BOOK REVIEW: Chicagonomics

In his new book, Chicagonomics: The Evolution of Chicago Free Market Economics, Lanny Ebenstein follows the development of classical liberal thought at the University of Chicago from its founding in 1891 by John D. Rockefeller. The University was the first in North America to boast of a separate department of economics. Twenty-eight of its students, researches, and faculty have won the Nobel Prize in Economic Sciences since the prize was first given in 1969.

But Ebenstein didn’t concentrate primarily on the University’s accomplishments per se, nor on the unique brand of Chicago economics after World War Two. Instead, Chicagonomics was a book addressed by Ebenstein “To Contemporary Libertarians,” purportedly to separate the view of a true classical liberal from today’s libertarians, particularly regarding egalitarianism and progressive taxation.

Classical Liberalism is not Contemporary Libertarianism

For example, Ebenstein on page 18 provides a list of contemporary “economists who continue to carry the banner for traditional, classical liberalism.” Some of the names include Joseph Stiglitz, Paul Krugman, Robert Reich, Ben Bernanke, and Janet Yellen. It probably goes without saying that not one of these people identify as or garner support from libertarians. To underscore this point, Ebenstein writes on page 31:

It merits emphasis again that ‘classical liberalism’ is not ‘libertarianism’ as the latter term is used today. It is important to be crystal clear on this point.

The most obvious distinction according to Ebenstein is that classical liberalism is more in tune with today’s left regarding income inequality. On page 83 Ebenstein says classical liberalism “is an egalitarian creed and program.” On page 187 he equates classical liberalism with “democratic welfare state capitalism.” He argues that “classical liberalism requires substantial income and wealth equalization through progressive income and estate taxation” (91) because:

Unless government steps in to equalize income and wealth, free market capitalism turns into crony, plutocratic capitalism, which is neither efficient nor just. (82)

It is never suggested that government actions may actually contribute to “crony, plutocratic capitalism.” According to Ebenstein, “It is by breaking down the power of the rich and, within reason, redistributing their resources that a competitive society can be achieved.” Thus, in the tradition emphasized in Chicagonomics, redistribution of wealth and income is not a dirty word or concept (86). Bastiat would have cringed at the idea that a free society is achieved based on legalized plunder.

For just one more illustration to contrast the views of classical liberals from contemporary libertarians, consider the following passage from Henry Simons, a Chicago economist in the first half of the 20th century:

On the expenditure side, we may look forward confidently to continued augmenting of the ‘free income’ of the masses, in the form of commodities and services made available by government… There are remarkable opportunities for extending the range of socialized consumption (medical services, recreation, education, music, drama, etc.) and, especially, for extending the range of social welfare activities.

The designing and building of a mighty engine of income and inheritance taxation is an undertaking big enough and hard enough to occupy the capable people who are really concerned about inequality. There are endless possibilities for increasing and improving the community’s ‘free income’ in the form of governmental services, especially throughout extensions of social welfare activities.

Immediately after this passage Ebenstein writes of Simons: “He was a true classical liberal.”

Ebenstein closes the book on page 208 arguing that “It is time to restore the heritage of classical liberalism to the political, economic, and social left.”

So the differences between classical liberalism as understood by Ebenstein and contemporary libertarianism should be clear. But a book targeted unfavorably towards libertarianism wouldn’t be complete without at least a few strawmen.

Libertarian Caricatures

Thus, we find out on pages 9 and 10 that “a society divided into a very few, ultra-wealthy makers and creators and a great mass of impoverished workers and indigents…is rapidly attaining the status of an ideal for many contemporary libertarian writers and thinkers.” This cartoonish perspective of libertarianism is too laughable to even attempt a contradiction.

Later on the same page he writes that “contemporary libertarians and many conservatives seek inequality as among their highest practical goals.” I’m not sure if there’s a better way to respond to this idea than just to say, “No they don’t.”

He continues, saying that libertarians’ “opinion of the appropriate and optimal society is one in which income and wealth are very unequally received and held, such as, for example, the contemporary United States.” I’d challenge anyone to peruse the libertarian blogosphere or read a couple libertarian books and report to me a single instance in which the libertarian speaks in terms of an “appropriate and optimal society.” Upholding property rights and seeking to eliminate crony government policies is very different than desiring more income inequality, which apparently libertarians just can’t get enough of, as Ebenstein reports on page 85:

Egalitarianism is part of classical liberalism, though not of contemporary libertarianism. Indeed, contemporary libertarians most often see massive inequality as one of the most crucial marks of a successful and prosperous society…and would, if anything, like to see even more inequality in the United States than is currently the case.

In Ebenstein’s version of libertarianism, libertarians look upon income inequality with the same drooling obsession in which Ron Swanson savors over his bacon!

Chicago Economists Mainstream During Great Depression

Another point to note of Chicago economists is that in the 30s “they were more Keynesian at times than Keynes himself.”(71). Indeed, the Chicago economists during the Great Depression were mainstream. “When it came to activist national fiscal and monetary policy…” writes Ebenstein, “Chicago economists, including [Jacob] Viner, joined with practically the entire economics profession in the United States and throughout Europe in calling for activist and stimulative fiscal and monetary policies.” (47)

In 1932 a dozen Chicago economists “endorsed a memorandum on economic policy calling for budget deficits to combat the Depression and countercyclical budget surpluses to lessen he extremes of the business cycle.” John Meynard Keynes was largely in agreement with the policy recommendations of the paper, saying that he had “very little to add to the…scope of this, or to criticize.” (72)

Ebenstein did a fine job relating the Chicagoan position to that of the Keynesians, but unfortunately his treatment of Austrian economics during the Great Depression was disappointing.

A Lazy Treatment of Austrian Economics

Not once in the chapter “Chicagoan and Austrian Economics in the 1930s” was Austrian Business Cycle Theory (ABCT) even mentioned (which only briefly showed up on page 146). Instead, Ebenstein presented one brief passage of Hayek’s from the preface of Monetary Theory and the Trade Cycle which by no means illustrated the meat of his argument. He then uses Friedman’s words, not Mises’s, to provide a (shaky) definition of praxeology, the Austrian method of economics, and offers his own strawman perspective of Austrian thought during the Great Depression:

There was no alternative but to do nothing in the face of tens of millions out of work and destitute. (75)

In short, it was a lazy treatment of Austrian economics which didn’t provide a scintillating comparison between them and Chicagoans.

Parting Thought

Overall I thought Ebenstein should have subtitled the book as “The Evolution of Chicago Egalitarianism” instead of free market economics. The emphasis from Ebenstein was not the legacy of classical liberal thought resulting in freeing up markets from government intervention, but rather in emphasizing the heritage of classical liberalism as an egalitarian creed.

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6 thoughts on “BOOK REVIEW: Chicagonomics

  1. Ron_H. December 14, 2015 / 5:38 am

    Great review, Nate. That sounds like a truly awful book, and I appreciate your saving me from reading it. It sounds like Ebenstein doesn’t understand the descriptive terms he’s using – including “classical liberal”.

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  2. Lanny Ebenstein December 16, 2015 / 7:11 pm

    I just became aware of this review, and enjoyed reading it. Though I think it emphasizes my views on egalitarianism a bit too much (see the penultimate para of the book, p. 208: “The goal of progressive taxation is not to create a society in which equality of result is the outcome or paradigm, but one in which the current vast and growing inequalities that typify the United States do not contine”), I advocate a more equal society than the current one. That’s the “classical liberal” position of Locke, Smith, Bentham, Mill, and others. Unfortunately, the “contemporary libertarian” position really is different. See the quote, e.g., to John Stossel on p. 200: “It’s true that today, the richest 1 percent of Americans own a third of America’s wealth. One percent owns 35 percent! But I say, so what?” –Lanny Ebenstein

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    • The Dismal Reviewer December 16, 2015 / 11:15 pm

      Lanny,

      You can’t imagine the type of exhilaration that went through my mind when I noticed the author of Chicagonomics bothered to reply to my review! Thank you very much indeed (even though at first I thought I might be getting trolled!). I do apologize for any mischaracterizations or unfair editorializing on my part. Anyways, I’ve got a lot of questions about the book and your knowledge in general, do you think we might be able to have a little discourse via email? I’m a college student studying econ so I couldn’t think of a better way to spend a part of my winter break! Anyways, thanks again, and I hope to hear back from you!

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    • Ron_H. December 17, 2015 / 12:32 am

      Dr. Ebenstein

      It’s not clear how you are able to equate a modern egalitarian advocacy of forced income redistribution from individuals who have earned that income (honestly, we presume), to other individuals who haven’t earned it, with a classical liberal ideology of private property, unhampered free markets, and rule of law – with Locke in particular advocating individual sovereignty and inalienable natural rights.

      While many classical liberals believed in taxation for specific and limited government purposes, redistribution of income or wealth through taxation would have horrified the likes of Locke and Smith.

      A progressive tax is, by definition, an attempt to equalize outcomes. To advocate income redistribution you must explain why income inequality is bad, what level of inequality, if any, is too high, and who is qualified to determine these things for others. I’ve yet to hear reasonable answers to those questions.

      I’m not sure I would hold up Stossel as a good example of a typical libertarian. “Libertarian Light” perhaps. He is first and foremost a TV personality who discusses libertarian issues. However, his question about the 1% owning 35% of the wealth is a good one, and I would echo his question “So what”? Such a claim is a pure appeal to class envy.

      Assuming a relatively free market economy in which people honestly make high incomes through voluntary, mutually beneficial exchanges of value with others, what exactly is wrong with someone having a very high income or great wealth income? Others have willingly made them wealthy in exchange for the even greater value they’ve provided. It would seem logical that those who have demonstrated the ability to provide great value should get to determine how their rewards are used.

      Adam Smith imagined an “invisible hand” directing resources to their best and highest use, as determined by individuals voting with their dollars. That’s exactly what happens when someone provides great value to others. More resources are directed their way so they can continue to provide great value for others. Forced redistribution short circuits this process by diverting resources to those who have demonstrated their inability to provide much value to others. We are all worse off as a result.

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