The Chicago School of Economics: What Went Wrong?
Economics at the University of Chicago is no longer very different from economics at other top programs. What happened? The proximate cause was lack of a strong instinct of memetic self-preservation. The ultimate cause, though, was that the Chicago School destroyed itself from within. Or so I argue in the closest thing I’ve written to a history of thought piece:
Future historians of thought will be puzzled by the transformation of the Chicago School. How does one get from Milton Friedman to Donald Wittman? My answer: Step by step, and myopically. More than anyone else, Friedman cemented the Chicago view that the free market is under-rated. Since many market failure arguments assume that consumers or workers are irrational, Chicago economists eagerly joined the rational expectations revolution. Initially, their new outlook made their defense of free markets more truculent; government intervention seemed even more pointless than previously believed. But this position was unstable. If people have rational expectations, how can the free market be “under-rated”? And if the free market is not under-rated, then what reason is there to second-guess democratically-chosen policies? This pointed question gnawed away at the intellectual conscience of Chicago economists until enough were ready to hear Wittman’s unconflicted answer: There is no reason to second-guess democratically-chosen policies.
During this evolution, Chicago economists seemed to lose sight of a much more fundamental principle: the importance of empirical testing. Rational expectations is an empirical hypothesis. It could be true, it could be false, and it could be true for some applications and false for others. It is awfully rash to accept it as a universal truth without testing. Even if an hypothesis seems intuitively obvious, you should look for exceptions.
But at least for beliefs about economics, Chicago economists should have found rational expectations to be completely counter-intuitive. As teachers of economics, they must have noticed that students do not arrive as blank slates. In fact, students typically seem to believe the opposite of what you plan to teach. Yes, it is possible that economic educators have misread their students for centuries. But such an extraordinary claim needs compelling empirical evidence to command assent.
The Chicago School inexplicably waived this requirement. Empirical evidence that beliefs about economics are unbiased never surfaced. But the rational expectations hypothesis became de rigueur anyway. Now that a large body of empirical evidence confirms that the teachers of economics were right all along, we can justifiably say not only that Chicago economists should not have changed their minds, but that they should have known better.
The sad truth is that the Chicago School died around the time I entered grad school. Bad timing on my part. I really wish I could have saved Chicago from itself. It had so much to live for.