Chicago School of Economics

The Chicago School of Economics refers to the free market approach to economics advocated by members of the Department of Economics at the University of Chicago. The Chicago School approach began in the 1930s under Frank Knight and persisted for decades producing multiple Nobel Prize winners. In addition to Knight, some of the leading and more well-known figures include Gary Becker, Ronald Coase, Aaron Director, Milton Friedman, Merton Miller, Richard Posner, and George Stigler. The Chicago School of Economics is also associated with the law and economics approach to jurisprudence developed at the University of Chicago Law School.

At the heart of the Chicago School approach are neoclassical price theory and a belief in free markets. Simply stated, the Chicago School approach stands for the belief that markets without government interference will produce the best outcomes for society (i.e., efficient outcomes). A primary assumption of this school of thought is the rational actor (self-interest maximizing) model of man. Under this view, all decision makers will act to maximize their self-interest and will, therefore, respond to appropriately designed price incentives. At the society level, free markets populated by rational actors will cause resources to be distributed based on their most valuable uses (allocative efficiency).

The Chicago School's approach to antitrust law in the area of regulatory policy provides an excellent demonstration of its general principles and approach. The traditional approach to antitrust regulatory policy is to limit concentrations of market power, such as by breaking up a firm that has monopoly power. The Chicago School approach, on the other hand, argues that consumers are best protected by competition, even if that is only between a few large firms in an industry. Those large firms may have gained their dominant market positions through efficiency advantages that provide greater benefits to consumers than a market forced by the law to include many smaller firms. Even if a firm gains monopoly power, the Chicago School approach prefers to allow the market to correct the problem rather than rely on government intervention, which may cause greater harms to efficiency.

The Chicago School's price theory and rational maximizer approach has been applied to a wide variety of areas, including both market- and nonmarket-based [Page 282]activities. For example, Gary Becker extended this analysis to areas such as crime, racial discrimination, marriage, and family life. In the realm of law and economics, the Chicago School approach argued that legal rules and court decisions should be based on the promotion of efficiency. The role of the law is simply to alter the incentives of individuals and organizations to achieve that end. For example, in the area of tort law, the goal should not simply be the minimization of costs from accidents but also the minimization of the costs of preventing such accidents. If liability rules require individuals to take precautions against accidents that are more costly than the accidents themselves, then the outcome is allocatively inefficient.

There are many criticisms of the Chicago School approach. For example, behavioral law and economics scholars challenge the assumption that humans are rational, self-interest maximizers. Instead, they argue that certain decision heuristics and biases prevent people from being the ideal decision makers assumed by the Chicago School approach. Others argue that the goal of efficiency comes at the cost of justice and equality in society.

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