Some time ago, I asked if “Milton Friedman was the next economist whose once lauded reputation may soon slide ?”

Turns out it happened much quicker than expected. A long Bloomberg piece, Friedman Would Be Roiled as Chicago Disciples Rue Repudiation, discusses the tarnishment of the Chicago school of thought.

Its long overdue. From the efficient-market theories, to the concept of man as rational profit maximizers, much of the edifice that is was the Chicago school of economics is based on a foundation that is false, disproven or otherwise questionable.

I first encountered the Chicago theory in law school. The Chicagoists somehow read into law a market efficiency component that was never there. I recoiled against it — not because of the libertarianism, which I embraced. Rather, it seemed a backdoor way to circumvent democracy, and force into the legal system rules that were never debated, voted on, or agreed to by a representative government. I found the extremist legal theories of Judges like Richard Posner and Frank Easterbrook intellectually repulsive. They were undemocratic, anti-representative government. When I told a professor that the law and economics movement was an attempt at a political coup, he laughed and said, try to stop it.

I disliked the neoclassical price theory. It was authoritarian, a worship of a form of mob rule outside of the usual legal channels. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable.  Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable (I know, radical, huh)

If there is one silver lining in the entire collapse, its that this group of intellectual charlatans have been revealed as utterly wanting. Oh, there will be some pushback by the Chicagoans. (Watch the comments for the cute little protests from law students who never practiced a day in their lives, and the biz school kiddies who never executed a single trade).

Anyway, here’s an excerpt from today’s Bloomberg:

“When Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed — whose remedies, ironically, entail countermeasures of nationalization,” Marshall Sahlins, an emeritus professor of anthropology, said during the debate, speaking in a room adorned with murals of female students parading through the campus in medieval gowns. Sahlins, 77, noted a few weeks later socialist and capitalist countries alike are regulating or nationalizing financial institutions in a rebuff to Friedman.

Off campus, the global meltdown is stirring anti-Chicago economists, who were voices in the wilderness during decades of lax government oversight of markets. Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.

‘Bears the Blame’ “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.

University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.

“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.

Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge. Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.”

That’s the phrase that best sums up the Chicago School: “Divorced from Reality.”

Chicago School repudiation?  Good riddance!


Friedman Would Be Roiled as Chicago Disciples Rue Repudiation
John Lippert
Bloomberg, December 23, 2008

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

102 Responses to “RIP Chicago School of Economics: 1976-2008”

  1. dead hobo says:

    Your passion for this topic is still viewing the world as more complicated than it really is. Your screeds yesterday about bad regulation were closer to the mark, although this one today has merit.

    The heart of both arguments is this simple:

    “Some people will steal anything they can, sometimes just to see the look on your face after they do it.”

    Regulation is both a preventative of this behavior and a most excellent tool of the predator. Economic theory can be twisted likewise. For example, a predator would say free markets are bad because this leads to organized crime. A predator would also say more regulation is needed after making sure that the proposed regulations can be manipulated to allow him to legally pillage at will.

    What is really needed are smarter people. However, since most people are both lazy and stupid, this will not happen soon. Rather, a new theory of something will emerge and captivate the world as the answer to everything. Predators, of course, will take over the new movement and lazy / stupid people will thank them for working so hard on their behalf.

  2. dead hobo says:

    I screwed up:

    I said

    For example, a predator would say free markets are bad because this leads to organized crime

    I meant:

    predator would support free markets because they prompt efficiency and ultimate good

    Damn, I shouldn’t write this early before the coffee kicks in.

  3. debreuil says:

    wow that is interesting… In game programming you often try and get the ‘economic engine’ going based on that kind of thinking (set things up right and it will optimize itself). It tends to never work, and always requires a fair bit of extra infrastructure and fudge — akin to regulation I suppose. I always thought that was just a matter of more effort in the setup, but maybe it is just a BS theory and never would have worked. Glad I didn’t spend the extra months in that case : ).

    Genetic algorithms are also similar (a bunch of solutions are run, then sliced and diced based on what was most successful, rinse and repeat) — they are ‘self solving, though much more successful. I suppose that is because a) there is constant borrowing of ideas, weighted to the good ones (no extremists can last long in that soup!), and b) bad ideas die, good ones multiply.

    Maybe if we shoot economists with failed theories, and allow the successful ones to spawn freely as long as they keep an open mind : )…

  4. VennData says:

    Economics is always and everywhere a study of human behavior

  5. pj says:

    “The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,”

    “Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge. Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate.”

    I dont claim to really understand a lot of economics, but I still don’t quite agree with all that has been written. Markets, I think are indeed self adjusting if you let them be. Just that there is a cost associated which not many are willing to pay. And maybe that cost would have been lower had the govt not tried to ward off the pain earlier for short term gain.
    Yes, I dont trust the government too much. Their role should be minimal. Yes, there are instances where markets fail and regulation is required, but thats it.
    Quite often you talk about repealing the Glass Steagall etc. Regulation does not mean only enacting a law, it is also govt in action when it repeals something. What were they thinking? What was the incentive? Lobbies, Self interest, Greed…
    So when that was done, it was also something a result of government action only. When Fed does something stupid, it is again something that a State arm is doing. When the TARP comes out, it is again what the govt is doing. When a currency note is printed and dropped from the chopper, it is again an action by govt. Bailout after bailout, it is the govt action everywhere. Greed, corruption, bending of rules….
    And you trust these guys to regulate well???
    Just be careful what you wish for BR.

    PJ : A B-School kiddie who executed trades one too many and wishes he hadn’t. :-(

  6. “Quite often you talk about repealing the Glass Steagall etc. Regulation does not mean only enacting a law, it is also govt in action when it repeals something. What were they thinking? What was the incentive? Lobbies, Self interest, Greed…
    So when that was done, it was also something a result of government action only. When Fed does something stupid, it is again something that a State arm is doing. When the TARP comes out, it is again what the govt is doing. When a currency note is printed and dropped from the chopper, it is again an action by govt. Bailout after bailout, it is the govt action everywhere. Greed, corruption, bending of rules….
    And you trust these guys to regulate well???
    Just be careful what you wish for BR.”–from, pj, above

    now that the Book wrapped, and b4 the Press Trail alights..please ponder that the “Chicago/Keynesian”-dichotomy is as Fraudulent as either ‘School’ themselves..

    Austrians v. Chicagoans
    by Karen De Coster

    “…Obviously, the two schools are radically different in regards to banking issues, and especially, public policy. The Chicagoans will devise every model possible to prove out how, where, and when intervention should happen in the economy. (See Bill Anderson on the Chicago school and antitrust.) The Chicagoans are also fully prepared to state how resources should be allocated based on those same empirical grounds. Yes, the Chicago school was once very unfashionable, and that was because they countered Keynesian tenets and the mistaken concept of “market failure,” and also, they were viewed as highly dogmatic.

    I remember Mark Skousen once wrote a series of articles applauding the use of quantitative economics by some good, Austrian sympathetic economists, and he basically stated that the reason Chicago was so far ahead of the Austrians was because they positioned themselves on the inside (read: capitulated), and made the right players happy in Washington.

    In regards to Ivan’s comment that the current Chicago school is not about free market economics, it’s important to remember perception, because, where the Chicago school is concerned, the pro-interventionist economists that he names (Becker, Stigler, Posner, Peltzman) are perceived as being representative of free market economics by mainstreamers. The current Chicago guys are who the media and think tanks turn to for a voice on “free market” issues, and that is because their answers are very much palatable to the masses and to policy makers…”

    Venn’s point: “Economics is always and everywhere a study of human behavior” is a good one.

    it comes down to Human Action.

  7. ByteMe says:

    I think the Chicago school still has merit, but in the real world, we’ve “socialized” out the pain from making bad mistakes. By “socialized”, I’m not talking government, but the social factors of person-to-person interactions that helped to correct the excesses. In other words, if we — as a nation of people hurt by the individual actions of hundreds of bad actors — were allowed to inflict the meaningful punishment on the heads of Bear, Lehman, WaMu, Countrywide, the SEC, etc., would the people who followed behind to create these kinds of organizations take or allow such large risks? If they knew that if the risks failed to pay off they wouldn’t get to retire to the beaches of St. Tropaz, but would instead get to live out what remained of their lives by hawking pencils on the sidewalk near the Wall Steet bull statue, would they still take those immense risks?

    The punishment of tooling around Manhattan in your high-end Mercedes and shopping for great gifts for your family and friends while planning your next great vacation to some exotic location all on the inexplicably huge parachute that was given to you by your peers who all want the same parachute if they get tapped to be the next CEO… that’s just not in keeping with an efficient market model theory.

  8. steveeboy says:

    “Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable (I know, radical, huh)”

    All Extremists Should be Killed!!!

    Seriously, why do you think the Chicago school will die?

    Did the neo-cons pay any penalty for their support for the invasion and occupation of Iraq?

    People on the right pay no penalty for being wrong about everything, they just get another cushy think tank job, a permanent pundit position on cable or some “liberal” media outlet such as the WaPo or NYT, or they get appointed to some high government post.

    We’ll never see the IMF demanding austerity measures here like they did in Asia or Latin America back in the day.

    Remember, it’s not the Chicago boyz that have failed, it’s the fault of various poor black and brown people!

  9. dead hobo says:

    The economic theories that will be the most widely accepted will be those with intellectual appeal and political favor, while still permitting predators to steal at will if the theory is applied properly.

  10. constantnormal says:

    The ONLY thing wrong with the Chicago School of economic thought, and Friedman’s belief that free markets allocate resources better than any alternative, is that they do not allow for the influence of corruption, fraud and greed. [BR: In other words, their fantasies about Human nature!] It is almost certainly better to not allow the markets to approach 100% efficiency, as that entails risk-taking that is extreme, and does not allow for the consequences of such risky behavior including domino-style collapses of entire economic systems.

    Hence, the need for flexible regulation, that keeps us back from the edge and keeps our economy from collapse. There will always be pressure from those who see (correctly or incorrectly) a better way to do things, if only those %@!&* regulations did not prevent it. An ongoing debate about the reasonableness of regulatory structure is a healthy thing, along with the modification of the regulatory strictures, but complete abrogation of regulatory constraints will always lead to collapse.

    That being said, the closer we can get to the maximum economic efficiency without stubbing (or losing) our toes, the better off we are as a society and civilization. Clumsy, overly-restrictive regulations are as large a problem as no regulations at all. Either case leads us to an economy on life support. But the free markets remain the most efficient allocator of resources — they just don’t guarantee that the system will not blow up in our faces.

  11. KJMClark says:

    Half of what you need to know to study economics is in today’s NYTimes:

    The title is “A Highly Evolved Propensity for Deceit.” Lying, cheating, and stealing is a common feature of all more evolved animals. Humans are the best liers, cheaters, and thieves of the bunch. The Chicago School’s theories make sense if cheating is rational, and being taken by a cheater is rational. Otherwise, and in fact, theories of rational actors don’t work at the edges in human societies. As the liers and cheaters get more proficient, they expand the “edges” where they have control.

    Just look at executive pay. Is it really market-based when CEOs stack their compensation committees with pawns and like-minded CEOs? Then the other CEOs can point to those with the best-stacked boards and highest compensation and claim they’re being shorted. We end up with a class of people that have stolen their way to utterly irrational compensation. They can claim that they are just rational actors getting paid what the market will bear, but anyone with two functioning brain cells can see that they’ve rigged the game. That anyone would believe the nonsense is just proof that humans are also rigged to be rubes.

  12. jmborchers says:

    Did the QID fund’s credit swaps blow up?

    Why is it $59 Bid /ask?

  13. wunsacon says:

    JM, ex-div, perhaps.

  14. grumpyoldvet says:

    This from H.L. Mencken:

    And here, more than anywhere else I know of or have heard of, the daily panorama of human existence, or private and communal folly–the unending procession of governmental extortions and chicaneries, of commercial brigandages and throat-slittings, of theological buffooneries, of aesthetic ribaldries, of legal swindles and harlotries, of miscellaneous rogueries, villainies, imbecilities, grotesqueries, and extravagances–is so inordinately gross and preposterous, so perfectly brought up to the highest conceivable amperage, so steadily enriched with an almost fabulous daring and originality, that only the man who was born with a petrified diaphragm can fail to laugh himself to sleep every night, and to awake every morning with all the eager, unflagging expectation of a Sunday-school superintendent touring the Paris peep-shows

    He wrote that in 1922. The more things change the more they stay the same.

  15. Byno says:

    “The Chicagoists somehow read into law a market efficiency component that was never there.”


    Since you and I have exchanged pleasant emails about this, rather than rehashing EMH, I’m curious for your take on the following points:

    1. Over ten years, approximately 80% of all fund managers under-perform their benchmark index
    a. Of the 20% who outperform, almost all fall neatly into the normal distribution
    b. Of the handful who do generate excess alpha, all are small funds that follow small cap stocks that are not widely followed by the analyst community. Once these funds get larger and are forced to buy larger stocks, they regress to the mean

    2. There is no question that a few brilliant minds such as Jim Simons, Warren Buffett and Peter Lynch have devised strategies by which to outperform the market consistently in the long term. However:
    a. Much of the best-performing asset managers’ excess returns come from leverage (i.e. Cramer averaged 25% for ten years net of fees over the ’90s using 2x leverage, but once you back out the leverage he basically equaled the S&P’s return. An investor using margin on the ten largest S&P stocks from 1990-2000 would have outperformed Cramer handily, at least net to the investor)
    b. As Buffett, for example, has taken on more and more assets, his returns have dropped substantially (see 1b).

    Net Net: EMH is not perfect, but if investors could consistently outperform the market – and especially the pros – why don’t we see that happening? Why is outperformance the exception – and a big exception at that – rather than the rule?

    Oh, and for the record, not saying the market can’t be outperformed. I am saying it’s very, very hard to do, and probably damn near impossible on a risk-adjusted basis.

    /Loathed MBA
    //Made a *few* trades in my life


    BR: How does EMH explain the Jim Simons and Warren Buffets — who dont use leverage — aren’t they impossibilities in EMH ?

  16. E says:

    QID went ex-div as of last night.

  17. Namazu says:

    You really disappoint me. Enlisting gas-bags like Galbraith and Stiglitz is a tell: even someone as political as Paul Krugman would have given a much more intellectually balanced view (which you can verify by searching for his comments on Friedman). It’s hard to know where to start, but for starters I’d challenge you to try to square this rant with the core thrust of any of Friedman’s key books, then to give a fair account of which schools of economic thought are most in love with their mathematical models these days. What you’re saying here doesn’t pass the smell test.


    BR: If you come here looking for balance, you will be disappointed. What I present are my own unvarnished views.

    Speaking of not passing the troll smell test: Going to a blog and being surprised by views that aren’t fair and balanced? Wow, how clueless do you have to be to post that comment?

    You might get to see Stockholm they ever gave Nobels for being asshats. Now, run along back to class, and continue working on that goatee . . .

  18. dead hobo says:

    A really good theory will also attract a servant class of ivory tower intellectuals who implicitly support the acts of predators, but confuse their theft and manipulations with efficient markets. They will provide this support as a matter of politics and purity of thought, without asking for profit. The predators view them as useful idiots and professional ball lickers.

    For example, look at the WSJ editorial pages. Their heart is with free markets that are honestly run, warts and all. Their words tell a different story. Damn near every kook theory that claims to be a descendant of a free market is embraced and shouted out, much like a well dressed crazy person on a street corner would yell at invisible people. Some of the best theories that favor predators are “Supply Side Economics”, “Trickle Down Economics”, “The Laffer Curve” and a cornucopia of others. How can a predator not loves these people?

    It’s not that the support from intellectual ivory towers is lacking a conscience or part of a conspiracy. It’s more like they don’t have any common sense and confuse the leadership provided by predators as support for their crazy ideas.

  19. KJ Foehr says:

    re QID, et al

    Proshares cap gains dist today

  20. Andy Tabbo says:

    I think we’re going to see the continued rise of “Behavioral Economics” as part of the discussion. What the Academics are clearly missing is the tendency for humans to act out in irrational ways in both the short and long term. We are, afterall, animals that tend toward herding behavior pre-rationally. Because of this, there are more pro-cyclical aspects to economic cycles than would have been forecasted by the “rational” thought crowd. The expansion of debt and risk taking are the most obvious pro-cyclical elements that exacerbate the economic cycles.

    No rational human being would take on this much debt….but if your neighbors are getting rich by flipping houses and buying stocks and switching out car leases every 2-3 years….then it seems like something you should be doing, whether or not you have the income to support those kinds of activities.

    No rational banker would have made those loans, but shit, when your brothers at other big banks are making big bonuses by slicing and dicing MBS/CDOs, then why shouldn’t you?

    Alas, we are not rational.

    - AT

  21. Transor Z says:

    Barry, thanks for posting this. I was just thinking the other day about the the Law & Economics take on insider trading — that there is a serious question as to whether there’s anything wrong with it at all.

    For folks not familiar with what I’m talking about, some (not all) Chicago thinkers argue that a person with “insider information” should actually be able to reap the benefits of gathering superior knowledge about a transaction. They analogize it to the person who buys the dusty painting in the antique shop for $100, knowing it is really a Rembrandt worth millions. What’s wrong with doing your homework, after all?

    This is “market efficiency” in action — money rightfully flowing to persons with greater knowledge.

    Those of us who have ethical problems with this kind of behavior just haven’t read enough Ayn Rand, I guess.

  22. algernon says:

    Free markets are ideal, just as freedom is ideal. They require gov’t to bring to bare laws that minimize the use of force or fraud. If that is what you mean by regulation, then amen.

    Having said that, I must admit that free people have a tendency to create credit bubbles about once every 30 years. Fractional reserve banking & fiat money facilitate this. We prevented the evolution of the free market in the area of money when we inflicted the FED & its faith-based money upon the US. Just as a true free market would have reformed the US auto industry way back in the 70s, a true free market in money may well have allowed us by now to get beyond these continual credit bubbles/busts.

  23. Jeroen says:

    A nice perspective on EMH from Buffett:

    Additionally, Byno: as you said, a fund getting larger because of its success will provide mean-reverting returns going forward. That’s basic math: in the long run the ever-growing winning fund will BE the market. However, that doesn’t mean that the person managing it has stopped being a market beater, if only he would run a smaller fund again. For instance, Berkshire is a pretty big fund and will have trouble repeating its historical performance: however, chopping it up in 20 smaller funds, all run by Buffett et al. returns would be presumably start to widen over the benchmark, imo.

    On a different note concerning EMH: to what extent is volatiliy/variance a good measure of risk (a basic premise of EMH and portfolio theory)? Volatility is higher than 3-4 months ago and the market has come down substantially since then. So is the market currently more risky at these levels than it was three months ago?



  24. Mike in Nola says:

    SMN paid a $26 dividend!

  25. Mannwich says:

    Right on, Barry, but since there are far too many diligent Chicago School evangelists in the mainstream still running around spouting this nonsense as if it’s somehow scientific fact and will parrot its screed until the end days, this battle needs to be continually fought over and over and over again by those who know better and care about the truth. These charlatans will not concede so easily, if at all, and need to be exposed.

    You and others are doing a great service to our country and humanity and detailing ad nauseum just how much of an insidious fraud this school of thought really is.

  26. MRegan says:

    Efficient market theory seems to me to have its source in a kind of antinomianism that took root at the UofC and which was also expressed in Strauss’ nihilistic political philosophy- AEI was filled with his ‘fieles devotos’ under a few days ago. It seems likely to have its roots in trauma.
    This self-annointing of an exceptionalism which requires utter ignorance of its adherents has done us little good. This season of Lawlessness is a manifestation of our unwillingness to accept the very real limitations imposed upon us by our material reality. Spilling blood doesn’t make us Supermen and stealing others bread can’t satisfy the hunger that theft generates in us.
    Lastly, I was listening to radio and someone was covering the death of Sammy Baugh and they played an interview he gave ten or so years ago and he said something like ‘when you’re out on the field you have got to believe you’re the best SOB out there’. You see that’s the exceptionalism that one can believe in- cause you’re out on the field getting knocked a&& over teakettle and taking yer shots…paying the price of the law.

    To Mr. Ritholtz, my thanks for all your many posts and an apology for my incoherence, haven’t the chops of some others here but I can feel gratitude so that will have to suffice.


    BR: Anyone who correctly uses the word “antinomianism” is okay in my book!

  27. RugbyD says:

    Claiming outright failure of a specific, regimented school of economic thought is not particularly productive or right. Just as none of Plato, Aristotle, Kant, Rawls, Mill, Nietzche, etc can claim to having been completely correct in their exhaustive personal efforts to understand life, no single economics theory is going to get it all right either. There are valuable lessons to be taken from all parts, some more than others, because there is always something new an interesting coming along next. Objectivity and adaptivity are the most important qualities to maintain. Blanket discredations don’t accomplish anything in that regard.

  28. scatmull says:

    I know it has been discussed many times that one of the reasons that pure deregulation always fails is because we as a society will not accept the natural consequences of that “orgy of greed.” Then it turns into free markets for profit gains and socialized losses. I’m not so sure that deregulated markets would always fail if we collective chose to accept the natural losses. I can’t help but think to the great depression and what an impression that left on so many people as changed their behavior (many were really good savers almost to excess) for decades. That was not a result of deregulated markets per se, but it does put forth an example of a condition we would have to accept if we want to accept deregulated markets. Like the stock market, you have to be willing to lose everything. No risk. No reward.

  29. Patrick Neid says:

    The twaddle of the interventionists. Thank god no one listens in the real world.


    BR: Greenspan? Phil Gramm? Bush? Who are you twaddling ?

  30. super_trooper says:

    No more Nobel prizes for economy to Chicago?

  31. TPC says:

    It’s a form of extremism to outright proclaim a long living theory to be dead. How many people do you see saying “buy and hold” is dead? After Obama won the Repubican Party was dead. Now it’s the Chicago School is dead. I think people who make such assertions lose sight of the truly “big picture”. There is no right or wrong. No theory is always better. Particularly in such a dynamic system as a stock market. There are times when the tenets of The Chicago School are useful and times when they are not. There are times when buy and hold works and times when it doesn’t. There are times when the Republican parties beliefs are ore applicable than the Democratic parties.

    People think the world is so black and white. You are either this or that. Did anyone ever consider that maybe this complex dynamic system we live in requires the cooperation of ALL beliefs?

  32. kwsmith2 says:

    I don’t know that the basic framework of the Chicago view is wrong. That is that one should be skeptical of propositions which rest on the assumption that people are not acting in their own best interest.

    I think that in practice a subset took this too far to assume

    1) People always act in their best interest. Unless you define best interest as the way people intend to act, this is simply not true. There is regret. There is even regret with full foreknowledge of the consquences.

    Note that this implies that consumer utility DOES NOT equal happiness or satisfaction.

    2) That market failure was negligible. That when people acted in their own best interest the market could generally be assumed to produce the socially optimal outcome. This is an empirical rather than theoretical question and truly powerful examples of market failure seem to be increasing in number.

    However, the basic model of people as rational actors I think is sound. We just have to be sure not to confuse utility with happiness.


    BR: People are FAR FROM RATIONAL. Smokers, people who dont use seatbelts, those who panic out at the bottom, and chase stocks /oil/bonds/ RE at the top.

  33. grumpyoldvet says:

    I am always amazed by those that adhere to strict idealogy. Be it religion, science, human behavior, whatever. It always assumes that whatever inputs I make the result will be predictable. One of the beauties of “real science” is that it is ever changing as new evidence comes forth. The future is unknowable.

    These characters that create mathematical models with inputs of “human behavior” to predict what will happen in the markets are just as bad as idealogues. Reminds me of a long time ago when I was young in a faraway jungle. The generals told us what to expect because they studied this stuff at West Point. Unfortunately Charlie didn’t read their books and thesis papers and mostly did the unexpected. We kept adapting on the run but the generals assured us that their plans would lead to ultimate victory.

    They were all full of shit.

  34. ottovbvs says:

    BR: Can’t go all the way with you there. I don’t think even Krugman would reject Friedmanism wholesale. In fact you personally are constantly railing against the Fed for running the printing presses which suggests you buy some of his monetarist theories or perhaps you’d forgotten that. Not all Keynes’s theories are watertight although most are and indeed most governments of whatever political color really run their economies on his terms whatever conservatives may say. The same is true of Friedman although I’m not an expert by any means. The problem with Friedmanism as with any theory is when it becomes considered the ultimate doctrinal answer instead of part of puzzle. And that’s what’s tended to happen in this country over the last 25 years. The process has been assisted of course by a peculiar American adherence to certain myths about itself and society. Someone, I can’t remember who, said economics is not a solution but an argument about a solution (or something similar). Friedman is like Keynes a part of the argument. A smaller part undoubtedly but a part nevertheless.


    BR: I don’t reject Friedman wholesale. I believe inflation and monetary are highly correlated.

    I was referring to the religion that grew up around Friedman’s views. That religion is called the Chicago school of economics. Its crap science, bad economics, and terrible public policy all rolled into one big ball of shit.

    I love the GBS kids — they only can blame the move off of the gold standard and fractional reserve banking for the credit crisis and housing collapse.

  35. Dan Duncan says:

    Barry, by having not adhering to the Chicago School of thought, and posting the same on his blog is “doing a great service to our country and humanity”?

    Serving all of humanity no less….

    As an aside…if Barry, should somehow become delusional and turn all Fiedmanite on us, and post his thoughts about his conversion—would it too be a great service to humanity?

    Do all opinions shared with yours’ and expressed become a great service to humanity?

    Forget the economic issues—that stuff is boring. What I’d like to know is:

    Barry—what do you think—do you also feel as though you are perfoming a great service to humanity?

    These blogs are fascinating….and funny, too!


    BR: I don’t have the slightest clue WTF you are talking about . . .

  36. theorajones says:

    I got to this observation through biology. It was immediately clear that the efficient market hypothesis was just a dressed up economic version of “survival of the fittest.”

    It always struck me as tremendously stupid on its face, because every student who’s gotten beyond bio 101 realizes that “fittest” isn’t always “best.”

    Path dependency alone leads to a lot of insane workarounds in organisms and populations, workarounds that often fail and kill the organism. Not to mention, many natural systems are marked by shocking boom-and-bust cycles. And stable systems can become unstable very quickly if you introduce a new element. The useful insight isn’t to say “we should welcome new species because the environment will self-adjust and rabbits will create a new stable equilibria for Australia,” it’s to look at a rabbit and say “whoa, there. This thing will f*** up everything. Rabbit stew in the customs impound lot tonight!”

    Seriously, what kind of moron thinks “the market will self-adjust” is a brilliant insight? EVERYTHING self-adjusts. But that does not mean things will be GOOD. If we launched every nuke on the planet today, the environment would self-adjust and cockroaches would reign supreme. But we would all be dead. If we got rid of all organized government, we’d live in a gang state like Haiti. We’d self-adjust, but things would suck.

    The point is to use insights about how the system operates free of constraint not to argue that no constraints are needed, but to figure out what constraints or other actions are needed to make it function better! It’s to think about what we want out of this system (sensible investment in the real world) and to try and influence the market towards achieving the outcomes we desire in aggregate. To look for certain destructive patterns, and find mechanisms to counter those (sometimes it’s just observation, sometimes it’s allowing a counter-force that’s developed to become stronger, sometimes it’s forcing transparency, sometimes it’s dragging off a guy in shackles).

    But at base, it’s the recognition that even robust systems are prone to massive collapse, and need management if you care to see them achieve a certain outcome. The goal is to see when a rabbit is headed for Australia (highly leveraged banks making crazy bets on CDOs?), and to stop it before it takes down everything. While, of course, allowing sheep and cows into Australia.

    It’s supposed to be hard, not magic.

  37. Mannwich says:

    @Dan Duncan: Anyone who has the chops to expose any great fraud is doing a “great service to our country and humanity”. Period. Next.

  38. Milton Freidman is dead. His ideas are not. Folks that think he offers nothing for today’s financial markets would be wise to understand even very simple observations he made about money, the understanding of which was his specialty.

    “Inflation is everywhere and always a monetary phenomenon.”

    Does John Kenneth Galbraith’s son believe this to be untrue? Anybody else like to refute it?

    Regarding Ben’s helicopter, Freidman gave an example in his 1994 book “Money Mischief” of a helicopter that dropped an extra $2,000 per person of fiat currency on a society, initially doubling the society’s cash balances:

    “It is easy to see what the final position will be. People’s attempts to spend more than they receive will be frustrated, but in the process these attempts will bid up the nominal value of goods and services. The additional pieces of paper do not alter the basic conditions of the community. They make no additional productive capacity available. They alter no tastes. They alter neither the apparent nor the actual rates at which consumers wish to substitute one commodity for another or at which producers can substitute one commodity for another in production.”

    Freidman is still relevant. And if that weren’t enough, his co-author of “The Monetary History of the United States”, Anna Schwartz, had this to say about the TARP in an October interview in the WSJ:

    “In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they’d lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: “If the borrowers hadn’t withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress,” deepening the crisis and causing still more failures.

    But “that’s not what’s going on in the market now,” Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

    “Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound. So if you could get rid of them, that would be an improvement.” The only way to “get rid of them” is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson’s original proposal to buy these assets from the banks was “a step in the right direction.”

    The source of our economic problems was not too little regulation, nor too few laws, nor ideological adherence to a free-market view propounded by the “Chicago School”. Plain and simple, it was mismanagement of the money. It was “Money Mischief” by a Fed chairman that wanted the world to believe he could pull some monetary levers and change reality, and then by his successor that believes dumping money out of helicopters changes anything real.

    I have a tough time accepting that we should now embrace the likes of John Kenneth Galbraith’s son, whose most unremarkable academic career he largely owes to his father’s influence, and throw the Milton Friedmans of the world under the bus. Friedman understood money perhaps better than any person to have walked the planet. If, as it seems, money mischief is the method by which we will attempt to fix our previous mischief, then remembering just the easy stuff Friedman taught us on the subject is well worth the time.

  39. Transor Z says:

    I find it interesting that people expect so little out of economics. Grouping the Chicago School theories with philosophical theories? How about judging the Chicago School theories on whether or not they are repeatable, observable, verifiable? Duh, it’s supposed to be a science.

    Here’s a ground-level economic theory that grumpyoldvet can appreciate, b/c he knows very well that the shortest distance between two coordinates on a map is hardly ever a straight line.

    The hunting trails in primitive settlements tend to find and follow paths of fewest calories expended. This gives you a USEFUL PREDICTIVE THEORY of where you’re likely to find ancient trails if you start with a topographical map and the known locations of settlements. Plug it into a computer with a good algorithm and there you go.

    Fast-forward to a complex M&A negotiation. “Skadden Farr” is representing A and a small boutique firm of Wall Street refugees representing B on the other side. Think the negotiation will follow notions of efficiency? Or will the Skadden Farr folks be so sure of their superiority that they will question every single language item submitted by B’s attorneys? And will economies of scale ensure that Skadden Farr’s staff keep accurate track of all faxes and documents? Dream on.

    Economics should stick to the Stone Age, because that’s where it is in its development.

  40. bcasey says:

    So what is the difference between Laissez Faire, and this Chicago theory? They sound a heck of a lot alike. Is it just plagerism?

  41. Tom K says:

    Do you really believe post-WWII U.S. economic policy was an example of the “Chicago school of thought”? Small government, free market capitalism at work, eh? A period where the national government was dominated by fiscal conservatives? You’re joking, right?

    Thank God the unabashed socialists (oh sorry, “progressives”) have come to the rescue. Finally, government will become investor for the people, and I’m sure we’ll reap great benefits from their infinite wisdom. I expect nothing less than considered regulation most carefully executed. And I’m so excited to see how our newly anointed group of wisemen and prophets will tranform government into the engine for job creation and economic prosperity, leveraging the ever-blossoming Federal Money Tree to power the insanely brilliant idea of trickle-up economics. The goverment gives people money and people buy stuff. Pure genius!!!

    I’m also so glad antiquated concepts like personal responsibility and competition are finally dead. Good Riddance!

  42. Groty says:

    Your attempt to urinate on Friedman’s ideology fails because policy makers often ignore a central tenet of his ideology during times of crisis. His philosophy demands that market participants ALWAYS take responsibility and he held accountable for their actions, including the possibility of financial ruin. Time after time, market participants have been bailed out for excessive risk taking, rather than being forced to accept the consequences of their actions.

    Beginning with the 1987 crash, the nanny state under FOMC Chairman Greenspan’s stewardship, came to the rescuse to bailout risk takers rather than let them suffer the consequences of the free market. The infamous “Greenspan put” is born.

    Then we get to the real estate and S&L crisis of the early 1990s. Once again the nanny states steps in to create the Resolution Trust rather than let the market sort things out.

    Fast forward to 1998, we get to LTCM, and rather than let the firm fail, and all the counterparties suffer the consequences of their decisions, Greenspan orchestrates another rescue.

    Fast forward to today’s mess.

    We’ll never know if market participants would have made different decisions during this episode had policy makers not intervened and forced them to accept the consequences of excessive speculative risk taking with the 1987, early 1990s, and the 1998 episodes.

    Had policy makers not intervened during periods of crisis, and we still found ourselves in the mess we’re in today, then your argument is credible.

    But since they have, your argument is an intellectually dishonest attack.

  43. DaveM says:

    “Inflation is everywhere and always a monetary phenomenon.” Curmudgeon on Friedman

    Let’s not forget that inflation easily lives side by side with deflation and what creates one does not kill the other.

    BR: “The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable. “…

    Using those two words (regulation and intervention) together as if they are somehow compatible is a mistake. Regulating obvious temptations is one thing. Intervention is another animal imposed by people scared of change. Change always wins.

  44. Otto Maddox says:

    Look at all the people (Naomi Klein, etc) who attack Friedman only after he’s dead. They still can’t win the argument.

  45. Mannwich says:

    @Otto Maddox: How did Klein NOT win that argument? Please explain.

  46. “Friedman stood out as a leading figure in the fight for limited government and personal freedom in the mid twentieth century.

    Of course, libertarianism has in some ways developed beyond the writings of Friedman. Today many libertarians advocate privatization beyond what Friedman envisioned. Yet Friedman stood against numerous efforts to expand government, and drew attention to the moral and practical arguments for liberty. He often acknowledged the great contribution of Mises and the Austrian School even as he disagreed with many important issues of method, money, and more–yet even here he caused us to strengthen our arguments.

    Friedman’s intellectual accomplishments were most impressive. He led the movement against Keynesian economics for decades. His arguments against Keynesian economics changed professional opinion for the better. The permanent income hypothesis reintroduced the idea of time preference into economics. Friedman argued that people consider lifetime or permanent income, rather than current income, when deciding upon current consumption. Friedman also argued that ‘long and variable lags’ would confound Keynesian efforts to fine tune the economy. Friedman also convinced most economists that faulty monetary policy was at least partially responsible for the initial phase of the Great Depression. While Friedman advocated limiting the discretionary powers of Federal Reserve authorities, he also saw that free banking (as advocated by Austrian economist Larry White) could work even better. Last but not least, Friedman overturned the faulty idea ideas of static expectations and the ‘Philips Curve’ trade off between output and unemployment.

    Friedman also worked to re-popularize price theory in economics. Friedman entered the economics profession at the time when Keynesian macroeconomics had attained a dominant position. Friedman insisted upon the microeconomic approach. Friedman’s price theory class at the University of Chicago has a legendary reputation. I was once told that after Friedman taught this class the first time, all UC grad students who had taken this class previously were required (by Frank Knight) to retake this class with Friedman.

    Friedman’s influence extended beyond the economics profession. Friedman’s books Capitalism and Freedom and Free to Choose reached a broad audience. While there is no method of measuring the influence of books exactly, these books surely did much to sway public opinion….”
    by D.W. MacKenzie

  47. DL says:

    Mike @ 9:47

    “SMN paid a $26 dividend”

    That really sucks for anyone who’s sitting on a capital loss.

  48. Ken says:

    debreuil and theorajones both draw analogies with evolution and genetic algorithms. There is one key difference, though. When organisms or algorithms are evolving, there are many thousands or millions of instances of the “species.” The population as a whole can explore all sorts of variations. Many, perhaps most, of the variations are non-viable, and die out; but enough survive that the species as a whole (generally) continues, and some of the new variations are even incremental improvements.

    But we’ve only got one macro-economy. If it tries out some variation that causes it to die, we’re all in big trouble. Of course it can’t really die, but it could easily reach a state where it is not performing well, and cannot be corrected by the existing market mechanisms and forces. We know this can happen, since it has happened.

    So we can’t afford to let the economy wander about its “genetic space” and try out all sorts of variations, since it might wander off a cliff. This is, IMO, a very legitimate purpose for regulations; to forbid certain types of market behavior which we know, or even strongly suspect, will damage the economy beyond its ability to recover. These sorts of regulations go well beyond the simple prevention of fraud, as there are any number of economic situations where the optimal individual outcome is disastrous for the whole, such as the tragedy of the commons.

  49. Mannwich says:

    So I guess Friedman and his crowd’s support of repressive, murderous regimes in Central and South America in the name of promoting their “pure”, ideological school of thought shouldn’t be mentioned? Let’s just gloss over that. It’s irrelevant that his theories often did great harm to democracy and democratic regimes, right?

  50. wally says:

    In my opinion, the Keynesians aren’t looking very good right now, either. I’d give them perhaps a ‘D-’, maybe even and ‘F’.

  51. JohnnyVee says:

    Barry-I can’t wait for the book.

  52. DL says:

    Two points:

    1 ) Friedman always said that they should get rid of the Fed and replace it with a computer.
    It’s hard to know what would have happened if a computer had been in charge of monetary policy, but we probably wouldn’t have had 1% interest rates in 2003.

    2 ) in order for markets to function properly, there has to be transparency. It’s a legitimate role, in a free market economy, for the government to require adequate financial disclosure, and to prosecute those who fail to meet those obligations.

    Thus, if we had had a computer instead of the Fed, and if we had had adequate financial disclosure, things might not have gotten so out of hand.

    Moreover, it is meaningless to suggest, in the abstract, that regulation is good. One must propose some specifics, since there is a lot of regulation that is decidedly bad.

  53. Jeff,

    the activities of the IMF, in C. & S. America, as well as other places, cannot be, broadly, broached here, in the NAU. For, surely, if they were, the population would begin to ask far too many Q’s, and, as well, be on look-out for them–the IMF & their ilk..

    better to keep running the false- Chicago v. Keynesian-dichotomy.. Now, it was the “‘evil’ Free-Market” that did it–running on endless-loop via HeadlineNews..

    We’re going to wind up with an Economy shot-through with the Plasticizer of ‘new’ Regulation, while the ‘stimulators’/’bailors’ pick winners ‘n losers..

    should be Good Times..

  54. Moss says:

    Not sure you can say it is dead. Certainly discredited. The question really is to what extent will free market philosophy survive. The regulatory philosophy needs to focus on the products as opposed to the institutions. No financial product should be allowed without a clear understanding of how it will be priced where it will be traded and what the rules governing the accounting of the instrument are. The mere existence of the shadow banking system defeats the whole purpose of free markets.

  55. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable.

    Claiming that regulation is inefficient is a rather silly argument if you ask me.. One could likewise claim that police forces are inefficient. Actually, both _are_ inefficient, but only in a world of clockwork oranges. Some folks may want to live in such a world, but I certainly don’t.

    Likewise, you could have a world with a cop (or cameras) in every home, perpetually spying, guaranteeing compliance with the law at every turn. That is also a place where I would not want to live.

    Frankly, what we need more of is a passionate, militant centrism that slaps down extremists of all sides. From what I’ve seen Obama do so far, I am starting to feel the warm burn of Hope(TM) down in my sub-cockle region.

    Its always the extremists that seem to control a discipline or school of thought. If I have any dogma, its extremism in all forms is undesirable

    All absolute statements are false. ;)

  56. DownSouth says:

    Milton Friedman crafted a pseudoscience that served the interests of the underbelly of the finance industry. That is why, despite its nonsensical and easily disprovable mathematical underpinning and its moral depravity, it managed to flourish and survive. It was a hot house baby that operated in an artificial, protected environment. It’s not unlike the relgious philosophy that flourished within the Catholic secular priesthood that justified and gave moral cover to the atrocities committed by the Conquistadores.

    As BR points out, its great achievement was that it allowed its advocates an end run around democracy. Kevin Phillips in “Wealth and Democracy” gives an insightful deconstruction. “One dollar, one vote” sounds great, but is inherently antidemocratic, since he who has more dollars has more votes. Economics should be a captive of, and the servant of, the society, not the other way around.

  57. donna says:

    We are all Keynesians now…

  58. makingmoney says:

    “That’s the phrase that best sums up the Chicago School: “Divorced from Reality.”

    There’s also a phrase that best sums up Keynesians: “Divorced from Keynes.”

    Keynesians aren’t even following what Keynes wrote.

    They’re now part of the “Loot From the Hip” school of economics, er, fraud.

  59. PMcKim says:

    This appears to be an emotional issue. While I doubt Mr. Ridholtz, who I respect very much, believes in Soviet style command and control economy of regulation, his reactionary language could be interpreted that way. The sad thing is that the last 25 years with Greenspan, Bernanke, the Fed and bailouts (the article sites the Continental bailout by Reagan which few remember) were anything but free. They were managed for the players on Wall St. and gov’t. A bubble ensued that had to pop. Wall St., and I’m not saying Main St. banks, but Wall St. banks became parasites that could only die when they killed or almost killed the host.

    I can’t imagine how anyone could look down and call these markets free, when everyone hung on each obscure word of Greenspan. This was as bad of the next version of the Soviet 5 year plan.

    The problem is if people manically adhere to some ideology in a perverse or corrupted (as in corrupt software) way, and disengage their common sense, or substitute arcane assumption riddled analysis for common sense, then bad things ensue.

    Monetarism doesn’t work if the estimates for inflation are corrupted by the government to benefit the government’s issuance of cheap debt and Wall St. that acts as a distributor and takes advantage of the system along the way. Monetarism doesn’t work when the Fed forces rates down below where they should be and keeps them there indefinitely. Monetarism certainly doesn’t work when technology creates huge advances in productivity that create good deflation, as we had in the late 1800’s, where monetarist treat all prices the same and in turn create asset bubbles. Monetarism works if monetary authorities limit money and credit expansion to general expansion of population and the economy and are aware that asset bubbles are bubbles that can be recognized by anyone who can look at a chart of prices.

    Keynesianism doesn’t work if only half of the theory is used. Keynes talked of paying down deficits in good times and using them in bad. The problem is that we haven’t paid a deficit down with reduced spending since the 1950’s. So it won’t work either, particularly with the debt already on the books. With each decade new debt additions have less of a positive effect on the GDP. This is no different from a household that goes into excessive debt.

    While I believe the Austrians have the best model, even their view that all government spending is wasteful is wrong. Defense spending to some degree is essential. And regulation if well designed like Glass Stegal is essential as well. After all it was the likes of Gav-Kal that talked about the rule of law that attracted those in emerging markets to the US. At the same time Wall St. who was trying to compete with an unfettered London was trying to throw our regulation as being anti competitive. And common sense died.

    I live part of the year in Brazil and I can show you how well intentioned regulation can not only drain the economy from excess spending, but also tire entrepreneurs from following byzantine laws.

    Regulation and structure that is self enforcing and keeps tinkers at bay is best. This government was founded on separation of powers and checks and balances, but regulation was always part of the mix. Over-regulation was not. Dr Noiswater above is correct. “Its always the extremists that seem to control a discipline or school of thought.”

  60. jomama says:

    While I’m not a fan of the Chicago school, what’s ‘free market’ about a Federal Reserve system
    pumping money into it via fractional-reserve lending?

    Looks more like a giant Ponzi scheme to me.

  61. Winston Munn says:

    “The ONLY thing wrong with the Chicago School of economic thought, and Friedman’s belief that free markets allocate resources better than any alternative, is that they do not allow for the influence of corruption, fraud and greed.”

    In other words, they do not allow for reality. Curious that Ayn Rand also embraced lack of reality, creating a fictional world upon which to foist her ficticious philosophy. Strauss, too, was guilty of this type intellectualized magical thinking.

    The need for fictionalization is explained by the realization that only by ignoring human behavior and controlling outcomes can the extremist’s view be proven valid.

  62. donna says:

    I think you also need to remember that any model is just a model, and all models are sometimes wrong since they are not the reality.

    This is what drives me nuts about the free marketeers. They can’t see that there is in reality no such thing as a completely free market, that it is simply a model. And it truly seems that they only want free markets when it is to their own benefit to believe in them, and then call for government help when they fail. And that is what is currently turning the rest of us against them.

    Free markets, fine. Let me go collect my yachts and ponies too. I’ll pay you for them later, ok? No? Well, then give back all the money stolen from us, who trusted you with our 401Ks.

  63. Robert says:

    This article is laughable. What free market? WTF would actually say we’ve had a free market? Give me a friggin break. This market was rigged by rate targets and government policy to promote home ownership. In a free market people are responsible for their actions and adjustments come quickly. In a rigged market people are not responsible for their actions and adjustments are delayed until the whole system blows up. Only fools believe that people in government are more moral and less self interested than in the market. This has been a political economy with elected officials manipulating grain prices, energy prices, bank rates, home ownership and the like. Totally unconstitutional. Don’t worry though. Barry will make it all right.

  64. Mannwich says:

    @Hoffer: I’m not necessarily in agreement with the Keynesian train of thought either. I just thought we should tell the whole story about Friedman and anything else for that matter.

  65. Mannwich says:

    Winston Munn Says: “The ONLY thing wrong with the Chicago School of economic thought, and Friedman’s belief that free markets allocate resources better than any alternative, is that they do not allow for the influence of corruption, fraud and greed.”

    In other words, they do not allow for reality. Curious that Ayn Rand also embraced lack of reality, creating a fictional world upon which to foist her ficticious philosophy. Strauss, too, was guilty of this type intellectualized magical thinking.

    Well put, Winnie.

  66. Its_Science says:

    I still find it interesting that BR implicates the Fed’s low interest rates as the major cause of the housing bubble, and then attacks the lack of regulation without mention of this. Is the point of increased regulation to stop the problems caused by lax monetary policies? Seems to me that there is an easier way to combat lax monetary policies. I also find it fairly meaningless to cry out for increased regulation without being very specific about how to increase regulation.

    [BR: Its more complicated than that; maybe I will write a book explaining the details.

    More and better regulations are much easier to say than to implement. I don’t claim that regulation is unnecessary (particularly in finance if we wish to preserve the fractional reserve banking system which places the expansion of the total money supply largely in the hands of creditors), but it seems to me that if accelerated credit expansion tends to be the problem, then a tighter Fed and leverage restrictions are the way to go. If more regulatory supervision is put in place, it is possible that these institutions will make people falsely feel more confident that their government will protect them; regulators cannot be everywhere at once (this isn’t to say that existing regulators cannot do a better job, but remember that their failures are always easier to spot ex-post). BR claims that regulation is necessary to combat human nature, but it is important to remember that regulators also suffer from human nature, as do legislators. To assume that regulators and legislators strictly have the people’s best interest at heart is a false ideology too.

    This is probably coming across as more free-marketeerish than I mean it to (I always tend to play Devil’s Advocate while commenting), but I do find blind calls for increased regulation to be dangerous. It’s also important to remember that bubbles can also happen naturally, as has been shown in lab experiments, so we may never be able to rid ourselves of them completely.

    As for the field of economics, I agree that behavioral economics is gaining traction, and that this is a good thing. I’m worried about Keynesian economics gaining traction simply because it is viewed as the opposite of the Chicago School. Keynesian economics is so simplified and disconnected from reality that I cringe anytime I see an economist or pundit speak in terms of aggregate supply and demand, or homogeneous labor and capital. While I don’t think the Austrians hold a monopoly on the truth, I do think they present the best criticism of Keynes. I personally hope for increased research using agent based computer models. If you don’t like traditional rational assumptions, you can give the agents characteristics from behavioral economics, or add randomness to preferences and/or behaviors. Such models treat the economy as complex adaptive systems, rather than perfectly efficient, and can capture much more realistic behaviors and outcomes than elegant mathematics can.

    As for Friedman, it’s important to remember that some of his arguments were stronger than others. The weaker ones always read more like philosophy than science.

  67. Tom K says:


    Agreed. The idea that we’ve lived through a period of unobstructed free market capitalism since WWII is a joke. We have government’s grubbly little hands in every aspect of our economy, picking winners and losers, and rigging the economy for social outcomes and political expediency.

    - Competition? Let’s have none of it.
    - Personal responsibility? Who? Me?
    - Liberty? You’re law-abiding and succeeded financially? No fair. We’ll tell you what can keep, and what you’ll have to do in order to keep it.

  68. Winston Munn says:

    As Eclectic explained about the definition of money some time ago:

    Paraphrased: “At its heart, money is nothing more than an exchangeable unit that symbolizes labor, either physical labor or intellectual labor.”

    My thoughts:
    (I am not an economist – the following is based simply on my own critical thinking.)

    If money represents labor, then doubling the money supply only restructures the value of labor and has no effect on prices – the effect on prices comes from human decision to utilize money to increase consumption, i.e., human choice and behavior.

    Debt, on the other hand, is a claim against future productivity. When debt is utilized as money, imbalances can occur due to the nature of the lenders’ willingness or need to adopt risk. Debt that grows beyond the capacity of its backing productivity insolvent, and any monetary claim of that debt becomes then a ficticious usage – if the productivity was never there to back the claim then the debt was always insolvent and hence any profit or capital growth based on that debt was never real.

    If the debt was insolvent (not enough labor to back it), there never was real monetary growth, could not have been, as money represents the value of labor.

    Therefore, this is the reason monetary interventions do not solve the problems of debt-destruction deflation. – debt and money are not the same.

  69. Tom K says:

    It’s funny how so many of you think free-market capitalism is synonymous with anarchy.

  70. Ken says:

    Winston Munn wrote: “Debt, on the other hand, is a claim against future productivity. When debt is utilized as money, imbalances can occur due to the nature of the lenders’ willingness or need to adopt risk.”

    It also occurs to me that, as a claim on the future, debt is subject to the same irrationalities as, say, smoking. That is, the (ab)user knows intellectually it is bad in the long run, but the short-term pleasures outweigh this. Also, note that “long run” and “short term” are very flexible; every drinker knows what the hangover will feel like, and that’s less than a day away, but that doesn’t stop them.

  71. Robert says:

    I have no problem with regulation when you are using other people’s money, like banking. But I remember watching a video with Friedman regarding regulation that you must have a cost benefit analysis. The benefits of regulation should far exceed the costs, both visible and invisible. Let’s remember that the really smart people thought their models would allow 40-1 leverage. Yes other smart people disagreed, but does it really matter when both groups know the Feds will just step up and bail it all out?

  72. donna says:

    What exactly is “law abiding” about paying government officials to get rid of the regulations controlling you and then taking advantage of the trust that others have given you to pay yourself obscene bonuses by inventing new money kiting scams?

  73. vic says:

    To paraphrase from Lord of the Rings:

    The age of Chicagoites is over. The time of the Austrians has come”.

    No offense Keynesians who still believe wealth can be created by raining money down from the sky.

  74. Winston Munn says:

    Ken wrote,

    “It also occurs to me that, as a claim on the future, debt is subject to the same irrationalities as, say, smoking. That is, the (ab)user knows intellectually it is bad in the long run, but the short-term pleasures outweigh this.”

    I believe that quite an apt analogy – except I might want to say “the short-term pleasures of excessive debt”.

    Debt has its uses – but acting like money isn’t one of them.

  75. wally says:

    “No offense Keynesians who still believe wealth can be created by raining money down from the sky.”

    It isn’t even a matter of whose approach is best to follow now; it is even more basic. For economists as a group to not foresee a recession is a level of incompetence that has become a joke, but for them to be completely blind to such a massive credit collapse as we are now in is a level on incompetence that cannot any longer be tolerated. To not even have measures for the amount of credit stress on a society, to be unable to see things like the massive lending bubbles and house price bubble – to have no tools or theories that make such things central to economic planning and forecasting is moronic.

  76. Double D says:

    RIP indeed. Now if the U of C Law School would only axe that vontz Richard Epstein…

  77. JustinTheSkeptic says:

    Give me rules that cannot be stretched or broken, and the clearest of all transparencies and I will take the Chicagoists, over Keynes every time. But if I had to choose it would be the Austrians. What I am most fearful of is the one-two-punch we are getting from both the chicago school, and the Keynesian school. It will in all likelyhood prove the Austrians right once again.

  78. danm says:

    His philosophy demands that market participants ALWAYS take responsibility and he held accountable for their actions, including the possibility of financial ruin. Time after time, mar
    That’s the point. His philosophy doesn’t account for human nature nor for reality.

  79. danm says:

    That’s why laws had to be changed or force had to be used.

  80. Kimble says:

    “That’s the point. His philosophy doesn’t account for human nature nor for reality.”

    No abstraction is perfect, but the criticism of Freidman’s abstraction seems far too harsh. And I think a lot of the criticism comes from a misunderstanding of his work, which is best evidenced by those who say that Freidman reckoned ALL government regulation was inherently bad.

    “(Watch the comments for the cute little protests from law students who never practiced a day in their lives, and the biz school kiddies who never executed a single trade).”

    And THIS was pretty childish in my opinion.

  81. anon1 says:

    Barry, the current crisis was caused by 1970′s regulation that granted an oligopoly to 3 NRSOs. They labeled ~85% of subprime mortgages riskless. Banks, duped by these ratings left these seemingly safe assets on their books rather than try to sell them (or prevent their creation in the first place).

    If the free market does not work it has nothing to do with this crisis.

  82. OkieLawyer says:

    PMcKim Says:

    Keynesianism doesn’t work if only half of the theory is used. Keynes talked of paying down deficits in good times and using them in bad. The problem is that we haven’t paid a deficit down with reduced spending since the 1950’s. So it won’t work either, particularly with the debt already on the books. With each decade new debt additions have less of a positive effect on the GDP. This is no different from a household that goes into excessive debt.

    This is exactly the point I was going to make. And this seems to be the real weakness of Keynesian thought: namely, that political actors are loathe to raise taxes during good times to pay off the debt incurred during recessionary periods. Or, looked at another way, politicians get hooked on the use of credit because they can argue that they are able to keep taxes low. In fact, when tax revenues are up, this seems to lead to calls to lower tax rates rather than some austerity and paying off of public debt. It’s an easy, cheap and politically popular thing to do when times are good.

    Keynesianism is technically correct in the abstract. The idea is to smooth out the business cycle so that you have fewer booms and busts (which also creates a more stable society as the threat of violent revolution is lessened). The problem is finding a way to convince politicians and the public to follow through when the crisis is over.

    Having said all that, I don’t know how the Chicago School or Austrian (Is there a difference? And if there is, what is it?) ideologies deal with these situations.

  83. OkieL,

    this being the Charitable Season, and all, I’ll, just, leave it as, see: December 23rd, 2008 at 8:28 am

    above..Links will take further toward the parsing of the Many differences..

    and, as a Gift, have your friends, down there, buckle up for U$D 25 WTI…there being Exporters, along w/ Crude, to Crack..

  84. james hogan says:

    Thank you for this blog. As nearly as I can tell, you are as close to the Truth as can be determined. We need more of this.

  85. Reed Right says:

    When the foudations of free market capitalism were being laid by the likes of A.Smith and D.Ricardo, the subject was called Political Economy: money is power, power is money, being two halves of the same coin. A social experiment began in the later 1700′s to split the two off, which we are witnessing the dramatic end of now. Mr. Smith’s Invisible Hand was always attached to a much larger socio-cultural-moral Body, which he took for granted; we, however, cannot.

    I lament the prospect of choosing between the two grand excesses, either the Statists who now have the upper hand or the Freemarketbooters who have proven that they are unable to control their own demons. Especially when you note that the Blagojeviches of the world will always be overrepresented in the linup of the Statist team, after all both teams are pulling from the same pool (with only slightly different skill sets). There is no omniscient computer which will rule all in pure logic, only the hairless apes with all their procilivities. All I can say is we’d better get to work on the new theory!

  86. danm says:

    No abstraction is perfect, but the criticism of Freidman’s abstraction seems far too harsh.
    One thing I noticed when I was only 20, is how each economic theory is a reflection of the times. So I took each theory with a grain of salt. Unfortunately, extremists will use anythig that can give them an advantage and shove it down other people’s throats even if it makes sense or not.

    All these “great economists” ended up focusing on a few variables, either forgetting human nature or using the rational consumer logic. Just look around and look at how many uneconomic decisions are made out there just to spite others.

  87. Pat Shuff says:

    No little bit pregnant, no middle way. The creep begets the gallop, the drift becomes the swerve.
    Compounding the errors is compounding the obligations faster than the money lent into existence
    can paper it over.

  88. OkieLawyer says:

    @Mark E Hoffer:

    I followed the link you provided and took a test on the difference between Mises and Chicago. I scored a 41 out of 100, but it didn’t explain what that meant. I don’t know if that means I am more Chicago or more Mises. I actually suspect that means I am a “centrist” and that I don’t agree with either one. After following the link you provided, I still don’t see any practical difference in them — a distinction without a difference.

  89. OkieL,

    with that quiz, the closer to 100= more Austrian, toward 25=waay Keynesian, so 41, seems like it would be more ‘centrist’, past that, I’m not sure why they didn’t ‘rate’ it.

    you should send a note to Jeffrey Tucker @ vMI and ask him what’s up/ why they don’t parse the diff. in a more obvious way..

    I would have thought that that post, above, would have given some insight into the delta..

  90. whitespiral says:

    Saddest thing of all is how everyone reverts by default to Keynesian dogma. And if adherence to the Chicagoites brought us this mess, watch what this wave of statism will bring.

  91. AnnS says:

    You left off your list of erring law professors names like Richard Epstein and many of the other long-time denizens of the U of C law school. Epstein has spent the past 25 years teaching a theory of torts that has never been accepted by the courts in any century – but which omits virtually every accepted principle of law in order to purvey his own “Friedman-style” view of what tort law ought to be. Epstein’s latest corkbrained theory is that if one can not pay out of pocket for medical care at the item it is needed, then they should just die. After all, that is the “correct” result according to their precious free-market theories. Kindergarten teachers die, Wall St thieves live. Research chemists die, Paris Hilton lives.

    They are way way past the ‘let them eat cake’ school of thought. They have less than a firm grasp onn history. The kind of resource distribution which so enamors them has, in the past, lead to revolutions.

    I attended a different law school but my husband and law partner is a U of C grad. He told me that he spent an entire year in Epstein’s torts class and never heard anything about the law of negligence until he clerked for a PI firm between his 1st and 2nd year. A visting Professor from Cambridge back then described the lot of the the Friedman/law adherents as “bloody crackers.”

    The politest thing to say about Posner is he is one cold SOB – and would have been much happier in the Germany of the 1930s were he could reduce human beings to no more worth than components on a factory line. Mr. Spock and Commander Data have a better grasp of human behavior than Posner.

    BTW, there has never, in all of recorded history, been any system or country that had completely free markets. The Romans regulated business and trade, the governments during medieval times regulated business and trade (think ‘guildhalls’), ditto the reformation and then Tudor and Stuart times, and continuing onto the present.

    Their whole ‘free market’ has never existed and is simmply a fantasy they created to justify unmitigated and uncontrolled greed. Even under their theories, if one accepts that unfettered markets are the most efficient means of allocating money, labor and goods, that is a statement that begs the question. The central question are what goals is this supposed efficency supposed to achieve and whether the results of the ‘markets’ is acceptable to the society. Putting all the money into the pockets of Wall St screwups instead of maintaining the roads and highways or creating and educated population is neither a moral nor socially desireable goal.

    Friedman’s ‘markets’ and his theories assume that the only desirable goals of a society are to make as much money as possible and to allow an elite group to acquire as much of the available resources as possible. That is extremely elitist and generally results in feudal-type society where a small group controls the money, resources and power while the peasants live in squalor, die young and work from birth to death. (Assuming of course that the peasants haven’t rebelled and offed the uber-wealthy and upper classes.)

  92. EDF says:

    AnnS: bravo.

  93. Rockytonker says:

    I’m not an economist. I’m an old honkytonk guitar picker and student of human behavior. But I have some observations.

    “Keynesianism is technically correct in the abstract. The idea is to smooth out the business cycle so that you have fewer booms and busts (which also creates a more stable society as the threat of violent revolution is lessened).”

    This supports my conclusion that FDR saw Europe swinging to communism or fascism, and chose socialism as an alternative tnat would would best preserve his own(privileged) social class. He probably actually did care about the “ordinary folk” as well.

    “(Friedman’s) philosophy demands that market participants ALWAYS take responsibility and he held accountable for their actions, including the possibility of financial ruin.”

    Then his philosophy cannot be regarded as a failure, because it has not been truly tested. That would require that the price of goods and services reflect their TRUE COST. The price of electricity would include the cost of responsible disposal of waste.

    Time and again, the federal government has used diplomat and military means on behalf of corporate interests (not American corporations, but global, non-American corporations. Installing the Shah in Iran, taking sides in a civil war in SE Asia, etc. has been marketed to the public as “protecting America’s interests abroad.” Viet Nam, like Pearl Harbor was about oil, not democracy. The horribly miscast “War on Terror” is justified by “They hate us for our freedoms.”

    If the corporations had to fight their own wars, hiring mercenaries at the going rate and paying for it themselves, then market forces would make war unprofitabe, and negotiation preferable. The price of goods and service would rise to reflect actual costs, but it would be a more peaceful world.

  94. paleotn says:

    I second that bravo. Nice work, AnnS.

    AnnS wrote: “Mr. Spock and Commander Data have a better grasp of human behavior than Posner.”

    That is the essence of what is wrong with Friedman and his cohort of chuckle heads. It is ironic that the fundamental defect in their ideology is so obvious even the average “Joe Six Pack” can easily grasp it. It is this defect that has directly lead us into the economic morass in which we find ourselves. If given the chance, in this case via laissez faire economics, will those with power economically screw those without much power? Many time, yes. Will those same people make decisions based upon short sighted greed, even if said decisions might ultimately result in the crash of the entire financial system? You betcha. How’s that for rationality? Monday morning quarterbacking? Not really. Many have been railing about the last two financial bubbles long before it was fashionable.

  95. Obwon says:

    Okay, let’s cut to the central question that underlies the principle of all this claptrap:

    “What do you call a ‘game’ that has no rules?”

    Eh? Of course it’s not a game at all, it’s nothing!

    Businesses are a quest for profit! As such, they must do everything in their power to achieve a profit!

    This means unless there is some prohibitions on their conduct, they will do anything and everything that figures to be profitable, including harming themselves when the cost/benefit ratio signals it can!

    Competition also means that business can have no “conscience”, and must resort to whatever their competitors are doing, and try to do it even better!

    So then, to ameliorate these effects, there must be outside intervention! That outside intervention comes in the form of Laws and regulations!

    These L&R’s prevent businesses from harming themselves for profit, and therefore protect their investors.

    These L&R’s prevent businesses from harming their customers in order to make easy profits, and therefore protect their consumers from substandard and/or dangerous products that businesses would otherwise sell!

    These L&R’s prevent businesses from engaging in “bad practices”, ensuring that the businesses do things that are not harmful or destructive of faith and/or trust of the industries they regulate! This protects investors/lenders/consumers/workers et als., from being too easily fooled!

    These L&R’s therefore protect businesses, not only from themselves, but from their competition as well.
    They also protect businesses from consumers, workers, lenders, et als, who are also able to prey on the businesses.

    Therefore it is L&R’s that create the game that businesses play! By giving them rules to obey and regulations to guide them, a somewhat “level playing field” is set up and tweaked as needed as “the game” evolves.

    So then, what we are experiencing now is; the rules have been taken away, and/or enforcement of the L&R’s has been lacking! So, businesses have had to deal with competitors making profits by doing things that should not be done! Making profits by cashing in on the publics faith in L&R’s, that once kept the markets orderly. Making money in ways that destroyed the companies themselves, destroyed the publics faith in them, destroyed the publics trust of them. And as a consequence they’ve destroyed the publics faith and trust in the rule of laws that seemingly can’t be enforced!

    Consequently what we’re seeing is businesses running on mere “traditional expectations”, rather than operating with in a real “game field of play”. Without any expectation that any rules can or will be enforced, there simply can’t be any “game”!

    So where we are now is, we’re running on the most fundamental market devices — “cash paid for value received” — that can, so far, still be trusted. We’ve lost all of our financial systems sophisticated “money pooling” devices. Predicated, as they were, on the understandings that L&R’s had to be observed.

    Eventually, if this condition goes on long enough, pressures, will begin to build, to the subversion of these remaining “traditional expectations” about business. That is, or will be, the very beginning of the end in the processes of “racing to the bottom” to stay ahead of competition.

    From then on, we’ll be at the tender mercies of inflation/deflation, as to how practical it will be, to continue to use paper money to pay. That point, as Greenspan correctly says: “One cannot know until after it has happened”. that our currency has failed.

    Obviously, since the Bush Adm., is the poster child of all this lawlessness, it stands to reason that any real effort to repudiate, and therefore correct, this situation, must begin with a dramatic “big bang”, which could not be served better than by bring down the symbol of it! We miss this opportunity at our extreme peril.


  96. paleotn Says: December 28th, 2008 at 12:02 am


    past the cognitive dissonance, running rife, in your post, if you, really, care about “J. S-P” so much, why not explain to him how he’s getting shafted by Inflation, created by the FedRes, and Fraud, by his ‘banker’ who pretends to ‘loan him money’?

    LSS: laissez faire economics, by any defensible definition, condones no Torts..

  97. usphoenix says:

    I doubt anyone will dig down this far, but here goes.

    I was never a fan of Friedman. He served certain vested interests quite well.

    I am a Chicago GSB alum and always found the program to be a mix between really good and really bad. Merton Miller and Fama: Everyone should have had to participate in one of their classes. And Dornbusch on Macro was spectacular. But attending LAbor Law was like listening to a quarter long anti-union tirade.

    Chicago was supposed to be about theory versus case study. Not about Friedman.

    Based on their recent publications I suspect that they have become a little too populist or money grubbing . And they were on the Phil Gramm side of the recession is only mental. So they have some digging to do.

    But the bottom line is their program used to be very, very solid. It’s really impressive. I remember my required interview with the Dean: George Schultz. There I was in a little room with a spectacular person. And Merton was good too. He had an open office and loved to exchange ideas. Oops, perhaps that spirit is gone.

    I don’t blame people for wanting to trash Friedman. The University of Chicago community has trashed the University for wanting to name something after him.

    But that’s one of the rare strengths of the U of C. They are about independent thinking. Teaching people to think.

    My two cents.

  98. usphoenix says:

    BR: I reread your intro comments, and really really found them out of line. What about Nobel laureate Becker? And his micro as the basis for anti-monopoly action? Or many, many other Chicago graduates, outside the GSB, that have a totally opposite view than Friedman?

    It would be wrong for me to enumerate all your sins, but I find it truly interesting that you would attack so aggressively. You weren’t inviting considered thought. You were trashing.

  99. dunnage says:

    There is no such thing as “Free Market”. Anybody pitching free markets and supply-side is a sociopath at best or an Economist produced in america’s finest private universities. Talk about the value of public education being self-evident.

    You set up a market, call it a free, fair market and make $ or you close the market. A market that is 1/2 assed straight is pretty cool.

    Stimulus vs. Bail out – not the same thing folks. Bail out Goldman — hey, might be the right thing, I do know that if I was the government I would get a cut. And apologies to the captitalists, but I would like to think I would tip well. Stimulus is when you send everybody, and I mean everybody in the country cold cash with a note saying spend it or die.

    Government vs. Private Enterprise: Would someone step forward and tell me how you tell the difference between Goldman the bank and Goldman the Government? Oh, the Goldman G is a blind trust managed by Goldman the B.

    Math, well I think numbers are really nice symbols but only an Economist would put them in a box.