[A very complete, erudite, evaluative study of the Chicago School! A history of the Chicago School from the mid-1800s starts at about 60% of the way through this study. -FNC]

From http://www.atimes.com/atimes/Global_Economy/JI05Dj03.html

Sep 5, 2008

Friedman's misplaced monument

By Henry C K Liu

The University of Chicago's plans, announced in June, to establish an economics research institute to be named after Nobel Prize-winner Milton Friedman, a free-market monetarist professor at the university from 1946 to 1976, faces strong vocal opposition from none other than Friedman's own colleagues in the university.

Friedman was widely regarded as the intellectual leader of the Chicago School of monetary economics, which stresses the overwhelming importance of the quantity of money as an instrument of government economic policy and as a determinant of business cycles and inflation. He was also an outspoken public defender of free markets, which he inevitably linked with political freedom.

Friedman was the 1976 recipient of the Nobel/Sveriges Riksbank Prize in economics. The press release of the award cited Friedman's coining of the term "money matters" or even "only money matters" as an arresting slogan for monetarism. On November 17, 2006, one day after his death at age 94, the Wall Street Journal printed an opinion piece by Friedman entitled: Why Money Matters.

The official press release on the award explained the choice of Friedman as follows:

This strong emphasis on the role of money should be seen in the light of how economists - usually advocates of a narrow interpretation of Keynesian theory - have, for a long time, almost entirely ignored the significance of money and monetary policy when analyzing business cycles and inflation. As far back as the beginning of the fifties, Friedman was a pioneer in the well-founded reaction to the earlier post-Keynesian one-sidedness. And he succeeded - mainly thanks to his independence and brilliance - in initiating a very lively and fruitful scientific debate which has been going on for more than a decade. In fact, the macro-econometric models of today differ greatly from those of a couple of decades ago as far as the monetary factors go - and this is very much thanks to Friedman. The widespread debate on Friedman's theories also led to a review of monetary policies pursued by central banks - in the first place, in the United States. It is very rare for an economist to wield such influence, directly and indirectly, not only on the direction of scientific research but also on actual policies.

The press release was factual in some respects and outright inaccurate in others. It is accurate that Friedman strongly emphasized the role of money. But it is inaccurate to describe Friedman as having reversed the "narrow interpretation" of Keynesian theory because "only money matters" is literally a narrowing spotlight among the broad range of factors that Keynesian theory normally considers in formulating economic policy, including monetary factors.

It is accurate to say Friedman was an early pioneer in reaction to post-Keynesianism, but it is not accurate to label post-Keynesianism one-sided. In fact "only money matters" sounded definitively one-sided to most listeners. Friedman's reaction to Keynesianism is hardly well-founded, though it is admittedly reactionary. As the press report noted, Friedman's emphasis of money is important to the analysis of the business cycle and inflation. But business cycles are not the economy, only one aspect of it. In fact, Friedman's fundamental flaw is his fixation on the business cycle as expressed by the stock market, rather than looking at the whole economy with a wide range of meta-finance concerns such as agricultural economics, labor economics, population economics, the economics of war, pollution, development, and so forth. The list is long and interlinked and any economist ignoring any of part of the list runs the risk of being one-sided.

The market is merely the transactional record of the economy. Students of the market economy tend to confuse business, which is transacted in the market, as the whole economy itself. That is the problem with Business School economists who really should be called "busi-nomists" rather than eco-nomists because by definition and by design they are not concerned with eco, a Greek word oikos, meaning "house". The word describes the complex symbiotic relationships of all living organisms in relation to their environment in the eco-system. Business is only a subsystem of the socio-economic ecosystem. The goal of busi-nomists is to keep the business cycle from recurring crashes even if it means destroying the economy in the process. To achieve this goal, central banking was invented.

This is not to denigrate business experts. All experts, however narrow their field, perform useful functions, and brilliant experts deserve admiration. It is just that they should refrain from fantasizing that they are generalists dealing with the economy. Business exists to make profit for the businessman and there is nothing wrong with that as long as ethical rules are observed. Unlike business, the economy exists to enhance progress in civilization. The former is artificial, the latter is actual. The key problem of the recent decades of Friedman monetarism has not been that money matters but that it matters too much.

Friedman had also written extensively on public policy, always with primary emphasis on the preservation and extension of individual freedom, going beyond economics. His books, periodical columns, media personal appearances and a 1980 10-part series on Public Television with the grand title of Freedom to Choose, followed by a second three-part series in 1984 which together commanded more air time than the 10-part series by Kenneth Clark on Civilization, made him an influential national opinion molder beyond economics. In time, Friedman readily transformed himself from the role of a social scientist to that of a globe-trotting, faith-peddling evangelist of what a disillusioned Japanese central banker later called snake-oil economics.

In 1988, Friedman was awarded the National Medal of Science by the National Science Foundation and the Presidential Medal of Freedom by president Ronald Reagan. Thus encouraged, Friedman went on to publish in 2002 Capitalism and Freedom, a passionate echo of official calls for extending individual economic freedom and limiting government action, except in foreign affairs. Free trade, officially endorsed by pseudo-science, has since become the central focus of US "transformational" foreign policy to spread freedom around the world. It is Adam Smith turned upside down.

President George W Bush has defended the free-trade agenda in moralistic terms. "Open trade is not just an economic opportunity, it is a moral imperative," he declared in a May 7, 2001 speech. "Trade creates jobs for the unemployed. When we negotiate for open markets, we're providing new hope for the world's poor. And when we promote open trade, we are promoting political freedom." While such claims remain highly controversial when tested by actual data, it explains why Friedman, a free-trade economist, was awarded the Presidential Medal of Freedom.

Phyllis Schlafly, a syndicated conservative columnist, responded three weeks later in an article "Free Trade is an Economic Issue, Not a Moral One". In it, she notes that while conservatives should be happy to finally have a president who adds a moral dimension to his actions:

The Bible does not instruct us on free trade and it's not one of the Ten Commandments. Jesus did not tell us to follow Him along the road to free trade ... Nor is there anything in the US Constitution that requires us to support free trade and to abhor protectionism. In fact, protectionism was the economic system believed in and practiced by the framers of our Constitution. Protective tariffs were the principal source of revenue for our federal government from its beginning in 1789 until the passage of the 16th Amendment, which created the federal income tax, in 1913. Were all those public officials during those hundred-plus years remiss in not adhering to a "moral obligation" of free trade?

Hardly, argues Schlafly, whose views were noteworthy because US politics was at that time enmeshed in a struggle between strict-constructionist paleo-conservatives and moral-imperialist neo-conservatives. Despite the ascendance of neo-imperialism in US foreign policy, protectionism remains strong in US political culture, particularly among conservatives and in the labor movement. And now in 2008, a new populism is rising against the US version of free trade.

Redefining humanist morality, the US asserts that world trade is a moral imperative and as such free trade promotes democracy, political freedom and respect for human rights in trade participating nations. Unfortunately, income and wealth equality are not among the benefits promoted by free trade. Even if the validity of this twisted ideological assertion is not questioned, it clearly contradicts US practice of trade embargo against countries the US deems undemocratic, lacking in political freedom and deficient in respect for human rights. If trade promotes such desirable conditions, such practice of linking trade to freedom is tantamount to denying medicine to the sick.

Love is blind and infatuation disguises faults as virtues. As Rudyard Kipling fell in love with the pageantry of colonialism and saw racial exploitation as the "white man's burden", Friedman fell in love with colonial Hong Kong, seduced by the wine-and-dine hospitality of its colonial masters and elite compradors before China reclaimed sovereignty of it in 1997. Friedman mistook Hong Kong's colonial economic system as a free market, despite Hong Kong's long history of highly orchestrated colonial command economic structure. The Hong Kong economy that Friedman loved prospered from Cold War geopolitical tension, not free-market principle. The Asian financial crisis that broke out in Thailand on July 2, 1997, one day after China took back Hong Kong, put monetarist market fundamentalism in the public opinion doghouse in Asia.

The new Milton Friedman Institute will be funded with seed money from the University of Chicago to launch a campaign to raise $200 million from private donors, who are expected to give $1 million or more each, no doubt from sources that have benefited royally by Friedman's wacky ideas.

Edward Snyder, dean of the university's Graduate School of Business, told Bloomberg News, "Naming the institute for Friedman will honor the economist, whose libertarian theories helped the spread of capitalist systems of government, and will attract donors from around the world. When you think about the big battle between socialism and free markets - he led the charge on behalf of the University of Chicago. There are a lot of people who will give back because of his name and effort and legacy." Crony capitalism is giving birth to crony intellectualism.

In an ironic twist of Friedman's "money matters", a Committee for Open Research on Economy and Society (CORES) has been formed to protest and oppose the proposed Friedman Institute. CORES is co-chaired by Bruce Lincoln, the University's Caroline E Haskell Professor of History of Religions. More than 100 other tenured faculty members from a broad range of disciplines who are concerned with the promotion of doctrinal hegemony by money power have signed a petition opposing the concept and structure of an institute whose stated aim is to promote and legitimize a narrow, controversial (now largely discredited by events), ideology-based scholasticism incompatible with the tradition of an open university devoted to independent search for truth.

At issue is the strong influence the Chicago School has exerted in recent decades on government policy and corporate attitude regarding its faith-based exultation of the alleged merits of market fundamentalism which nevertheless has produced glaring, unwholesome results the world over in the past two decades.

The Chicago School of Economics is closely identified with vehement opposition to government intervention in national economies and with wholesale rejection of regulation in free markets. Its ideological bent is that on economic issues, or even on all issues, the market knows best, based on its attachment to price theory. Government intervention, even if well-intentioned, is deemed to always do more harm than good. The advancement of civilization can be intermediated through the price mechanism in free markets. This dogma has been buttressed by exhaustive studies of historical data and rationalized with a large reservoir of path-opening theories to pluck conceptual holes created by overstretched generalization.

The Chicago School, a refuge for snubbed market fundamentalists during the Keynesian era, began to enjoy broad establishment support after the end of the Cold War, when the sole remaining superpower no long needed to win the hearts and minds of the world by reining in systemic exploitation of the weak by the strong. The function of government shifted from protecting the weak from the strong, to freeing the strong to cannibalize the weak under the doctrine that survival of the fittest strengthens the specie.

Economically, the shift began when Friedman became policy advisor to conservative Republican candidate Barry Goldwater in his 1964 unsuccessful presidential campaign against liberal Democrat Lyndon Johnson. In his acceptance speech of the nomination, Goldwater said: "My fellow Americans, the tide has been running against freedom. Our people have followed false prophets."

The high point of the speech was: "I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue." Goldwater attacked Kennedy/Johnson liberalism as a threat to liberty, in violation of the nominal rules of political epistemology.

In 1976, Friedman penned an essay that declared: "the Great Depression was produced by government mismanagement," ignoring the historical fact that government non-interference in the market all through the post World War l era produced the stock-market frenzy of the Roaring Twenties. At any rate, both non-intervention and intervention are government policies, only the former is positive and the latter normative.

The market fundamentalist doctrines of the Chicago School were enthusiastically embraced by vested-interest opportunists. At long last, vulture-ism was sanctified as a positive natural law. Economic oppression through uneven market power was redefined as a natural law. The Chicago School overnight enjoyed enthusiastic support from the finance sector because its tilted theories could be exploited to spectacularly enrich financiers who were looking to push the ethical envelope of commerce without government interference. Transnational financial institutions and conglomerates used market fundamentalism to lure Third World policymakers into accepting neo-imperialism disguised as neo-liberalism.

The target of Friedman's evangelical crusade was John Maynard Keynes and the Keynesians who dominated government policy since the New Deal. Actually, both Keynes and Friedman were pro-market economists. Their difference was that while Keynes proposed to save the market from its self-destruct tendencies, Friedman asserted that the market could self-correct with a simple governmental monetary policy of focusing on the money supply. Federal Reserve chairman Paul Volcker tried Friedman's formula in 1980 with his "new operating method" of controlling the money supply with sharp interest rate volatility and almost caused the Fed to loose control of the Fed funds rate, the most effective instrument for controlling the money supply without calling on the heavy artillery of the discount rate and bank reserve requirements.

His successor as chairman, Alan Greenspan, also followed Friedman's advice of monetarist management of the economy and set the global economy on a two-decades-long joy ride of serial bubbles with his loose use of liquidity laxative. In 2007, it landed the world in the worst financial crisis since the Great Depression. (See Greenspan, the Wizard of Bubble Land, Asia Times Online, September 14, 2005.)

Just as president Nixon declared "We are all Keynesians now" when he reintroduced wage-price control and decoupled the dollar from gold in 1971, Larry Summers, Treasury secretary in the final years of the Bill Clinton administration, wrote: "Any honest Democrat will admit that we are now all Friedmanites," in a tribute on Friedman's death in 2006, when signs of a pending collapse of Friedman-esque free-market fundamentalism were already clearly visible to those who did not operate on a denial mode.

The Chicago School is strongly identified with monetarism in microeconomics. Central Bankers, many trained by Chicago School monetarists, became blind-sighted by Friedman. Chicago School monetarism enjoyed respectful awe from central bankers because it provided them with a simple formula for handling complex problems. It did this by accepting that inflation is always and everywhere monetary phenomenon, which relieved them from the dilemma of choosing between full employment and price stability. A natural rate of unemployment is structural in a market economy and therefore not the fault of central bankers. Full employment is not even a policy prerogative of the central bank.

Critics have long pointed out that the data behind the Chicago School theories are selectively collected and arranged to support a preconceived ideology, which is more a vertical system of beliefs than the outcome of truly open scientific inquiry. Economics is a complex subject. Any subject, however complex, if looked at in the right way, will become even more complex. On the other hand, if it is looked at in a simplistic way, it can lead to convenient but misleading conclusions. This truth escapes many experts who tend to avoid small errors meticulously while sweeping on to grand fallacy. This was what happened to the Chicago School economists.

In his 1953 essay "The Methodology of Positive Economics", Friedman argues against the "basic confusion between descriptive accuracy and analytical relevance that underlies most criticisms of economic theory." The paper asserts that complex realities can be scientifically reduced to simple fundamental structures. And the test of this hypothesis is its fruits. A theory is the way we perceive "facts" and we cannot perceive "facts" without a theory.

David Hume (1711-86) pointed out in his Inquiry into Human Understanding that since the conclusion of a valid inference could contain no information not found in the premise, there could be no valid conclusion from observed to unobserved phenomena.

Immanuel Kant (1724-1804) emancipated man's command of knowledge from Humean skepticism. In his Critique of Pure Reason (1781), Kant emphasized the contribution of the knower to knowledge. While acknowledging that the three great issues of metaphysics - God, freedom and immortality - could not be logically determined, he asserted that their essence is a necessary presupposition. In his subsequent publications, Critique of Practical Reason (1788) and Critique of Judgment (1790), Kant asserted as a moral law his famous categorical imperative requiring moral actions to be unconditionally and universally binding to absolute goodwill.

Goodwill is singularly absent in market fundamentalism. God and immortality appeared to have been claimed by some market fundamentalists on the basis of their alleged logic on the issue of freedom.

Positive/normative questions are distinguished by the "is/ought" dichotomy. John Neville Keynes, lesser known father of John Maynard Keynes, divided economics into "positive" (the study of "what is", and the way the economy works), "normative" (the study of "what should be"), and the "art of economics" (applied economics - how to make "what should be" into "what is"). Intervention then is inescapable for progress.

In the same 1953 essay on positivism, Friedman tried to deny the "is/ought" dichotomy by arguing that answers to "ought" questions necessarily depend on a prior establishment of "what is". Nevertheless, most critics of Friedman's positive methodology feel he was arguing against normative economics and thus assume that he was only arguing in favor of positive economics. Yet "what is" determines "what ought to be", reflecting on the value judgment of the applied economist. Thus positive methodology must precede normative prescriptions. But if positive methodology is used to justify "what is" without proceeding to "what ought to be", then positive investigation becomes superfluous.

The claim of the Chicago School that prosperity will spring from markets left free of government interference is challenged by developing facts. Recurring financial crises appear have jelled into a pattern of 10-year cycles, as evidenced by the crashes of 1987, 1997 and 2007. By now, after three decades of hegemonic dominance in government policy and private enterprise philosophy, the Chicago School theology can no longer rest on its secure platform of political power disguised as theoretical supremacy.

The collapse of market fundamentalism in economies everywhere is putting the Chicago School theology on trial. Its big lie has been exposed by facts on two levels. The Chicago Boys' claim that helping the rich will also help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways. When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman test are in - and they are all rotten.

The policy ascendance of the Chicago School evolved around the core of macroeconomic monetarism, of which Friedman was the leading guru. "Money matters" became its popular slogan. But the slogan is only half true. Money matters enough for it to be not just an economic issue; it is an important political issue. Students of monetary history know that money has been an issue of intense political contention throughout history. For the United States, a comparative new nation set on seeking a new form of government through popular democracy, the issue of money surfaced in every chapter of its political history.

But the Chicago School is more than just a movement of economic theory. In recent decades, it has become an aggressive agent of intellectual imperialism, taking on the dusty mantle of social Darwinism, applying its economic doctrines to other disciplines such as political science, legal theory, history, sociology, international relations and even theology.

[The Blankfein quote, “doing God's work”]

Getting rich has become the equivalent of doing God's work in market capitalism. Yet many religions consider the attitude toward money as often more indicative of a person's true worth than the mere possession of it. The same is true for civilizations. This explains why modern societies, whose members can be be obsessed with a single-minded quest for material wealth, are constantly faced with recurring crises of values. The pursuit of maximization of wealth leads inevitably to the betrayal of human values that would otherwise forbid unconscionable exploitation of and impersonal disregard for others. Human values cannot be intermediated through price, notwithstanding the infamous World Bank memo by Larry Summers on the economic efficiency gained by allocating pollution to the Third World.

Super-winners in market capitalism are not only respected and admired for what they do to win in the market but also for their alleged wisdom in life. They are sought out constantly for pronouncements on the great questions of the age, even those far removed from their fields of competence.

The University of Chicago historically aimed at encouraging a community of scholars of varied views and expertise to germinate broad ideas on big social problems not by doing timid empirical research on the status quo, but by bold new leaps of pure intellect that will be future subjects of empirical research, as under the presidencies of education giants such as William Rainey Harper and Robert Maynard Hutchins. It is therefore ironic that it is home to the Chicago School of Economics, generally viewed as a doctrinal garrison.

In 1856, Democratic Senator Stephen A Douglas, of Lincoln-Douglas debates fame, who introduced the anti-slavery Freeport doctrine that permitted the new territories to exclude slavery in the name of popular sovereignty, offered a grant of 10 acres of land to Presbyterians "for a site for a University in the City of Chicago". The elitist Presbyterians declined and the offer fell by default to the populist First Baptist Church of Chicago, which believed that God's grace is for everyone and not just predestined individuals.

The Baptist trustees relied on the subscriptions of wealthy Chicagoans to finance the building of the university. However, the Great Fire of 1871 and the Panic of 1873 rendered worthless a large proportion of the subscriptions that had been secured

without conditions. These calamities left the university heavily in debt, which it never managed to pay back. The commencement on June 16, 1886, marked the end of the first University of Chicago.

To keep the university alive, Baptist trustee Thomas Goodspeed asked John D Rockefeller, also a devout Baptist, who had never visited Chicago, for financial support. At the time, Rockefeller was thinking of creating a great Baptist university in New York. After negotiations between New York and Chicago through the intermediation of Baptist clergyman Frederic Taylor Gates and Jewish scholar William Rainey Harper, Rockefeller opted for Chicago. Gates was a key advisor in convincing Rockefeller of his need for philanthropy to develop a social purpose for his enormous wealth and to rebuild the public image of his name by supporting projects and institutions devoted to the public good.

With the Interstate Commerce Act of 1887 and of the impending Sherman Antitrust Act of 1890, Chicago had the advantage of being far from Wall Street and would avoid talks of a special relationship between moneyed interests and the new university. The Chicago School of economics and the proposed Milton Friedman Institute seem to have totally overcome such sensitivity.

In 1890, Rockefeller agreed to donate $600,000 (the equivalent of $14 million in 2008 dollars - much less than what is being sought now for the Milton Friedman Institute) if local Chicagoans could come up with another $400,000. Goodspeed turned to Chicago banker and philanthropist Charles Hutchinson to lead the Chicago elite to match the Rockefeller condition and the new university was born. Merchant Marshall Field donated land for a new campus in Hyde Park.

Harper was appointed president and opened the new University of Chicago on October 1, 1892. He was an academic prodigy who earned a PhD from Yale when he was aged 18. Schooled in Hebrew and biblical studies, Harper commanded linguistic competence in Aramaic, Arabic, Syriac and Akkadian. As the first president of the new university, he foresaw a glorious future for the University of Chicago, which would be destined to rival Ivy League schools such as Harvard and Yale, not by copying them but by leap-frogging over them. Only in 1897 did Rockefeller make his first visit to the university, which eventually grew into one of the world's greatest. It also marked the beginning of a massive program of Rockefeller philanthropy in education around the globe.

The final decades of the 19th century were a turbulent period for the US economy. Serial financial panics and agricultural crises appeared along with the emergence of monopolies that acted as midwives to the birth of the industrial economy. The concentration of ownership through predatory finance, while facilitating spectacular growth, caused public resentment due to widespread fraud, financial manipulation and labor abuse. Agrarian crusades and trade unionism were met with unspeakable violence from capitalists and management who hired goons as private security force who literally take the law into their own hands. Populist reformers such as Henry George, bimetal monetarists, Progressives, and even Silverite Republicans became active and sought advice from progressive economists for conceptual support of their political positions.

The new University of Chicago, charged with Harper's vision of overtaking the eastern academic power centers, started an aggressive program of poaching young rising stars from leading institutions, a strategy since copied by all universities of financial means. As practically all economists of respectability at the time were in various degree Apologists who defended the new industrial capitalism, blemish and all, the university in 1892 invited arch-conservative economist J Laurence Laughlin to form its first economics department. Laughlin had studied under Charles Dunbar at Harvard, later dropped out of academia to make a small fortune in insurance, then returned to teach at Cornell for two years before he received the call from the University of Chicago.

Laughlin set a tradition for the university by expanding intellectual space and appointed several institutionalists, notably his former student at Cornell, Thorstein Veblen, to head Chicago's Journal of Political Economy. Theory of the Leisure Class, a classic critique of consumerism, was written by Veblen in Chicago.

Laughlin, himself an avid free-marketeer, along with Frank Taussig at Harvard, Arthur T Hadley and social Darwinist William Graham Sumner, both at Yale, refused to become members of the American Economic Association, which had been conceived by the "new school" as the US equivalent of the German Verein fur Sozialpolitik, making the association a stronghold of the emerging institutionalists by default. Laughlin's establishment reputation rests on his work in monetary economics, as a vocal opponent to bimetallism and an energetic promoter of central banking.

The American Apologists employed religious and moral arguments to defend the status quo of industrial capitalism as the working of "eternal laws of economics", God-given and moral, even if not altogether just. Any attempt to interfere with it, such as anti-trust legislation or legalized unions, was unnatural if not outright immoral, and would eventually spell self destruction for the human specie by destroying its survival instinct. Veblen, with Henry J Davenport and Frank H Knight, had a grand time making fools of the Apologists with their own nonsensical utterances.

Frank H Knight, known as the "Grand Old Man" of Chicago, commanded as much respect as Joseph Schumpeter at Harvard. Jointly with Jacob Viner, Knight presided over the Department of Economics at the University of Chicago from the 1920s to the late 1940s, and played a central role in setting the character of the department. His famous dissertation "Risk, Uncertainty and Profit" (1921), remains one of the most interesting reads in economics, particularly at this time.

Knight made a distinction between "risk" from randomness with knowable probabilities and "uncertainty" resulting from randomness with unknowable probabilities, which is now known as Black Swan Theory, coined by Nassim Nicholas Taleb, the brilliant theoretician on quantitative finance. Frank set forth the role of the entrepreneur in a distinctive theory of profit and gave one of the earliest presentations of the famous law of variable proportions in the theory of production.

Viner was an upside-down Keynesian in that he believed depressions were due to deflation in output prices occurring at a faster rate than the collapse in costs. Recovery, he believed, required a restoration of profit margins even if brought about by government-induced inflation, but not by monetary expansion or inflation targeting, but rather by deficit fiscal spending to create the necessary price rise while costs remain lagging and profit rises. Friedman mistakenly described Viner as an early monetarist. The hole in Viner's prescription is that without rising wages and full employment, no depression can recover. This is particularly true today when overcapacity is a core problem. As Henry Ford discovered, the way to profit is through higher-than-living wages.

The intellectual thrust of the Chicago School of 1920-1950 differed significantly from its later incarnation. Led by Knight, the school was highly suspicious of positive economic methodology to study how the economy works currently. Faculty members denounced intellectual imperialism, arguing for a confined role for economic analysis. They were suspicious of the efficiency claims of laissez-faire economics, accepting it only on a "non-consequential" basis. Efficiency is not contagious; it tends to increase through a decrease of efficiency is other areas.

The Chicago Boys of this era welcomed active government policies to cure recessions including Henry Simons's Chicago Plan for counter-cyclical monetary policy. On the faculty was Paul Douglas, a passionate New Deal liberal, who left to become a US senator of great influence even in foreign policy. Through the Chicago School of Sociology, Douglas developed an intellectual affinity with Jane Adams, social reformer and the first American woman to be awarded the Nobel Peace Prize. Another member was card-carrying socialist Oskar Lange who developed a model for market socialism. Lange was expected to become a major figure in the department but instead left Chicago at the end of World War II to join the new communist government in Poland and served as its ambassador to the new United Nations.

In the 1960s, the department began to congeal into a new shape, led by George J Stigler and Friedman. This is sometimes referred to as the Second Chicago School, famous for its anti-Keynesian polemics. It eventually came to be known as the Chicago School of Economics as the term is understood today. The Stigler-Friedman period of neoclassical economics adamantly deny of the possibility of market failure, with militant hostility toward imperfect competition in which market entry is restricted such as in the case of monopolies. Above all Chicago Boys of this era saw themselves as natural born nemeses of Keynesian economics.

The Chicago Boys were outstanding propagandists, making good use of their two influential journals - the Journal of Political Economy and the Journal of Law and Economics - as heralds of truth. Learning from the secular success of the Manchester School of Economics of free trade. which had been buttressed by direct British government policy support and industry financial sponsorship, the Chicago School focused on building ideological alliances inside Washington with conservatives on domestic issues and neo-liberals on international issues, financial alliances with Wall Street bankers who wanted less government interference and alliances with central bankers who wanted simple formulae that would absolve them from accountability.

These market fundamentalists hid behind their vigorous research methodologies to abduct truth as their private property, notwithstanding other equally vigorous economists were drawing diametrically opposing conclusions, albeit less amenable to the moneyed interests. The Chicago Boys soon captured key posts in the policy apparatus of government and power points in business management to avenge their year in the wilderness during the Keynesian era.

In microeconomics, led by George Stigler, the neo-classical paradigm was extended by incorporating new observations amenable to economic analysis, breaking new paths with economics interpretations of human capital, ownership rights and transaction costs, assigning measurable values to all things so that marginal utility could inform decision making.

It was an approach that allowed efficiency to overshadow direction. It did not matter where the nation was going as long as it was going there fast and at lowest cost. Business and finance, previously the province of trade schools, were brought in the intellectual realm philosophy in the university and incorporated into neoclassical economics. Corporate planning became indispensable for survival and respectable undertakings, but national planning was deemed a threat to liberty. Profit began to achieve the equivalent status of immortality. Political science and institutional theory were restructured to rest on a financial base rather an economic foundation, even for national security and international relations.

On one level, the Milton Friedman Institute controversy at the University of Chicago is a local issue in a private university. But the University of Chicago is world-class institution with connections and influence all over the world. What happens at Chicago carries wide implications elsewhere in the world.

On that level, the struggle at Chicago is global. Institutions of higher learning everywhere are all struggling against the illegitimate use of overwhelming, ill-gained financial resources to perpetuate flawed ideologies that had rationalized such ill-gotten gains at the expense of the well-being of billions all over the world, and to blindly increase the efficiency of a global exploitative regime. The problem is especially acute in emerging economies.

The struggle at the University of Chicago could act as a beacon around the world to strip market fundamentalism of its pseudo-science pretense and expose it as a propaganda device to rationalize the exploitation of the many by a few the world over.

(Professor Lincoln of CORES encourages all who identify with the aim of the struggle at Chicago to express their support via its website. )

Henry C K Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.