A primary reason why the Chicago School played such an effective role in promoting laissez-faire capitalism throughout the third quarter of the twentieth century was the philosophical leadership provided by Friedrich von Hayek from the Committee on Social Thought and by Milton Friedman from the Department of Economics. These deep-thinking, widely-read scholars imbued the entire Chicago School program with a sound normative basis from which to direct their influential positive economic analyses.
The philosophy that drove Hayek and Friedman forward in their attack on statism and socialism in the professing of economics was not primarily a desire to maximize the wealth of a society – though that was never very far from their thinking. The fundamental driving force was a belief that individual freedom (or individual liberty) is the most highly-valued ethical goal, and an understanding that individual freedom was under severe threat from the progressive socialist agenda that was then advancing across the Western World.
Both Hayek and Friedman prized individual freedom in its negative sense, as the absence of arbitrary coercion of any individual by any other individual or group of individuals in society. Such freedom offers no individual any specified outcome in society, but rather provides each individual with the opportunity to carve for himself such achievements as he can, in so doing enhancing his human fruitfulness. Negative freedom, they clearly recognized, is the direct enemy of positive freedom, the philosophy of progressive socialists that insists that individuals have the right to certain categories of attainment that require coercive interventions by the state and its agencies. Yet, neither Hayek nor Friedman was an anarchist. Both endorsed significant roles for the state, albeit roles that minimize invasions of negative freedom. The rule of law was crucial for such a minimization of coercion of some by others:
“Whether he is free or not does not depend on the range of choice but on whether he can expect to shape his course of action in accordance with his present intentions, or whether somebody else has power so to manipulate the conditions as to make him act according to that person’s will rather than his own. Freedom thus presupposes that the individual has some assured private sphere, that there is some set of circumstances in his environment with which others cannot interfere.” F.A. Hayek, The Constitution of Liberty, 1960
“The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather ‘What can I and my compatriots do through government’ to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom.” M. Friedman, Capitalism and Freedom, 1962
These normative beliefs provided the fulcrum from which Harold Demsetz would develop the economic case for preserving private property rights, from which Ronald Coase would develop the case for allowing private bargaining to take care of externalities under conditions of low transaction costs, from which the young George Stigler and Sam Peltzman would develop economic arguments in favor of deregulation, and from which Harry Johnson would advocate the case for free trade. These were the arguments, of course, from which Hayek argued the case for constitutional constrants on government and for the spontaneous evolution of the Law of Nomos over the legislated expansion of the Law of Thesis. These were the arguments from which Milton Friedman wrote Capitalism and Freedom and from which he and his students launched the monetary workshop, that eventually would transform governance throughout the Western World.
Friedrich von Hayek remained at Chicago only for the relatively short period, 1950 to 1962, when he moved to Freiburg. Friedman joined the Chicago faculty in 1946 and retired in 1977. The period 1950 to 1975 is indisputably the truly productive era of the Chicago School.
As early as 1978, however, just one year after Friedman’s departure, the philosophy of individual freedom was under aggressive attack from within the Chicago School. In 1978, George Stigler published a paper in The Journal of Legal Studies under the ominous title: ‘Wealth, and Possibly Liberty’. In that fateful paper, Stigler outlined, for the first time, a radical moral agnosticism that led him to deny any distinction between coerced and free choices, licit and illicit acts, robbery and commerce, as long as they are equally utility-enhancing. Finding the concept of coercion to be baseless, Stigler identified liberty with wealth. The only ends that matter are all included in a single maximand, wealth, tempered by proximity-altruism. Led by Stigler and his most loyal disciple, Gary Becker, all but a very few remaining Chicago Remnants fell in line with the Stigler Doctrine.
The rest, as they say is history, at least for the Chicago School. My next two columns will outline the inevitable consequences of such shallow thinking for the decline and fall of Chicago Economics, and for the entirely unnecessary nightmare that engulfed the School in September 2008.