by Jerry O’Driscoll
In the last two days, two prominent economists have asked me essentially the same question: what is the difference between Chicago and Austrian economics? It is interesting that both asked, particularly since one has a Ph.D from Chicago.
The second economist asked me specifically if Armen Alchian wasn’t really an Austrian. I’ll respond as I did to him. I learned most of my Austrian economics in the UCLA graduate economics program. (At that time, UCLA was known as Chicago West.) I was never an Alchian student, but one read lots of Alchian anyway. And his influence pervaded the department. It was obvious to me that Mises had influenced Alchian. Also Hayek, as is made clear in a video of Alchian interviewing Hayek.
Hayek’s classic essays on prices and information were on various reading lists at UCLA. Fisher was used as a text in Hirshleifer’s capital theory class. For purposes of learning capital theory, Fisher was as Austrian as Bohm-Bawerk (and much more accessible). Both Hayek and Mises thought Fisher had improved on BB.
It was by taking Leijonhufvud’s macro course that I became acquainted with Prices and Production. I wrote a term paper on it for that class, which eventually became my dissertation (Economics as a Coordination Problem).
When Harold Demsetz arrived, the influence of Mises on his theory of property rights was evident. We read a lot of Ronald Coase, and his relationship with Hayek at London is well documented by James Buchanan in Cost and Choice.
The relationship between Vienna and Chicago proper is more complex, mainly because Chicago is complex. There was an Old Chicago School of Frank Knight, Henry Simons, Lloyd Mints, Paul Douglas, et al. Some have viewed it as leftwing. It was “Keynesian” on fiscal policy before Keynes. Simons was frequently criticized by classical liberals, yet Hayek defended him vigorously. Simons proposal for 100% reserve banking was adopted as first best by Milton Friedman and second best (to free banking) by Hayek (who thought both systems would be an improvement, but not politically possible).
The new Chicago School, heavily influenced by Friedman and Stigler, struck out on its own. Its relationship with the old school blurred as time passed. On micro topics like competition, there was heavy overlap with modern Austrians. Demsetz and Kirzner made common cause on competition. Hayek was never fond of monetarism, however.
The modern Chicago School of rational expectations and real business cycles is a topic unto itself. But, yes, there is still a connection as John Cochrane and others understand.
Those are my thoughts in a nutshell.