In the 1960s, I attended the University of Chicago and spent many hours with Milton Friedman and graduate students in his economics department. They called themselves “the Chicago school,” and they stood apart from the professors of economics at Harvard, MIT, Stanford, et al. Those were the days of High Keynesian economics. The Chicago school was free market all the way, whereas the other elite universities had professors and students who doubted and challenged the free market – particularly in macro-economics.
The mainstream of college and university economics, in the United States and all across the English-language world, was the Keynesian theory of macro-economics and slowly dying ideas of central economic planning. The Soviet and Chinese experiments had not yet been exposed and abandoned. When some of “the Chicago boys” who were foreign students from Chile returned home in 1975-80 to work in the anti-socialist government, the label was clearly known, and despised by socialists everywhere.
But standing apart from this dominant English-language tradition was the “Austrian School” of Ludwig von Mises and F.A. Hayek. Perhaps the main difference was in how mathematics is used. Most people who want to learn economics do not read the language of algebra and calculus. Thousands of college students today who want to study economics are cheated, because they are taught mathematics in class and retain little knowledge of economics. The Austrian writers communicate ideas in clear language and students remember.
In the 50 years since I first studied economics, the Austrian School has grown in influence. For business economists, particularly in regard to investments and long-term planning, the insights of human action and the clear, logical, non-mathematical ideas of Von Mises and Hayek have almost completely wiped out the ideas of socialism and government planning.
But, there has remained a sharp divide between Austrian economics and what professors still teach in colleges and universities. The most important difference is in mathematics. The Austrians, from the earliest days, refused to adopt the “mathematical formalism” that became the fashion in English schools. Keynes was partly successful because he could manipulate math equations, and in the 1960s, Milton Friedman was more successful – showing the false connections in the Keynesian model – because Friedman was a better statistician than his Keynesian critics.
Yet, today the “mainstream” economics world still drifts. Look at the Federal Reserve. It wants to be a central planning agency for our credit and capital markets. How well is that working? The Austrian economists would abolish the Fed immediately. The eternal debate about setting interest rates is just a Keynesian game, based on a mathematic model. It is not a very robust model, because money and credit are evolving and no longer operate the way Milton Friedman observed them. The Austrian School economists were never bamboozled by mathematical models the way English and American schools were. Even Friedman’s idea of monetary control no longer applies to global credit markets.
The Austrian School has flourished among businessmen and students who can clearly understand the logic of micro-economic choice and value theories, competition and innovation in free markets, and the advantages of globalization. None of these new readers of economics, learning how economic theory identifies and explains the way the world really works, have any use for the mathematical models. The statistical information they use is for historical illustrations, not for building a mathematical model. The Austrians have always claimed there are no fixed parameters or constants in human action, except the first axiom of action, purposeful choice.
Whatever happened to “the Chicago School”? It is still there, and some professors (many in the Booth School of Business) are doing superb work in micro-economics. The books and articles by John Cochrane, Casey Mulligan, and Steven Levitt are excellent examples of this new work. But the distinctive personality of Milton Friedman and his colleagues George Stigler, Gary Becker, and Yale Brozen are gone. Today the free market is much more widely supported than in the 1960s and socialist ideas seem now only to dominate in the (bogus) field of macro-economics. We need only watch Paul Krugman.
When we finally get rid of the Federal Reserve, this will remove the last playpen of mischief for the old Keynesians. Central-planner mischief will be removed from the capital markets.