Does the recent financial crisis signal the end of free-market economics? (Reuters)
Nov 04, 2008
Nestled within the leafy campus of the University of Chicago, stands
a brownstone building known currently as the Chicago Theological
Seminary Building.
But the building's new occupants have more worldly pursuits than the study of God.
It is now the planned site for what will be the Milton Friedman Institute for Research in Economics.
The new $200m establishment will be dedicated to the Nobel
prize-winning economist viewed as the pioneer of neo-liberal economic
thought and founder of the so-called "Chicago School" of economists,
whose policies have shaped world markets for decades.
However, those who commissioned the establishment could not have
picked a more inauspicious time for its launch - as Friedman's
policies, which influenced so many within US politics, are widely being
blamed for the current global financial turmoil.
As the US prepares to vote for a new president on November 4 and at
a time when the world is beginning to view tighter regulation and
oversight of markets as the only way out of the crisis, many people
are questioning whether the 'Chicago school' of ideology itself has any
future.
Dominating ideology
The Chicago School of Economics is less of an actual department than
a school of thought - shaped by Friedman and his colleagues working
across the economics department and the nearby law and business schools
in the 1950s.
Friedman and his allies rejected Keynesianism - the popular economic
theory of the time which espoused belief in the state's role in
stimulating economic growth and stability in the private sector through
interest rates, taxes and public works - in favour of "laissez faire"
capitalism and deregulation.
"In the 1950s and 1960s there was only a small isolated minority
who believed in methological individualism - the preference of
individuals - as opposed to institutions,' says Gerald Friedman (who is
not related to the late Milton), the professor of economics at the
University of Massachusetts at Amherst.
"But time passed until, by the 1980s, the Chicago School came to dominate US economic thought."
But, although feted by many, critics argued that much of the Chicago
School's ideas were best implemented by undemocratic states - pointing
in particular to the infamous "Chicago Boys" of 25 Chilean economists
trained by Friedman at the school who then returned to Chile to impose
free-market policies under General Augusto Pinochet's rule - a period
marked by his brutal repression and atrocities against human rights.
And just last month, as the US financial markets crumbled and
protesters marched down New York's Wall Street, even Alan Greenspan,
the former chairman of the US Federal Reserve, made the extraordinary
admission to a US house committee on the crisis that he had "found a
flaw ... in the model that I perceived is the critical functioning
structure that defines how the world works" - the very basis of the
free-market school of thought itself.
'Scapegoats'?
But Robert E Lucas, a professor of economics at Chicago University
and a member of the original Chicago School, rejects claims that the
ideology is responsible for the current financial turmoil, saying that
the late Friedman and his colleagues have been made into "scapegoats".
"We have a free-markets tradition, but I personally don't believe [that the school is responsible]," he says.
"It doesn't mean anything - why don't you ask these guys [critics] what should be done specifically and what should be done now?
"People like [Josef] Stiglitz [the US economist and critic of free
markets] use name-calling instead of just diagnosing the problem and
saying what should be done.
"Should there have been regulation to prevent this? Well sure, but
what sort of regulation? Let them spell out what regulation we should
have in place."
But Gerald Friedman says that many people within the financial
community feel it is the flawed methodology of the Chicago school which
has facilitated the crisis.
"There is a lot of anger towards the Chicago school and the people on Wall Street feel betrayed," he says.
"Deregulation has been a complete disaster for them."
"I think [the Chicago School] changed the direction of economics, but it's over now and completely discredited."
Campaign issue
The question of the economy has proved central in recent weeks on the US presidential election campaign trail.
Both campaigns have economic advisers
with ties to the school - John McCain has Jack Kemp, a Republican
politician and proponent of the Chicago school ideology.
And, perhaps more surprisingly, Barack Obama, the Democratic
candidate, has Austan Goolsbee, a professor of economics at the Chicago
Business school and Cass Sunstein, a legal scholar who taught at the
Chicago University's Law school for decades.
McCain has been swift to seize on Obama's economic plans as "evidence" of what he calls "socialism".
He has accused Obama of wanting to "spread the wealth" and of aiming
for the role of "redistributor-in-chief" while Sarah Palin, his
vice-presidential running mate, told a rally in Ohio on Monday that
"now is not the time to experiment with socialism".
Obama, who has consistently emerged as the favoured candidate when
voters are asked who can best deal with the economic crisis, has
assured voters he "loves the markets", causing some left-wing
commentators to refer disparagingly to the Illinois senator's own
advisers as "Chicago Boys".
But Gerald Friedman says that Sunstein, seen as a relative
progressive, is viewed as the man shaping the Democratic candidate's
policies and that Obama, if elected, would be much more "aggressive" in
finding a solution to the crisis.
"McCain's guys have the very conventional old-school aspects of [economics] which are 20 years out of date," he says.
"[With Obama] it's not New Deal, big government but on the other
hand it's certainly - for first time since the 1970s - that we could
have a government that's a significant step [away] from the Chicago
School."
Still believers?
However, if the Chicago School's philosophy is perceived by some to
be finished, this is not a message that has so far trickled down to
everyone.
On the university campus, students at the Chicago School of
Business's sleek, glass-panelled school are still scurrying to classes
- albeit in smart suits more befitting of a bank boardroom meeting than
economics 101 classes - and meeting friends for coffee in the
building's cavernous hall.
They are the next generation of business leaders and the influence of the Chicago School of Economics looms large.
Many of them told Al Jazeera they had applied to study at the
university purely for the prestige of attending classes still taught by
the founding fathers of the free-market movement.
Nikolai, a young MBA (Masters of Business Administration) student
from Germany who did not want to give his last name, said many of his
friends had thought of switching their degrees from finance because of
concerns over market conditions and fears of not being able to get jobs
once they graduate.
But he still retains confidence in the school's tenets.
"Maybe it's just for the time being, this downturn," he ventures.
"Right now there are some arguments against it - but I'm still a believer in free markets."
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Nestled within the leafy campus of the University of Chicago, stands
a brownstone building known currently as the Chicago Theological
Seminary Building.
But the building's new occupants have more worldly pursuits than the study of God.
It is now the planned site for what will be the Milton Friedman Institute for Research in Economics.
The new $200m establishment will be dedicated to the Nobel
prize-winning economist viewed as the pioneer of neo-liberal economic
thought and founder of the so-called "Chicago School" of economists,
whose policies have shaped world markets for decades.
However, those who commissioned the establishment could not have
picked a more inauspicious time for its launch - as Friedman's
policies, which influenced so many within US politics, are widely being
blamed for the current global financial turmoil.
As the US prepares to vote for a new president on November 4 and at
a time when the world is beginning to view tighter regulation and
oversight of markets as the only way out of the crisis, many people
are questioning whether the 'Chicago school' of ideology itself has any
future.
Dominating ideology
The Chicago School of Economics is less of an actual department than
a school of thought - shaped by Friedman and his colleagues working
across the economics department and the nearby law and business schools
in the 1950s.
Friedman and his allies rejected Keynesianism - the popular economic
theory of the time which espoused belief in the state's role in
stimulating economic growth and stability in the private sector through
interest rates, taxes and public works - in favour of "laissez faire"
capitalism and deregulation.
"In the 1950s and 1960s there was only a small isolated minority
who believed in methological individualism - the preference of
individuals - as opposed to institutions,' says Gerald Friedman (who is
not related to the late Milton), the professor of economics at the
University of Massachusetts at Amherst.
"But time passed until, by the 1980s, the Chicago School came to dominate US economic thought."
But, although feted by many, critics argued that much of the Chicago
School's ideas were best implemented by undemocratic states - pointing
in particular to the infamous "Chicago Boys" of 25 Chilean economists
trained by Friedman at the school who then returned to Chile to impose
free-market policies under General Augusto Pinochet's rule - a period
marked by his brutal repression and atrocities against human rights.
And just last month, as the US financial markets crumbled and
protesters marched down New York's Wall Street, even Alan Greenspan,
the former chairman of the US Federal Reserve, made the extraordinary
admission to a US house committee on the crisis that he had "found a
flaw ... in the model that I perceived is the critical functioning
structure that defines how the world works" - the very basis of the
free-market school of thought itself.
'Scapegoats'?
But Robert E Lucas, a professor of economics at Chicago University
and a member of the original Chicago School, rejects claims that the
ideology is responsible for the current financial turmoil, saying that
the late Friedman and his colleagues have been made into "scapegoats".
"We have a free-markets tradition, but I personally don't believe [that the school is responsible]," he says.
"It doesn't mean anything - why don't you ask these guys [critics] what should be done specifically and what should be done now?
"People like [Josef] Stiglitz [the US economist and critic of free
markets] use name-calling instead of just diagnosing the problem and
saying what should be done.
"Should there have been regulation to prevent this? Well sure, but
what sort of regulation? Let them spell out what regulation we should
have in place."
But Gerald Friedman says that many people within the financial
community feel it is the flawed methodology of the Chicago school which
has facilitated the crisis.
"There is a lot of anger towards the Chicago school and the people on Wall Street feel betrayed," he says.
"Deregulation has been a complete disaster for them."
"I think [the Chicago School] changed the direction of economics, but it's over now and completely discredited."
Campaign issue
The question of the economy has proved central in recent weeks on the US presidential election campaign trail.
Both campaigns have economic advisers
with ties to the school - John McCain has Jack Kemp, a Republican
politician and proponent of the Chicago school ideology.
And, perhaps more surprisingly, Barack Obama, the Democratic
candidate, has Austan Goolsbee, a professor of economics at the Chicago
Business school and Cass Sunstein, a legal scholar who taught at the
Chicago University's Law school for decades.
McCain has been swift to seize on Obama's economic plans as "evidence" of what he calls "socialism".
He has accused Obama of wanting to "spread the wealth" and of aiming
for the role of "redistributor-in-chief" while Sarah Palin, his
vice-presidential running mate, told a rally in Ohio on Monday that
"now is not the time to experiment with socialism".
Obama, who has consistently emerged as the favoured candidate when
voters are asked who can best deal with the economic crisis, has
assured voters he "loves the markets", causing some left-wing
commentators to refer disparagingly to the Illinois senator's own
advisers as "Chicago Boys".
But Gerald Friedman says that Sunstein, seen as a relative
progressive, is viewed as the man shaping the Democratic candidate's
policies and that Obama, if elected, would be much more "aggressive" in
finding a solution to the crisis.
"McCain's guys have the very conventional old-school aspects of [economics] which are 20 years out of date," he says.
"[With Obama] it's not New Deal, big government but on the other
hand it's certainly - for first time since the 1970s - that we could
have a government that's a significant step [away] from the Chicago
School."
Still believers?
However, if the Chicago School's philosophy is perceived by some to
be finished, this is not a message that has so far trickled down to
everyone.
On the university campus, students at the Chicago School of
Business's sleek, glass-panelled school are still scurrying to classes
- albeit in smart suits more befitting of a bank boardroom meeting than
economics 101 classes - and meeting friends for coffee in the
building's cavernous hall.
They are the next generation of business leaders and the influence of the Chicago School of Economics looms large.
Many of them told Al Jazeera they had applied to study at the
university purely for the prestige of attending classes still taught by
the founding fathers of the free-market movement.
Nikolai, a young MBA (Masters of Business Administration) student
from Germany who did not want to give his last name, said many of his
friends had thought of switching their degrees from finance because of
concerns over market conditions and fears of not being able to get jobs
once they graduate.
But he still retains confidence in the school's tenets.
"Maybe it's just for the time being, this downturn," he ventures.
"Right now there are some arguments against it - but I'm still a believer in free markets."
Nestled within the leafy campus of the University of Chicago, stands
a brownstone building known currently as the Chicago Theological
Seminary Building.
But the building's new occupants have more worldly pursuits than the study of God.
It is now the planned site for what will be the Milton Friedman Institute for Research in Economics.
The new $200m establishment will be dedicated to the Nobel
prize-winning economist viewed as the pioneer of neo-liberal economic
thought and founder of the so-called "Chicago School" of economists,
whose policies have shaped world markets for decades.
However, those who commissioned the establishment could not have
picked a more inauspicious time for its launch - as Friedman's
policies, which influenced so many within US politics, are widely being
blamed for the current global financial turmoil.
As the US prepares to vote for a new president on November 4 and at
a time when the world is beginning to view tighter regulation and
oversight of markets as the only way out of the crisis, many people
are questioning whether the 'Chicago school' of ideology itself has any
future.
Dominating ideology
The Chicago School of Economics is less of an actual department than
a school of thought - shaped by Friedman and his colleagues working
across the economics department and the nearby law and business schools
in the 1950s.
Friedman and his allies rejected Keynesianism - the popular economic
theory of the time which espoused belief in the state's role in
stimulating economic growth and stability in the private sector through
interest rates, taxes and public works - in favour of "laissez faire"
capitalism and deregulation.
"In the 1950s and 1960s there was only a small isolated minority
who believed in methological individualism - the preference of
individuals - as opposed to institutions,' says Gerald Friedman (who is
not related to the late Milton), the professor of economics at the
University of Massachusetts at Amherst.
"But time passed until, by the 1980s, the Chicago School came to dominate US economic thought."
But, although feted by many, critics argued that much of the Chicago
School's ideas were best implemented by undemocratic states - pointing
in particular to the infamous "Chicago Boys" of 25 Chilean economists
trained by Friedman at the school who then returned to Chile to impose
free-market policies under General Augusto Pinochet's rule - a period
marked by his brutal repression and atrocities against human rights.
And just last month, as the US financial markets crumbled and
protesters marched down New York's Wall Street, even Alan Greenspan,
the former chairman of the US Federal Reserve, made the extraordinary
admission to a US house committee on the crisis that he had "found a
flaw ... in the model that I perceived is the critical functioning
structure that defines how the world works" - the very basis of the
free-market school of thought itself.
'Scapegoats'?
But Robert E Lucas, a professor of economics at Chicago University
and a member of the original Chicago School, rejects claims that the
ideology is responsible for the current financial turmoil, saying that
the late Friedman and his colleagues have been made into "scapegoats".
"We have a free-markets tradition, but I personally don't believe [that the school is responsible]," he says.
"It doesn't mean anything - why don't you ask these guys [critics] what should be done specifically and what should be done now?
"People like [Josef] Stiglitz [the US economist and critic of free
markets] use name-calling instead of just diagnosing the problem and
saying what should be done.
"Should there have been regulation to prevent this? Well sure, but
what sort of regulation? Let them spell out what regulation we should
have in place."
But Gerald Friedman says that many people within the financial
community feel it is the flawed methodology of the Chicago school which
has facilitated the crisis.
"There is a lot of anger towards the Chicago school and the people on Wall Street feel betrayed," he says.
"Deregulation has been a complete disaster for them."
"I think [the Chicago School] changed the direction of economics, but it's over now and completely discredited."
Campaign issue
The question of the economy has proved central in recent weeks on the US presidential election campaign trail.
Both campaigns have economic advisers
with ties to the school - John McCain has Jack Kemp, a Republican
politician and proponent of the Chicago school ideology.
And, perhaps more surprisingly, Barack Obama, the Democratic
candidate, has Austan Goolsbee, a professor of economics at the Chicago
Business school and Cass Sunstein, a legal scholar who taught at the
Chicago University's Law school for decades.
McCain has been swift to seize on Obama's economic plans as "evidence" of what he calls "socialism".
He has accused Obama of wanting to "spread the wealth" and of aiming
for the role of "redistributor-in-chief" while Sarah Palin, his
vice-presidential running mate, told a rally in Ohio on Monday that
"now is not the time to experiment with socialism".
Obama, who has consistently emerged as the favoured candidate when
voters are asked who can best deal with the economic crisis, has
assured voters he "loves the markets", causing some left-wing
commentators to refer disparagingly to the Illinois senator's own
advisers as "Chicago Boys".
But Gerald Friedman says that Sunstein, seen as a relative
progressive, is viewed as the man shaping the Democratic candidate's
policies and that Obama, if elected, would be much more "aggressive" in
finding a solution to the crisis.
"McCain's guys have the very conventional old-school aspects of [economics] which are 20 years out of date," he says.
"[With Obama] it's not New Deal, big government but on the other
hand it's certainly - for first time since the 1970s - that we could
have a government that's a significant step [away] from the Chicago
School."
Still believers?
However, if the Chicago School's philosophy is perceived by some to
be finished, this is not a message that has so far trickled down to
everyone.
On the university campus, students at the Chicago School of
Business's sleek, glass-panelled school are still scurrying to classes
- albeit in smart suits more befitting of a bank boardroom meeting than
economics 101 classes - and meeting friends for coffee in the
building's cavernous hall.
They are the next generation of business leaders and the influence of the Chicago School of Economics looms large.
Many of them told Al Jazeera they had applied to study at the
university purely for the prestige of attending classes still taught by
the founding fathers of the free-market movement.
Nikolai, a young MBA (Masters of Business Administration) student
from Germany who did not want to give his last name, said many of his
friends had thought of switching their degrees from finance because of
concerns over market conditions and fears of not being able to get jobs
once they graduate.
But he still retains confidence in the school's tenets.
"Maybe it's just for the time being, this downturn," he ventures.
"Right now there are some arguments against it - but I'm still a believer in free markets."
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