of Chicago from the
1920s to the late 1940s, and played a central role in setting the character of
the department. His famous dissertation "Risk, Uncertainty and Profit" (1921),
remains one of the most interesting reads in economics, particularly at this
time.
Knight made a distinction between "risk" from randomness with knowable
probabilities and "uncertainty" resulting from randomness with unknowable
probabilities, which is now known as Black Swan Theory, coined by Nassim
Nicholas Taleb, the brilliant theoretician on quantitative finance. Frank set
forth the role of the entrepreneur in a distinctive theory of profit and gave
one of the earliest presentations of the famous law of variable proportions in
the theory of production.
Viner was an upside-down Keynesian in that he believed depressions were due to
deflation in output prices occurring at a faster rate than the collapse in
costs. Recovery, he believed, required a restoration of profit margins even if
brought about by government-induced inflation, but not by monetary expansion or
inflation targeting, but rather by deficit fiscal spending to create the
necessary price rise while costs remain lagging and profit rises. Friedman
mistakenly described Viner as an early monetarist. The hole in Viner's
prescription is that without rising wages and full employment, no depression
can recover. This is particularly true today when overcapacity is a core
problem. As Henry Ford discovered, the way to profit is through
higher-than-living wages.
The intellectual thrust of the Chicago School of 1920-1950 differed
significantly from its later incarnation. Led by Knight, the school was highly
suspicious of positive economic methodology to study how the economy works
currently. Faculty members denounced intellectual imperialism, arguing for a
confined role for economic analysis. They were suspicious of the efficiency
claims of laissez-faire economics, accepting it only on a "non-consequential"
basis. Efficiency is not contagious; it tends to increase through a decrease of
efficiency is other areas.
The Chicago Boys of this era welcomed active government policies to cure
recessions including Henry Simons's Chicago Plan for counter-cyclical monetary
policy. On the faculty was Paul Douglas, a passionate New Deal liberal, who
left to become a US senator of great influence even in foreign policy. Through
the Chicago School of Sociology, Douglas developed an intellectual affinity
with Jane Adams, social reformer and the first American woman to be awarded the
Nobel Peace Prize. Another member was card-carrying socialist Oskar Lange who
developed a model for market socialism. Lange was expected to become a major
figure in the department but instead left Chicago at the end of World War II to
join the new communist government in Poland and served as its ambassador to the
new United Nations.
In the 1960s, the department began to congeal into a new shape, led by George J
Stigler and Friedman. This is sometimes referred to as the Second Chicago
School, famous for its anti-Keynesian polemics. It eventually came to be known
as the Chicago School of Economics as the term is understood today. The
Stigler-Friedman period of neoclassical economics adamantly deny of the
possibility of market failure, with militant hostility toward imperfect
competition in which market entry is restricted such as in the case of
monopolies. Above all Chicago Boys of this era saw themselves as natural born
nemeses of Keynesian economics.
The Chicago Boys were outstanding propagandists, making good use of their two
influential journals - the Journal of Political Economy and the Journal of Law
and Economics - as heralds of truth. Learning from the secular success of the
Manchester School of Economics of free trade. which had been buttressed by
direct British government policy support and industry financial sponsorship,
the Chicago School focused on building ideological alliances inside Washington
with conservatives on domestic issues and neo-liberals on international issues,
financial alliances with Wall Street bankers who wanted less government
interference and alliances with central bankers who wanted simple formulae that
would absolve them from accountability.
These market fundamentalists hid behind their vigorous research methodologies
to abduct truth as their private property, notwithstanding other equally
vigorous economists were drawing diametrically opposing conclusions, albeit
less amenable to the moneyed interests. The Chicago Boys soon captured key
posts in the policy apparatus of government and power points in business
management to avenge their year in the wilderness during the Keynesian era.
In microeconomics, led by George Stigler, the neo-classical paradigm was
extended by incorporating new observations amenable to economic analysis,
breaking new paths with economics interpretations of human capital, ownership
rights and transaction costs, assigning measurable values to all things so that
marginal utility could inform decision making.
It was an approach that allowed efficiency to overshadow direction. It did not
matter where the nation was going as long as it was going there fast and at
lowest cost. Business and finance, previously the province of trade schools,
were brought in the intellectual realm philosophy in the university and
incorporated into neoclassical economics. Corporate planning became
indispensable for survival and respectable undertakings, but national planning
was deemed a threat to liberty. Profit began to achieve the equivalent status
of immortality. Political science and institutional theory were restructured to
rest on a financial base rather an economic foundation, even for national
security and international relations.
On one level, the Milton Friedman Institute controversy at the University of
Chicago is a local issue in a private university. But the University of Chicago
is world-class institution with connections and influence all over the world.
What happens at Chicago carries wide implications elsewhere in the world.
On that level, the struggle at Chicago is global. Institutions of higher
learning everywhere are all struggling against the illegitimate use of
overwhelming, ill-gained financial resources to perpetuate flawed ideologies
that had rationalized such ill-gotten gains at the expense of the well-being of
billions all over the world, and to blindly increase the efficiency of a global
exploitative regime. The problem is especially acute in emerging economies.
The struggle at the University of Chicago could act as a beacon around the
world to strip market fundamentalism of its pseudo-science pretense and expose
it as a propaganda device to rationalize the exploitation of the many by a few
the world over.
(Professor Lincoln of CORES encourages all who identify with the aim of the
struggle at Chicago to express their support via its
website. )
Henry C K Liu is chairman of a New York-based private investment group.
His website is at http://www.henryckliu.com.
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