The Chicago School

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pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Ponzi scheme, price stability, rent control, road to serfdom, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The Wealth of Nations by Adam Smith, Thorstein Veblen

Chamberlin had written a chapter on the Chicago School...in 1957, the earliest such explicit essay I have found.”3 Chamberlin’s chapter indicates that the idea of the Chicago school that later became prominent was not fixed in 1957. According to Chamberlin, the Chicago school “believes in ‘competitive theory,’ but such a belief is widely held and would not in itself distinguish a Chicago school. It is distinguished by the zeal with which the theory of monopolistic competition has been attacked.... I shall therefore call it the Chicago School of Anti-Monopolistic Competition.”4 Although criticism of the theory of monopolistic competition—the view that businesses are best considered to be monopolies and are able to obtain monopoly profits and charge monopoly prices—was certainly part of the Chicago school approach, in part through the work of Aaron Director, this was by no means the whole of what the Chicago school later became known for.

Writing in his memoirs about the first meeting of the Mont Pelerin Society, a group of libertarian-oriented academics and others, in 1947, he quoted journalist John Davenport as saying that these participants included a “sprinkling of what became known as the Chicago School”13—that is, they were not known as the Chicago school yet. The Chicago school of economics is largely the Friedman school of economics; his positions and views are those associated with the school. Stigler wrote in his autobiography that the “origin of the school can be identified only if the central theses of the school are known. They were two: a policy position and a method of studying economics. The policy position was the more commonly recognized element of the school, and clearly Milton Friedman... was the primary architect.” According to Stigler, Friedman influenced the policy positions of the Chicago school in these areas: “He revived the study of monetary economics, which had become moribund.

He provided much of the energy and drive to the interaction among members of the Chicago economics department, business school, and law school that came to be known as the Chicago School.” This would indicate that Friedman himself sometimes expresses the view that the phrase “Chicago school” was not used much before the middle to late 1950s. H. Laurence Miller, “On the ‘Chicago School of Economics,’” Journal of Political Economy (February 1962), sees a major division between Friedman and earlier Chicago economists: “The way in which Friedman and other modern Chicagoans concentrate their attack on government interference with the market represents a major departure from the earlier Chicago position” (p. 67). Also see in the same issue Stigler’s “Comment” and Martin Bronfenbrenner’s “Observations on the ‘Chicago School(s).’” Bronfenbrenner humorously wrote: I never heard of any “Chicago School” until I left Chicago....


pages: 317 words: 87,566

The Happiness Industry: How the Government and Big Business Sold Us Well-Being by William Davies

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1960s counterculture, Airbnb, business intelligence, Cass Sunstein, corporate governance, dematerialisation, experimental subject, Exxon Valdez, Frederick Winslow Taylor, Gini coefficient, income inequality, invisible hand, joint-stock company, market bubble, mental accounting, nudge unit, profit maximization, randomized controlled trial, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, science of happiness, sentiment analysis, sharing economy, Slavoj Žižek, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, Steve Jobs, The Chicago School, The Spirit Level, theory of mind, urban planning

This cocoon in which the university sits was a significant factor in the development of the ‘Chicago School’ of economics, which was instrumental in the design and implementation of the neoliberal policy revolution. Chicago itself is 700 miles from Washington, DC, and 850 miles from Cambridge, Massachusetts, the homes of Harvard and MIT, the original bastions of American economics. Not only were Chicago School economists tightly congregated in Hyde Park, they were also several hundred miles from the core of the political and academic establishments. They had little choice but to seek debate with one another, and for three decades after the end of World War Two, they engaged in this with a rare fury. The scholars who became known as the Chicago School began to cluster around the leadership of economists Jacob Viner and Frank Knight during the 1930s.

In their hostility to state intrusions in markets, Friedman and company had largely just assumed that free markets were intrinsically superior on principle. But paradoxically, this belief also committed them to certain types of state intervention, namely regulation and competition law, which would ensure that the market maintained its correct form. Coase’s brilliance was to spot within the Chicago School position a final remnant of metaphysical speculation that they themselves were not aware of. Up until this point, the Chicago School still assumed that markets needed to be open, competitive, run according to certain principles of fairness, or else they would become submerged under the weight of monopolies. Markets needed ground rules if they were to match up to the ideal of being a space of individual freedom. This meant that they still required authorities capable of intervening, once competitors ceased to play fair or grew too powerful, and the market started to ‘fail’.

In the most controversial episode of a controversial career, Friedman visited Chile in spring 1975 to offer advice to the autarchic Pinochet regime. For a man who professed anarchist sympathies, this engagement with a military dictator appeared hypocritical to say the least. Friedman simply defended himself as someone who was in pursuit of scientific knowledge and willing to share it with whomever was interested. In any case, the Chicago School complaint against governments was not that they had too much power, but – à la Bentham – that they used it in an unscientific fashion. In short, policy-makers needed to listen to economists more closely, a view that reveals the most distinctive Chicagoan trait of all: the fundamental belief that economics is an objective science of human behaviour which can be cleanly separated from all moral or political considerations.


pages: 273 words: 34,920

Free Market Missionaries: The Corporate Manipulation of Community Values by Sharon Beder

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anti-communist, battle of ideas, business climate, corporate governance, en.wikipedia.org, full employment, income inequality, invisible hand, liquidationism / Banker’s doctrine / the Treasury view, minimum wage unemployment, Mont Pelerin Society, new economy, price mechanism, profit motive, Ralph Nader, rent control, risk/return, road to serfdom, Ronald Reagan, school vouchers, shareholder value, structural adjustment programs, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Torches of Freedom, trade liberalization, traveling salesman, trickle-down economics, Upton Sinclair, Washington Consensus, young professional

The doctrine of non-interference with the market meant, in practice, clear the track for big business. Inequalities of bargaining power, knowledge, and income were brushed aside, and the realities of monopoly, quasi-monopoly, and imperfect competition were treated as either immaterial or nonexistent.15 The Chicago School’s policy prescriptions included maximum freedom of choice for entrepreneurs and producers; minimization of taxation, welfare and government intervention; the removal of tariffs; the privatization of government services; deregulation of labour markets and the denationalization of money. Friedman was credited with being the leader of the Chicago School economists and was taken up and promoted by Hayek-inspired networks: ‘more than anyone else, he was responsible for reviving’ and popularizing free market ideas.16 For many years these free market economic ideas were considered marginal and obsolete in other universities.

Other influential nations tend to go along with free market policy prescriptions because nations are represented on the IMF by their finance ministers and central banks, and these tend to represent the financial communities and be staffed by people who have had careers, or hope to, with private financial firms and banks. In addition, economists in the bureaucracies of many countries have been trained in neo-classical theory as orthodoxy. Even in the mid-1980s, the Chicago School represented a minority economic opinion in the US. One survey of 200 industrial economists found 68 per cent were opposed to the Reagan government policies that had been promoted by the Chicago School.11 Nevertheless, this doctrine was taught in some of the most elite US universities and the graduates of these, particularly the ‘high-flying graduates 148 FREE MARKET MISSIONARIES from elite US universities such as Stanford, Harvard, and Chicago’, then went on to get government positions and became senior advisers around the world (as in Chile): part of an ‘influential network of strategically placed individuals’.12 Many of the most powerful economic policy-makers in emerging market countries received their training from one of the few top-notch business training grounds for executives in the US.

Contestability theory, or contestable markets theory, claimed that competition did not have to be real or actual for the market to keep prices down; all that was needed was the potential for competition to ensure that prices and profits did not go too high. So, according to this theory, even a monopoly could be kept in check by the potential of competition.39 Contestability theory, originally formulated by William Baumol and others, was taken up by the Chicago School and then by the Reagan administration. Contestability theory was used to favour deregulation policies for monopolies by a ‘a group of economists, in particular associated with the Bell Lab. of the American Telephone and Telegraph Company, and with the US Civil Aeronautics Board’.40 Contestability was also cited in the UK when British Telecom and British Gas were privatized as monopolies. Normally, a monopoly is thought to need regulation, to ensure prices are kept within reason and ensure good service.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, invisible hand, Jean Tirole, joint-stock company, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, payday loans, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, War on Poverty, Washington Consensus, We are the 99%, working poor

In an op-ed article in the Financial Times, Rajan defended the upside of financial speculation, blaming the harmful fallout on the Congress and the Fed for distorting market incentives. Elsewhere, the Stanford economist Gregory Rosston was quoted as saying, “I don’t think (recent events are) necessarily a repudiation of the Chicago School of economics as personified by Alan Greenspan, but it definitely shows there is some role for regulation in society.” Actually, all that was revealed was the unabashed ignorance of history on the part of Rosston, since Alan Greenspan was never a member in good standing of the Chicago School, but rather an acolyte of the Ayn Rand cult, who had been awarded a belated PhD by NYU in 1977 after serving as chairman of the Council of Economic Advisors under Gerald Ford, and who subsequently parlayed numerous right-wing political connections into elevation to his position as chairman of the Federal Reserve from 1987 to 2006.

The television series funded by the Neoliberal Thought Collective on PBS, Free to Choose, provides many more. 129 Mirowski, ScienceMart; Thorpe, “Political Theory in STS”. 130 Hayek, “The Intellectuals and Socialism”; Burgin, History, p. 194; Hayek, Law, Legislation and Liberty, chapter 2. 131 The response of Caldwell, “The Chicago School, Hayek, and Neoliberalism,” to this criticism is a good example of the unwillingness to explore this issue. 132 Hayek, Law, Legislation and Liberty, pp. 45–46. 133 Ibid., p. 51. 134 Zingales, A Capitalism for the People. 135 Conversation among Friedman, Director, and Craig Freedman, August 1997; reported in Freedman, Chicago Fundamentalism, p. 12. 136 Stigler, “The Intellectual and His Society,” p. 312. 137 “The large mass of the public does not find it economically worthwhile to become well acquainted with the effects of policies which have small harmful effects upon each non-beneficiary.” (George Stigler, unpublished paper “Schools in Science,” quoted in Nik-Khah, “George Stigler, the Graduate School of Business, and the Pillars of the Chicago School,” p. 140) 138 Some evidence supports Stigler’s position: in a number of countries, it was explicitly socialist parties that introduced some of the most critical neoliberal reforms.

Thus there are at least two imposing obstacles confronting anyone seeking a deeper understanding of neoliberalism: the fog thrown up around the term “neoliberalism” and attendant doctrines by the participants themselves, in pursuit of their own political unification ambitions and projects with other movements on the right; and the fact that the tenets of neoliberal doctrine evolved and mutated over the postwar period.41 The ten-plus commandments of neoliberalism were not delivered complete and immaculate down from the Mont in 1947, when the neoliberals convened their first meeting of the MPS. Nor can one reliably reconstruct it from a small set of “Hayekian encyclicals,” as Jamie Peck so aptly puts it. In fact, if we simply restrict ourselves to Mont Pèlerin itself (and this is unduly narrow), there rapidly precipitated at least three distinguishable sects or subguilds: the Austrian-inflected Hayekian legal theory, the Chicago School of neoclassical economics, and the German Ordoliberals.42 Hayek himself admitted this in the mid-1980s, when he warned of “the constant danger that the Mont Pèlerin Society might split into a Friedmanite and Hayekian wing.”43 An impartial spectator could observe ongoing tensions between them, but also signs that they eventually cross-fertilized each other. It takes a rather bulky Baedeker to keep it straight; another thing that surely wards off the merely curious outsider.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Mikhail Gorbachev, Milgram experiment, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond

John Maynard Keynes (2006) The General Theory of Employment, Interest and Money, Atlantic Books, New Delhi: 140. 29. Alan Greenspan (2007) The Age of Turbulence: Adventures in a New World, Allen Lane, London: 124. 30. Fox, The Myth of the Rational Market: 41. 31. MacKenzie, An Engine, Not a Camera: 95. 32. Ibid: 8–12. 33. van Overtveldt, The Chicago School: 67. 34. Dan Gardner (2008) Risk—The Science and Politics of Fear, Virgin Books, London: 53. 35. van Overtveldt, The Chicago School: 291. 36. Quoted in Greenspan, The Age of Turbulence: 55. 37. Quoted in van Overtveldt, The Chicago School: 172. 38. Quoted in Fox, The Myth of the Rational Market: 269. 39. Daniel Altman “Managing Globalization: Q & A with Joseph Stiglitz” (11 October 2006) The International Herald Tribune. 40. MacKenzie, An Engine, Not a Camera: 24. 41. Kurt Vonnegut Jr (1963) Cat’s Cradle, Holt, Rhinehart & Winston, New York: 75. 42.

Quoted in Peter Watson (2000) A Terrible Beauty: The People and Ideas that Shaped the Modern Minds—A History, Phoenix Press, London: 81. 9. Philip Mirowski (2002) Machine Dreams: Economics Becomes a Cyborg Science, Cambridge University Press, Cambridge: 203, 204. 10. Johan van Overtveldt (2007) The Chicago School: How the University of Chicago Assembled the Thinkers Who Revolutionised Economics and Business, Agate Books, Chicago: 9. 11. Ibid: 91. 12. Justin Fox (2009) The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street, Harper Business, New York: 252. 13. van Overtveldt, The Chicago School: 85–7. 14. Pierre Bayard (2007) How to Talk About Books You Haven’t Read, Bloomsbury, London. 15. Yergin and Stanislaw, The Commanding Heights: 89. The quote is derived from John Ranelagh’s book, (1991) Thatcher’s People: an insider’s account of the politics, the power, and the personalities, Harper Collins, London.

The University of Chicago radically changed how the world thought about economics, politics, and business, with a system based on: “belief in the efficacy of the free market as a means for organizing resources...skepticism about government intervention into economic affairs and...emphasis on the quantity theory of money as a key factor in producing inflation.”1 In the early part of the twentieth century, work in theoretical physics was centered around the Cavendish Laboratory (Cambridge, England), Göttingen (Germany), and the Institute of Theoretical Physics (Copenhagen, Denmark). Under Niels Bohr, the Nobel-prize-winning Danish physicist, and his German protégé Werner Heisenberg, the “Copenhagen Interpretation” became dominant. Generations of physicists once asked: “What is Copenhagen’s view of this?” Generations of economists now asked: “What is Chicago’s view of this?” As remote from real life as quantum physics, the Chicago School was highly influential for more than 50 years. Dismal Science Thomas Carlyle, the Victorian historian, christened economics the “dismal science.” American satirist P.J. O’Rourke described economics as “an entire scientific discipline of not knowing what you’re talking about.”2 Economics focuses on how production and financial systems work or should work. Macroeconomics focuses on growth, employment, production, inflation, and monetary and government budgetary (fiscal) policy.


pages: 399 words: 116,828

When Work Disappears: The World of the New Urban Poor by William Julius Wilson

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affirmative action, citizen journalism, collective bargaining, conceptual framework, declining real wages, deindustrialization, deliberate practice, desegregation, Donald Trump, edge city, ending welfare as we know it, full employment, George Gilder, ghettoisation, glass ceiling, income inequality, informal economy, labor-force participation, labour market flexibility, low skilled workers, low-wage service sector, manufacturing employment, new economy, New Urbanism, pink-collar, race to the bottom, RAND corporation, school choice, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, upwardly mobile, urban decay, urban renewal, War on Poverty, working poor, working-age population, Works Progress Administration

The figures reported in this paragraph for the period 1980 to 1990 are based on tracts with at least 100 black residents. 18 quotation from Jargowsky: Jargowsky (1994), p. 18. 19 quotation from Massey and Denton: Massey and Denton (1993), p. 118. 20 segregation and a group’s overall rate of poverty increase: It should also be pointed out that whereas the growth of concentrated poverty occurred mainly among African-Americans in the large metropolitan areas in the 1970s, in the 1980s “the growth in concentrated poverty was substantially higher among non-Hispanic whites in smaller metropolitan areas like Louisville, Kentucky, and Tulsa, Oklahoma” (Pear [1993]). 21 The Truly Disadvantaged: Wilson (1987). 22 the Chicago School of urban sociology: Representative studies by those identified with the Chicago School include Robert E. Park and Ernest W. Burgess, The City (1925); N. Anderson, The Hobo (1923) and Men on the Move (1940); F. Thrasher, The Gang (1927); L. Wirth, The Ghetto (1928); H. W. Zorbaugh, The Gold Coast and the Slum (1929); R. E. L. Faris and W. Dunham, Mental Disorder in Urban America (1931); E. Franklin Frazier, The Negro Family in Chicago (1932). (These were all published by the University of Chicago Press.) 23 the studies of the Chicago School: I am indebted to O’Connor (1992) for much of the discussion to follow in this section. O’Connor correctly points out: Subsequent historical research on immigrants and the black urban experience have shown the inadequacies of the Chicago school assimilationist framework, whether as a description of the migrant experience or as a predictor of how black migrants would fare in the city.

The city of Chicago epitomizes these changes. Since the early twentieth century, Chicago has been a laboratory for the scientific investigation of the social, economic, and historical forces that create and perpetuate economically depressed and isolated urban communities. The most distinctive phase of this research, referred to as the Chicago School of urban sociology, was completed before 1950 and was conducted by social scientists at the University of Chicago. Immediately following World War I, the Chicago School produced several classic studies, many of which were conducted under the guidance of Robert E. Park and Ernest W. Burgess over the next three decades. These studies often combined statistical and observational analyses in making distinctive empirical and theoretical contributions to our understanding of urban processes, social problems and urban growth, and, commencing in the late 1930s, the nature of race and class subjugation in urban areas.

These studies often combined statistical and observational analyses in making distinctive empirical and theoretical contributions to our understanding of urban processes, social problems and urban growth, and, commencing in the late 1930s, the nature of race and class subjugation in urban areas. The Chicago social scientists recognized and legitimized the neighborhood—including the ghetto neighborhood—as a subject for scientific analysis. Chicago, a community of neighborhoods, was considered a laboratory from which generalizations about broader urban conditions could be made. The perspectives on urban processes that guided the Chicago School’s approach to the study of race and class have undergone subtle changes through the years. In the 1920s, Park and Burgess argued that the immigrant slums, and the social problems that characterized them, were temporary conditions on the pathway toward inevitable progress. They further maintained that blacks represented the latest group of migrants involved in the “interaction cycle” that “led from conflict to accommodation to assimilation.”


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

“Liberals,” they all called themselves, sticking to the nineteenth-century, pro-laissez-faire definition that was already being expropriated in the United States by the Left. Libertarians is what we would call them today. Friedman later wrote that the Mont Pelerin meeting was “the beginning of my active involvement with the political process.”6 He had returned to Chicago to teach the year before, as had Director. Stigler made it a decade later. Hayek also moved to Chicago, but never really joined the “Chicago school” of economics he helped spawn. Instead it was Friedman who took the leading role. He built his reputation among his peers with theoretical work, as well as his famous methodology essay. But as the 1950s progressed he increasingly focused on issues of public policy. While working in Paris for a few months in 1950 consulting for the U.S. agency that administered the Marshall Plan, Friedman wrote a memo that recommended ditching the Bretton Woods system of fixed currency exchange rates (devised in part by John Maynard Keynes, who had been almost ruined trading currencies in 1920).

Popularized and expanded upon the chart-reading Dow theory of his predecessor Charles Dow. Friedrich Hayek Austrian economist whose anti-big-government book, Road to Serfdom (1944), inspired Milton Friedman and many other libertarians, and whose 1945 article, “The Use of Knowledge in Society,” helped inspire the efficient market hypothesis. Moved to the University of Chicago in 1950 but never played a big role in the Chicago school. Co-winner of the 1974 economics Nobel. Benjamin Graham Money manager who pioneered careful analysis of stocks and bonds and then, as a part-time professor at Columbia University and coauthor, with David L. Dodd, of the classic text Security Analysis, helped reshape Wall Street after the 1929 crash. Alan Greenspan Product of Wesley Mitchell’s institutionalist school of economics and protégé of libertarian author Ayn Rand who served as chairman of the Federal Reserve Board from 1987 to 2006.

Hutton, 57 earnings estimates, 280–81 Eastman Kodak, 161 Econometric Society, 36–37 Econometrica (Cowles), 37, 42, 48, 51 Econometrica (journal), 184 “The Economic Role of the Investment Company” (Bogle), 112 Economics (Samuelson), 61, 62–63 “The Economy as an Evolving Complex System” (conference), 302 Edwards, Robert, 68 Edwards, Ward, 177 efficient market hypothesis. See also rational market hypothesis and agency costs, 162 and behavioral finance, 299–300 and the Chicago School, xiii, 101–5 and contrary evidence, 224–25 and corporate finance, 355n. 38 described, 153 and Fama, 97, 206–7 and finance, 202–6 and Friedman, 93 and Graham, 119–20 and information availability, 182 and Jensen, 107 and market anomalies, 304 and market crashes, 228, 232 and Mills, 320 and mutual funds, 125, 130, 131 origin of, 43, 73 and portfolio theory, 54–55, 57 and psychology, 201–2 resistance to, 105–7, 269–70 and risk, 139 and Samuelson, 73 and security analysis, 366n. 29 and Shiller, 196–98 and Shleifer, 247 and stock market bubbles, 315 and takeovers, 166–68 taxonomy of, 101 testing, 190, 194–95 “Efficient Markets: Theory and Evidence” (Fama), 104 Einstein, Albert, 7, 50, 66 Ellis, Charley, 130, 131 Employee Retirement Income Security Act (ERISA), 272, 290 Employee Retirement Security Act, 137–38 endogenous change, 305–6 endowment effect, 294 Engel, Louis, 97–98 Engels, Friedrich, 369n. 1 Engle, Robert, 139 Enron, 267, 283 environmental risk, 185 equilibrium theory and the Arrow-Debreu framework, 77–78 and asset pricing, 87 background of, 9–12 and behavioral finance, 301 and complexity theory, 304–6 and derivatives, 237 and intrinsic values, 193 and Keynesian economics, 35 and mathematics, 49–50 and Pareto’s Law, 349–50n. 2 and Reder, 89–90 and Samuelson, 61 equity risk premium, 141–43, 263–64 Erhard, Werner, 285, 319 Erhard Seminars Training (est), 285 event study method, 102 exchange rates, 92–93, 200, 250 executive compensation, 164–65, 274–79, 279–80, 284–85 expected utility, 51–52, 54, 75, 80, 176–77, 193 experimental economics, 188–90 Fallows, James, 365n. 8 Fama, Eugene, 323 and Alexander, 72 and Asness, 259–60 and behavioral finance, 295–96, 296–97, 298, 299–300 and the Chicago School of Economics, 96 and computing, 99–100 and the efficient market hypothesis, 101, 103–5, 193–94, 204, 206–8 and equity risk premium, 263 and experimental economics, 190 and the Journal of Financial Economics, 201 and Mandelbrot, 70, 134 and market crashes, 232 satirical depiction of, 287–88 and Shleifer, 248, 252 and stock price momentum, 209–10 and value stocks, 225 Fannie Mae, 313 Farmer, J.


pages: 327 words: 88,121

The Vanishing Neighbor: The Transformation of American Community by Marc J. Dunkelman

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Affordable Care Act / Obamacare, Albert Einstein, Berlin Wall, big-box store, blue-collar work, Bretton Woods, Broken windows theory, call centre, clean water, cuban missile crisis, dark matter, David Brooks, delayed gratification, double helix, Downton Abbey, Edward Glaeser, Fall of the Berlin Wall, Filter Bubble, Francis Fukuyama: the end of history, Gini coefficient, glass ceiling, global supply chain, global village, helicopter parent, if you build it, they will come, impulse control, income inequality, invention of movable type, Jane Jacobs, Khyber Pass, Louis Pasteur, Marshall McLuhan, Martin Wolf, McMansion, Nate Silver, Nicholas Carr, obamacare, Occupy movement, Peter Thiel, post-industrial society, Richard Florida, rolodex, Saturday Night Live, Silicon Valley, Skype, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, the medium is the message, Thomas L Friedman, Tyler Cowen: Great Stagnation, urban decay, urban planning, Walter Mischel, War on Poverty, women in the workforce, World Values Survey

The third migration saw the arrival of millions of European immigrants in the nation’s metropolises. And the fourth, which had only begun when Mumford was writing his essay, was the exodus of well-to-do city dwellers from the urban core—an evolution propelled by the pull of the single-family homes being constructed on city outskirts around the country. Mumford’s contemporaries in the world of sociology—or, at least, those who came to be known as members of the Chicago School—were largely preoccupied with the effects of that third migration, from town to city. Believing that distinct social environments shaped disparate social outcomes, they worried that the depravity of urban life might breed generations of social misfits.11 They feared that absent the warmth and comity of small-town America, the children of urban factory workers would mature without the decency required to sustain a modern, civilized society.

Believing that distinct social environments shaped disparate social outcomes, they worried that the depravity of urban life might breed generations of social misfits.11 They feared that absent the warmth and comity of small-town America, the children of urban factory workers would mature without the decency required to sustain a modern, civilized society. The American Dream might eventually be extinguished amid the crime-ridden and poverty-stricken streets of America’s overcrowded cities. By the end of the 1900s, with cities awash in the affluent crowd Richard Florida termed the “creative class” seeming safer and more prosperous, a look back might have concluded that the Chicago School’s concerns were absurd.12 But a snapshot of life back then reveals the roots of their worry. America’s big turn-of-the-century metropolises were nasty places. The nation’s new mills and factories polluted the surrounding areas. Crime was rampant—at least by the imagined standards of idyllic small-town life.13 The political issues of the day were largely understood through that prism: the push for prohibition, for example, was at heart an effort by the nation’s more staid rural population to impose a sense of decorum on raucous and unhinged masses.14 As New York University historian Thomas Bender noted in an important book published decades later, a subtler change was also at work: the growing separation between home and neighborhood.

As reported at the time, even as Genovese screamed for help in an alley, none of the thirty-eight people within earshot took the trouble to call the police.18 The horror of the attack, and the blithe decision of those nearby to turn away rather than help, suggested that inhabitants of America’s cities had been stripped of the innately human instinct to be their brother’s keeper. Genovese’s story, however apocryphal, reinforced what sociologists associated with the Chicago School had argued decades earlier: urban America was a place where few people knew your name.19 The Industrial Revolution, the sociologists concluded, hadn’t simply changed the sorts of professions driving the economy—it had disrupted the very fabric of American community. Americans had moved to cities, taken jobs on assembly lines, and begun to raise their children in the hustle and bustle of city life.


pages: 339 words: 95,988

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything by Steven D. Levitt, Stephen J. Dubner

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airport security, Broken windows theory, crack epidemic, desegregation, Exxon Valdez, feminist movement, George Akerlof, Joseph Schumpeter, mental accounting, moral hazard, More Guns, Less Crime, oil shale / tar sands, peak oil, pets.com, profit maximization, Richard Thaler, school choice, sensible shoes, Steven Pinker, Ted Kaczynski, The Chicago School, The Market for Lemons, Thorstein Veblen, War on Poverty

A behavioral scientist could hardly design a better experiment in his laboratory. Just as the scientist might randomly assign one mouse to a treatment group and another to a control group, the Chicago school board effectively did the same. Imagine two students, statistically identical, each of whom wants to attend a new, better school. Thanks to how the ball bounces in the hopper, one student goes to the new school and the other stays behind. Now imagine multiplying those students by the thousands. The result is a natural experiment on a grand scale. This was hardly the goal in the mind of the Chicago school officials who conceived the lottery. But when viewed in this way, the lottery offers a wonderful means of measuring just how much school choice—or, really, a better school—truly matters. So what do the data reveal?

Remember Terry Malloy, the tormented former boxer played by Marlon Brando in On the Waterfront? As Malloy saw it, all his troubles stemmed from the one fight in which he took a dive. Otherwise, he could have had class; he could have been a contender. If cheating to lose is sport’s premier sin, and if sumo wrestling is the premier sport of a great nation, cheating to lose couldn’t possibly exist in sumo. Could it? Once again, the data can tell the story. As with the Chicago school tests, the data set under consideration here is surpassingly large: the results from nearly every official match among the top rank of Japanese sumo wrestlers between January 1989 and January 2000, a total of 32,000 bouts fought by 281 different wrestlers. The incentive scheme that rules sumo is intricate and extraordinarily powerful. Each wrestler maintains a ranking that affects every slice of his life: how much money he makes, how large an entourage he carries, how much he gets to eat, sleep, and otherwise take advantage of his success.

“Cheating classrooms will systematically differ from other classrooms along a number of dimensions,” he and his co-author, Brian Jacob of the Kennedy School of Government, wrote in “Catching Cheating Teachers.” “For instance, students in cheating classrooms are likely to experience unusually large test-score gains in the year of the cheating, followed by unusually small gains or even declines in the following year when the boost attributable to cheating disappears.” Levitt used test-score data from the Chicago schools that had long been available to other researchers. There were a number of ways, he realized, that a teacher could cheat. If she were particularly brazen (and stupid), she might give students the correct answers. Or, after the test, she might actually erase students’ wrong answers and fill in correct ones. A sophisticated cheater would be careful to avoid conspicuous blocks of identical answers.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

., p. 33. 12 IT EMPHASIZED, AS SIMONS PUT IT: Henry Simons private papers, cited by Rob Van Horn and Philip Mirowski, “The Rise of the Chicago School of Economics and the Birth of Neoliberalism,” in The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective, ed. Philip Mirowski and Dieter Plehwe (Cambridge, Mass.: Harvard University Press, 2009), p. 145. 13 THIS APPROACH IN A TIME: H. L. Miller, “On the Chicago School of Economics,” Journal of Political Economy 70 (February 1962): 64–69. 14 “MY TEACHERS REGARDED THE DEPRESSION”: Milton Friedman, “Comments on the Critics,” Journal of Political Economy (September-October 1972): 906–50. 15 “SIMONS FOR EXAMPLE DID NOT EQUATE”: Miller “On the Chicago School of Economics,” p. 70. 16 “ONCE A DEFLATION HAS GOTTEN UNDER WAY”: Henry Simons, Personal Income and Taxation: The Definition of Income as a Problem of Fiscal Policy (Chicago: University of Chicago Press, 1938), p. 222, cited by Esteban Pérez Caldentey and Matías Vernengo, “Fiscal Policy for the Global Economic Crisis,” Challenge, May-June 2001. 17 HE WAS, IN FACT, A MILD PROPONENT: Author interview with Milton Friedman, November 2003; Lanny Ebenstein, Milton Friedman: A Biography (London: Macmillan Palgrave, 2007). 18 FEW INVITATIONS CAME HIS WAY: Friedman did get an offer from the University of Wisconsin, but became embroiled in what he said was an anti-Semitic battle between the economics department and the business school, and he had to leave.

(New York: Foundation for Economic Education, 1946). 20 ONE CONSERVATIVE STAFFER: Van Horn and Mirowski, “The Rise of the Chicago School of Economics and the Birth of Neoliberalism,” p. 173n58. 21 THERE, PARTLY UNDER THE INFLUENCE: Obituary on his death, 2004, University of Chicago Press Office, http://eh.net/pipermail/hes/2004-September/002496.html. 22 THE FUND ALSO HELPED FINANCE: In the Foreword to Capitalism and Freedom, Friedman acknowledges the Volker Fund’s financing of his book, which many considered the American version of The Road to Serfdom, despite obvious differences. 23 HAYEK WROTE THE PROPOSAL: From Theodore Schultz (a Chicago economist) papers, cited by Van Horn and Mirowski, “The Rise of the Chicago School of Economics and the Birth of Neoliberalism,” p. 152. 24 HE HAD WRITTEN IN 1948: Ibid. See also J.

According to Friedman, the Chicago economists also believed that the Depression was the consequence of mistaken government policies, not the financial speculation of the 1920s or any other inherent weakness of free markets. “My teachers regarded the depression as largely the product of misguided policy,” Friedman wrote. “They blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline.” But what became known as the Chicago School was originally not, contrary to conventional wisdom, as pure a free market institution as it became when Friedman was its leading member in the 1950s. “Simons for example did not equate the ideal market with the actual market in this country,” wrote one economist. The older guard also believed that short-term government spending could be necessary in some circumstances to support a falling economy and that monetary policy itself was inadequate at times—ideas that were anathema to Friedman.


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, means of production, microcredit, minimum wage unemployment, open economy, paradox of thrift, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies

Paul's first class in economics was taught by Aaron Director, who was perhaps the most libertarian among the faculty and who later became Milton Friedman's brother-in-law. Both Friedman and George Stigler were graduate students at the time. Director's laissez-faire philosophy failed to take in the youthful reformist Samuelson, who enjoyed being an intellectual heretic in a conservative institution and who was influenced by a father known as a "moderate socialist." Moreover, during the depression, most of the leaders of the Chicago school advocated deficit spending and other government activist policies as temporary measures. Samuelson did inherit one concept from Chicago that he carried with him until he encountered Keynes—monetarism. He called himself a "jackass" for having been taken in (Samuelson 1968, 1). Alvin Hansen Switches Sides to Become the "American Keynes" After Chicago, Samuelson immediately went to Harvard, where he witnessed an amazing transition.

During the heyday of Keynesianism, which lasted into the late 1960s, too many economists were fearful that thrifty consumers might damage the economy, that progressive taxation and federal deficits could do no harm, that monetary policy didn't matter, and that centrally planned economies such as the Soviet Union could grow faster than the free West. The spirit of Keynes, and even Marx, dominated the political and intellectual atmosphere. Milton Friedman Leads a Monetary Counterrevolution However, by the early 1960s, a counterrevolution had begun that went a long way toward restoring the virtues of free markets and classical economics. The primary force behind this revolt against Keynesianism was the Chicago school of economics, led by Milton Friedman (1912-2006). His fierce, combative style and ideological roots were ideally suited for the task of taking on the Keynesians. Moreover, he had impeccable credentials in technical economics to command respect from the profession. Friedman earned his Ph.D. in economics from Columbia University; he won the highly prestigious John Bates Clark Medal two years after Paul Samuelson won it; and he taught economics at one of the premier institutions in the country, the University of Chicago.

He declares that market imperfections and market failures are so pervasive and so serious that the market is always inefficient and requires government correction. Imperfect information exists in labor, products, money, trade, and capital markets.1 Serious unemployment 1. Neo-Keynesians have contributed extensively to the new field of "behavioral economics," which questions the efficiency/rational expectations model of the Chicago school, and proposes ways to counter the tendency of individuals to make financial mistakes, such as undersaving, over-consuming, and undeipeiforming the stock market averages. See, for example, Richard Thaler (2004) andRobert Shiller (2005). However, not all behavioral economists are Keynesian. See Jeremy Siegel (2005). could exist even without minimum wage laws or labor unions, he contends. During the Great Depression, "had there been more wage and price flexibility, matters might have been even worse," he states (2001, 477).


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

Nothing in this book should be taken as an argument for returning to the land or reconstituting the Soviets’ Gosplan. But to claim that free markets always generate good outcomes is to fall victim to one of three illusions I identify: the illusion of harmony. In Part I, I trace the story of what I call utopian economics, taking it from Adam Smith to Alan Greenspan. Rather than confining myself to expounding the arguments of Friedrich Hayek, Milton Friedman, and their fellow members of the “Chicago School,” I have also included an account of the formal theory of the free market, which economists refer to as general equilibrium theory. Friedman’s brand of utopian economics is much better known, but it is the mathematical exposition, associated with names like Léon Walras, Vilfredo Pareto, and Kenneth Arrow, that explains the respect, nay, awe with which many professional economists view the free market.

In such an environment, free market economists were relegated to the role of preachers in an obscure sect. They sustained themselves by offering eulogies up to Smith and the invisible hand. The two most important of these evangelists were Friedrich Hayek, a well-bred Austrian who was born in Vienna in 1899, and Milton Friedman, a voluble New Yorker who was born in Brooklyn in 1912. In the late 1940s, both Hayek and Friedman moved to the University of Chicago, where they helped to create the “Chicago School” of economics. Friedman, who died in 2006, remains a household name, but even among economists, Hayek, who died in 1992, is a much less well-known figure. When I began studying economics at Oxford during the early eighties, Hayek was widely seen as a right-wing nut. True, he had received the Nobel Memorial Prize in 1974, but that was viewed within the economics profession as a political sop, with Hayek’s name added to balance that of his co-winner, Gunnar Myrdal, a left-wing Swedish economist.

They emanate from the second law of thermodynamics, commonly referred to as “time’s arrow.” Since time doesn’t run backward, the future is unknown and businesses, investors, and consumers are compelled to make decisions on the basis of best guesses about what might happen. Sometimes these guesses turn out to be fairly accurate. Often, they don’t, and when this happens resources tend to get misallocated. (In adopting the rational expectations hypothesis, the members of the Chicago School sidestepped this problem.) Having raised the issues of uncertainty and information, which pose fundamental problems for any economic theory, Bator turned to areas that are more amenable to traditional analysis. Even in a world of perfect foresight, he argued, there would be at least three other sources of market failure. One is monopoly or oligopoly power. In the free market model, each industry consists of large numbers of competing firms, none of which can capture more than a small share of the market.


pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

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airport security, banking crisis, Bretton Woods, British Empire, collective bargaining, complexity theory, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, if you build it, they will come, Isaac Newton, Joseph Schumpeter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, price mechanism, pushing on a string, road to serfdom, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

The Pèlerinos who ascended the funicular railway to the Hôtel du Parc, a resort more used to hikers than intellectuals, were a disparate group brought together by a shared sense of righteous isolation and noble persecution. As the historian George H. Nash17 put it, “The participants, high in the Swiss Alps, were only too conscious that they were outnumbered and without apparent influence on policymakers in the Western world.”18 Among those present were Mises; Robbins; Frank Knight; George Stigler,19 the Chicago School economist; Fritz Machlup, the Austrian School economist who fled to America in 1933; John Jewkes,20 the British antiplanning economist; Karl Popper,21 the LSE scientific philosopher; Henry Hazlitt, whose laudatory review of The Road to Serfdom in the The New York Times helped ensure the book’s success in America; William Rappard, head of the École des Hautes Études in Geneva; Wilhelm Röpke, of Geneva, who was to reform the German currency; and Veronica Wedgwood,22 the Oxford-educated English Civil War historian who wrote pieces for Time and Tide.

Friedman’s championing of Hayek’s libertarian approach to the economy and politics ignored the Austrian “stages of production” notions in favor of government regulation of the supply of money, a process that the Austrians thought anathema. And while Hayek believed that the free market held a monopoly of virtue, Chicago scholars such as Frank Knight believed it could be equally as inefficient as government intervention. However, the fact that both the Austrian and the Chicago School believe that prices hold the key to understanding the economy, and that the free market is preferable to intervention, has meant that the competing traditions are commonly deemed to be synonymous. Friedman’s breakthrough in economics, determining the link between unnecessary constrictions in the money supply and recessions that follow, showed how profoundly Chicago’s economists could differ.

Unlike Hayek and Mises, who thought economic activity too complex to quantify and that averages were misleading indicators of how individuals set prices, Friedman’s research took as a given the Keynesian notion of observing the economy as a whole and using averages to determine the cause and effect of economic changes. While careful never to criticize Hayek’s Austrian School notions too harshly, Friedman remained unconvinced of their merit. Hayek’s venture into doomsday prognostication in The Road to Serfdom was also cited as evidence that he lacked the intellectual rigor expected at the Chicago School. According to John Nef, chairman of Chicago’s Committee on Social Thought, some Chicago economists believed The Road to Serfdom “too popular a work for a respectable scholar to perpetrate. It was all right to have him at Chicago so long as he was not associated with the economists.”42 In the fall of 1950, at the suggestion of Nef, Hayek became professor of social and moral science in the Committee on Social Thought, a chair funded in part by the Volcker fund.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

Real business-cycle theory dismisses market imperfections and assumes "rational expectations" -consumers and businesses behave as if they had access to all available knowledge and infinite calculating power. Real business-cycle theory takes the assumptions of rationality in business decisions to the same extremes as Becker's description of family life. 14 The Chicago School also recognizes the merits of the market system as a pluralist process of experiment and discovery. Some of the most compelling formulations of the arguments of chapters 9 and 10 have been presented by Chicago economists such as F. H. Knight and more recently by Almar Alchian. 15 But the much stronger claim of the Chicago School is that competitive markets have efficiency properties unattainable under any other form of economic organization. Indeed this is now the belief of many mainstream economists. The best-selling economics textbook by Gregory Mankiw-a mainstream economist, but currently President Bush's principal economic adviser-sets out the claims clearly: Culture and Prosperity { 201 } These observations lead to two insights about market outcomes: free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay. free markets allocate the demand for goods to the sellers who can produce them at least cost.

Problems of incentive compatibility, and the absence of the collective knowledge created by the trials and errors of disciplined pluralism, would inevitably lead to failure. Hayek, von Mises, and some other Central European economists of the early to mid twentieth century are sometimes described as "the Austrian school." 6 Hayek was actually an isolated figure, and the Nazi destruction of the intellectual life of Central Europe prevented the development of any continuing tradition. More recently, the conservative baton has transferred to Chicago. The Chicago School ••••••••••••••••••••••••••••••••••••• Almost from its foundation by John D. Rockefeller, the University of Chicago was a center of conservative economic thought? Gary Beckern encapsulates that philosophy: "The combined assumptions of maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach." 8 As well as Becker and Friedman, Chicago figures such as George Stiglern and Richard Posner have played an active part in policy debates.

It became clear that Wolfensohn's continued support for Stiglitz might be at the cost of his own job, and in 1999 Stiglitz returned to research and teaching at Stanford University. In 2001, Stiglitz, along with George Akerlof and Michael Spence, was awarded the Nobel Prize for work on markets and imperfect information. That award was a formal recognition ofhow far modern economics had moved from the simplified theoretical framework of Arrow-Debreu and the simplified policy prescriptions of the Chicago School. Stiglitz became an increasingly public and controversial figure. I return to this controversy in chapter 28. In the remaining chapters of this part of the book, I review successively various assumptions explicit or implicit in the ArrowDebreu framework: What happens if individuals are not self-regarding utility maximizers? (chapter 18) What happens if information about complex products is imperfect?

Undoing the Demos: Neoliberalism's Stealth Revolution by Wendy Brown

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Affordable Care Act / Obamacare, bitcoin, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, corporate governance, credit crunch, crowdsourcing, David Brooks, Food sovereignty, haute couture, immigration reform, income inequality, invisible hand, labor-force participation, late capitalism, means of production, new economy, obamacare, occupational segregation, Ronald Reagan, shareholder value, sharing economy, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trickle-down economics, Washington Consensus, Wolfgang Streeck, young professional

There was, first, the Ordoliberal or Freiburg School, comprising sociologists, economists, and philosophers, which emerged in Germany and Austria in the mid-1930s and gained serious traction at the close of World War II. On the other side of the Atlantic, the Chicago School of economics emerged in the 1950s. Foucault identifies F. A. Hayek as a critical intellectual link between the two schools and chief inspiration of “American anarcho-capitalism”; Hayek was raised on Ordoliberalism, but after spending time in the United States in the 1950s was eventually appointed at the University of Freiburg in 1962, “thus closing the circle.”26 Foucault devotes much of lecture 5 to the major differences between the two schools. He notes that the Ordo School was reacting C h a r t in g N eo l ib e r a l P o l i t i c a l R at i o n a l i t y   59 to Nazism and fascism, while the Chicago School was reacting to New Deal Keynesianism, and he elaborates their distinctive intellectual positions on the nature of the economy, state, and freedom.

He notes that the Ordo School was reacting C h a r t in g N eo l ib e r a l P o l i t i c a l R at i o n a l i t y   59 to Nazism and fascism, while the Chicago School was reacting to New Deal Keynesianism, and he elaborates their distinctive intellectual positions on the nature of the economy, state, and freedom. Among the most important of these is the Ordoliberals’ deep appreciation of the state’s role in facilitating competition and the Chicago School’s development of the theory of human capital. The Ordoliberals, according to Foucault, also provide more latitude for state governance of the social, for protecting “warm moral and cultural values” antithetical to the “cold mechanism of competition.”27 (Ironically, this makes for greater conviviality between neoliberalism and neoconservatism in its European variant, yet it is in America that neoconservatism and neoliberalism became so thickly entwined in the 1980s.) 28 Foucault describes American neoliberalism as “more complete and exhaustive” in its promulgation of competition for every sphere, its unlimited extension of the market to every endeavor, activity and problem. 29 There is much more separating the European and American schools of neoliberalism, but given the extent to which these separate intellectual inf luences have now intersected and even fused — for example, the Ordo emphasis on extending the formal rationality of the market and the Chicago emphasis on extending its concrete mechanisms have come together in a contemporary governing rationality that features both — I will not on dwell further on these differences.

But these changes mark something apart from the political rationality of neoliberalism. Political rationality does not originate or emanate from the state, although it circulates through the state, organizes it, and conditions its actions. Political rationality also differs from a normative form of reason, although the former emanates from and is suffused with the latter. Neoliberalism might have remained only a form of reason generated by Ordoliberalism and the Chicago School, without ever becoming a political rationality. Indeed, this seemed its likely fate at midcentury, although Foucault (and Daniel Stedman Jones, in his history of neoliberal thought) insist that postwar Germany was already organized by it.5 Political rationality could be said to signify the becoming actual of a specific normative form of reason; it designates such a form as both a historical force generating and relating specific kinds of subject, society, and state and as establishing an order of truth by which conduct is both governed and measured.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

They lost these debates in academic and policy circles partly for methodological reasons – their rejection of the growing role of mathematics in economics – but far more for political ones – the opposition to any policy response to the greatest crisis that had ever befallen capitalist economies, other than letting it burn itself out. Paradoxically, their defeat in academe liberated Austrian economics. It has become politically influential, principally in the US, where Austrian economics has become a favourite economic ideology of libertarians and so of parts of the modern Republican Party: former Congressman Ron Paul is a devotee. The reason for this appeal is that, unlike the Chicago School, in which the late Milton Friedman was the dominant post-war figure, the Austrian economists see no case for a government role in managing the market economy, including even the money supply. Many contemporary ‘Austrians’ favour a return to the gold standard. Naturally, they are opposed to every element of the new (or old) orthodoxy on monetary and financial policy. They are purist adherents of laissez-faire.

Indeed, we must assume at least a degree of failure. Henry Simons and the Chicago Plan Mises concluded that the ability of private institutions to create debt-backed money out of thin air, as a by-product of their lending (as discussed above), needed to be brought under control, via 100 per cent reserve banking – that is, a system in which deposits are backed by central-bank reserves, one to one. The Chicago School – another group of free-market economists – came to the same conclusion in the 1930s, for the same reason: they concluded that the bank-based monetary system (which we still have today) was itself unstable and so destabilized the economy. The economists involved were hugely distinguished and respected: Frank Knight (1885–1972), who pioneered the crucial distinction between calculable risk and uncertainty; Henry Simons (1899–1946), author of the most complete version of the Chicago monetary plan; Irving Fisher (1867–1947), the most famous pre-Second World War American economist; and, after the war, Milton Friedman (1912–2006).40 Again, as with the Austrians, these free-market economists concluded that the ability to create credit-backed money had to be ended if the market economy was to be protected from ruinous crises.

Republicans should love that! To this should be added savings on government-debt interest (on the assumption that these would not be interest-earning deposits) and the earnings on any money lent to the private sector. Also dramatic would be the implications for the operation of monetary policy. The central bank would have direct control over the money supply. It could be told to follow a strict rule, as the Chicago School proposed, which would include a precise inflation target. The central bank could set any interest rate it liked, including negative rates, up to the point that people preferred to hold cash instead of deposits. The stabilization of the economy would become a relatively simple challenge because the main obstacle to it would have been eliminated. Not surprisingly, the opposition of the banking industry forced abandonment of the Chicago Plan in the 1930s.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund

It was, after all, the home of Milton Friedman, the economist known perhaps more than any other for the “markets know best” argument. Educated at both Chicago and Columbia, Friedman gained exposure to the McNamara-style systems analysis via a stint at the US Navy–sponsored Statistical Research Group (which operated at Columbia during the war). Two other young economists he worked with there, George Stigler and W. Allen Wallis, also went on to become professors at Chicago. Together they developed what became known as the Chicago School of economics. Its antigovernment, antiregulation, fanatically pro-market ideology has dominated American economics and business education ever since. With the support of major business foundations like Ford, Chicago began pulling in the biggest economic names in the field. The Walgreen Foundation, which had been a longtime supporter of the school, shifted its financial grants to the business program.

The result was a very finance-driven approach to business education, in which the central questions were no longer about companies, but about markets—a way of thinking that one recent account describes as “free-market-oriented and interested only in the predictive power of theory, irrespective of the realism of assumptions.”32 This new approach may have been more theoretical than practical, but it was quickly embraced and became de rigueur for anyone who wanted a career in corporate America or the finance industry. MAXIMIZE VALUE—BUT FOR WHOM? The key assumption of the Chicago School, one that Milton Friedman himself upheld devoutly, was that the purpose of the corporation was to maximize financial value. As Friedman famously said back in 1970, “the social responsibility of business is to increase its profits.”33 This went hand in hand with another idea, which was that the share price of a firm always perfectly reflected all known information, and thus stock prices were the best overall measure of corporate value.

Despite the increase in borrowing during the boom days before 2008, and the collapse in borrowing during the recession, corporations invested at exactly the same rate in the five years after the meltdown as they did in the few years preceding it: around 10 cents of each borrowed dollar. The other 90 cents (which varied in dollar amounts depending on credit and growth conditions) primarily went to shareholder payouts.28 That means that far from funding the economy that you and I live and work in, stock markets now basically fund payouts to the wealthy. This “shareholder revolution,” based on the Chicago School notion that maximizing shareholder value is the purpose of corporate America (as covered in chapter 3), is the single most important reason why high corporate profits and unprecedented cash hoards have failed to translate into jobs, wage growth, and innovation. All of this raises a profound question: What is a company for? We thought that companies, like banks themselves, were supposed to be entities that generated wealth broadly, by allocating capital to productive purposes—investing in people, factories, new ideas, and businesses.


pages: 357 words: 95,986

Inventing the Future: Postcapitalism and a World Without Work by Nick Srnicek, Alex Williams

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3D printing, additive manufacturing, air freight, algorithmic trading, anti-work, back-to-the-land, banking crisis, battle of ideas, blockchain, Bretton Woods, call centre, capital controls, carbon footprint, Cass Sunstein, centre right, collective bargaining, crowdsourcing, cryptocurrency, David Graeber, decarbonisation, deindustrialization, deskilling, Doha Development Round, Elon Musk, Erik Brynjolfsson, Ferguson, Missouri, financial independence, food miles, Francis Fukuyama: the end of history, full employment, future of work, gender pay gap, housing crisis, income inequality, industrial robot, informal economy, intermodal, Internet Archive, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, late capitalism, low skilled workers, manufacturing employment, market design, Martin Wolf, means of production, minimum wage unemployment, Mont Pelerin Society, neoliberal agenda, New Urbanism, Occupy movement, oil shale / tar sands, oil shock, patent troll, pattern recognition, post scarcity, postnationalism / post nation state, precariat, price stability, profit motive, quantitative easing, reshoring, Richard Florida, rising living standards, road to serfdom, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Slavoj Žižek, social web, stakhanovite, Steve Jobs, surplus humans, the built environment, The Chicago School, Tyler Cowen: Great Stagnation, universal basic income, wages for housework, We are the 99%, women in the workforce, working poor, working-age population

Neoliberalism sets the agenda for what is realistic, necessary and possible. While the economic crisis of 2008 has upset the blind belief in neoliberalism, it nevertheless remains an entrenched part of our worldview – so much so that it is difficult even for its critics to picture coherent alternatives. Yet this ideology of neoliberalism did not emerge fully formed from the minds of Milton Friedman or Friedrich Hayek, or even the Chicago School, and its global hegemony did not arise inevitably from capitalism’s logic. In its origins, neoliberalism was a fringe theory. Its adherents found it difficult to gain employment, were often untenured, and were mocked by the Keynesian mainstream.1 Neoliberalism was far from being the world-dominating ideology it would eventually become. The question this chapter will focus on is: How did a small band of neoliberals manage to reshape the world so radically?

A chance meeting with a Swiss businessman in 1945 gave Hayek the financial means to put his ideas into action.17 Thus was born the Mont Pelerin Society (MPS): a closed intellectual network that provided the basic ideological infrastructure for neoliberalism to ferment.18 It is no exaggeration to say that almost all of the important figures in the postwar creation of neoliberalism were in attendance at its first meeting in 1947, including the Austrian economists, the UK liberals, the Chicago School, the German ordoliberals and a French contingent.19 From its beginnings, the MPS was consciously focused on changing political common sense and sought to develop a liberal utopia.20 It explicitly understood that this intellectual framework would then be actively filtered down through think tanks, universities and policy documents, in order to institutionalise and eventually monopolise the ideological terrain.21 In a letter to those he had invited, Hayek wrote that the purpose of the MPS was to enlist the support of the best minds in formulating a programme which has a chance of gaining general support.

Businesses funded projects to turn his work into popular television shows, taking the media terrain by storm.42 These technological tools were the essential means he used to diffuse his economic vision to policymakers and the public. Newspapers such as the Wall Street Journal, Daily Telegraph and Financial Times paralleled this effort, shaping the public’s perspective by invoking neoliberal policies at every opportunity.43 Business schools and management consultancies also began to adopt and spread neoliberal ideas about corporate forms, and the Chicago School became a global beacon of neoliberal thought.44 Such institutions were crucial for the spread of neoliberal hegemony, since they were often the training grounds of the global elite.45 Individuals would come to these neoliberal US schools and then return to their own countries with the neoliberal ideology inculcated in them. By the 1970s, therefore, a full-spectrum infrastructure had developed to promulgate neoliberal ideas.


pages: 452 words: 110,488

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead by David Callahan

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1960s counterculture, affirmative action, corporate governance, David Brooks, deindustrialization, East Village, forensic accounting, full employment, game design, greed is good, high batting average, housing crisis, illegal immigration, income inequality, job satisfaction, market fundamentalism, McMansion, microcredit, moral hazard, new economy, New Urbanism, offshore financial centre, oil shock, Plutocrats, plutocrats, postindustrial economy, profit maximization, profit motive, RAND corporation, Ray Oldenburg, rolodex, Ronald Reagan, shareholder value, Silicon Valley, Steve Jobs, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, Thorstein Veblen, War on Poverty, winner-take-all economy, World Values Survey, young professional

In the field of economics, a new generation of free-market scholars launched an assault on prevailing liberal orthodoxies about the need for active government intervention in the economy. These attacks were spearheaded by the Chicago School of economics, so named because its leading luminaries—including Friedrich von Hayek and Milton Friedman—taught at the University of Chicago. These economists argued that market solutions would create more individual opportunity than government approaches in nearly every case—from broadly promoting the prosperity of the economy to ensuring affordable housing and health care for all. By the 1980s, the ideas of the Chicago School—and students and disciples—had fanned out across the entire discipline of economics.11 Free-market philosophy also found fertile ground in the battles over social policy. Conservatives took aim at the safety net that had appeared so belatedly in American society.

On Webster Hubbell's problems and rationales, see Ellen Joan Pollock, "Hubbell Receives 21-Month Prison Sentence for Bilking His Law Firm and Clients," Wall Street Journal, 29 June 1995, B4; and Adam Liptak, "Stop the Clock? Critics Call the Billable Hour a Legal Fiction," New York Times, 29 October 2002, G7. [back] 10. Schiltz, "On Being a Happy, Healthy, and Ethical Member of an Unhappy, Unhealthy, and Unethical Profession," 807. [back] 11. For a good summary of the Chicago School's rise, see Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle for the World Economy (New York: Simon & Schuster, 1998/2002), 123–31. [back] 12. Charles Murray, Losing Ground: American Social Policy, 1950–1980 (New York: Basic Books, 1995). See also Myron Magnet, The Dream and the Nightmare: The Sixties Legacy to the Underclass (New York: William Morrow, 1993). [back] 13.


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The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton by Colin Read

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Albert Einstein, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, discovery of penicillin, discrete time, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, floating exchange rates, full employment, Henri Poincaré, implied volatility, index fund, Isaac Newton, John von Neumann, Joseph Schumpeter, Long Term Capital Management, Louis Bachelier, margin call, market clearing, martingale, means of production, moral hazard, naked short selling, price stability, principal–agent problem, quantitative trading / quantitative finance, RAND corporation, random walk, risk tolerance, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, stochastic process, The Chicago School, the scientific method, too big to fail, transaction costs, tulip mania, Works Progress Administration, yield curve

Remarkably, given that Friedman had a well-deserved reputation as a ruthless and convincing debater, Black held his own, even if he brought what he knew, from Cambridge’s Keynesian roots and Modigliani’s influences, into the epicenter of anti-Keynesian theory. It must have been a remarkable spectacle to watch the two titans argue their perspectives. Despite or perhaps because of his notorious debates with Friedman, who was by then the Chicago School patriarch, Black thrived and managed to extend his stay. Black also encouraged Scholes to join him, which Scholes did in 1973. However, his shift from the three-piece suits of financial consulting to the elbow-patched life of a university professor did not sit as well with Black’s wife, Mimi. Frustrated and pregnant, she moved back to Cambridge without him. A year later, he and Scholes both returned to Cambridge with an invitation of permanent positions for both of them at the Sloan School at MIT.

In his treatment, interest rates can change, and the equation also permitted dividends, as a percentage of the stock price. But, while Merton’s derivation is the most elegant and general of the three approaches, and while he was encouraged to publish his results immediately, he declined to do so until Black and Scholes had successfully published their derivation. Assumptions for Merton’s derivation Merton’s intuition took a leaf out of the book of the Chicago School. In the absence of transaction costs, the correct combination of any two of the following instruments should be able to predict the third if arbitrage exists: the risk-free rate of return, a stock price, an option written on the stock price. In this case, his dynamic (continuous) trading strategy using just the stock and the risk-free rate of return should price the option as predicted by the Black-Scholes equation in the absence of arbitrage opportunities.


pages: 91 words: 26,009

Capitalism: A Ghost Story by Arundhati Roy

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Bretton Woods, corporate governance, feminist movement, Frank Gehry, ghettoisation, Howard Zinn, informal economy, land reform, Mahatma Gandhi, means of production, megacity, microcredit, neoliberal agenda, Occupy movement, RAND corporation, reserve currency, special economic zone, spectrum auction, stem cell, The Chicago School, Washington Consensus, WikiLeaks

Hindu, February 25, 2012 http://www.thehindu.com/news/national/small -loans-add-up-to-lethal-debts/article2932670.ece. 44. David Ransom, “Ford Country: Building an Elite in Indonesia,” in The Trojan Horse: A Radical Look at Foreign Aid, ed. Steve Weissman with members of the Pacific Studies Center and the North American Congress on Latin America (Palo Alto, CA: Ramparts, 1975), 93–116. 45. Juan Gabriel Valdés, Pinochet’s Economists: The Chicago School of Economics in Chile (New York: Cambridge University Press, 1995). 46. Rajander Singh Negi, “Magsaysay Award: Asian Nobel, Not So Noble,” Economic and Political Weekly 43, no. 34 (2008): 14–16. 47. Narayan Lakshman,“World Bank Needs Anti-graft Policies,” Hindu, September 1, 2011, http://www.thehindu.com/todays-paper/tp -international/world-bank-needs-antigraft-policies/article2416346.ece.


pages: 444 words: 138,781

Evicted: Poverty and Profit in the American City by Matthew Desmond

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affirmative action, Cass Sunstein, crack epidemic, Credit Default Swap, deindustrialization, desegregation, dumpster diving, ending welfare as we know it, ghettoisation, glass ceiling, housing crisis, informal economy, Jane Jacobs, late fees, New Urbanism, payday loans, price discrimination, profit motive, rent control, statistical model, superstar cities, The Chicago School, The Death and Life of Great American Cities, thinkpad, upwardly mobile, working poor, young professional

McKenzie would explain residential sorting as being steered by “a selective or magnetic force [emanating from various neighborhoods] attracting to itself appropriate population elements and repelling incongruous units, thus making for biological and cultural subdivisions of a city’s population.” R. D. McKenzie, “The Ecological Approach to the Study of the Human Community,” in Park, Burgess, and McKenzie, eds., The City, 63–79, 78. The most influential perspective on residential mobility—the residential attainment model—is deeply influenced by the Chicago School’s vision of mobility and neighborhood sorting. But those working within this tradition substitute the Chicago School’s emphasis on sentimentality and morality with one focused on instrumentality and economic advancement. The residential attainment model perceives mobility as a result of social climbing and views the city not as a patchwork of isolated moral worlds but as a geography of advantage and disadvantage. According to this perspective, when people move, they try to move up, parlaying economic capital for residential capital.

If it differs from her mother’s, he infers the applicant is divorced or remarried, a plus. If the surnames match, he considers the applicant a single mother by a single mother—and usually turns her down. 9. This is a very different way of understanding how certain people get sorted into certain neighborhoods, compared to conventional perspectives—one that pays attention to the people doing the sorting: the landlords. For the Chicago School, the city was a space of sentiments and its pattern of physical and social segregation primarily the result of tens of thousands of individual decisions based on where one best fits. “In the long run,” wrote Robert Park, “every individual finds somewhere among the varied manifestations of city life the sort of environment in which he expands or feels at ease.” See Robert Park, “The City: Suggestions for the Investigation of Human Behavior in the Urban Environment,” in The City, eds.


pages: 309 words: 86,909

The Spirit Level: Why Greater Equality Makes Societies Stronger by Richard Wilkinson; Kate Pickett

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Berlin Wall, clean water, Diane Coyle, epigenetics, experimental economics, experimental subject, Fall of the Berlin Wall, full employment, germ theory of disease, Gini coefficient, impulse control, income inequality, knowledge economy, labor-force participation, land reform, Louis Pasteur, meta analysis, meta-analysis, Milgram experiment, offshore financial centre, phenotype, Plutocrats, plutocrats, profit maximization, profit motive, Ralph Waldo Emerson, statistical model, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, ultimatum game, upwardly mobile, World Values Survey

Environmental influences on rates of violence have been Figure 10.4 There is more conflict between children in more unequal countries (based on percentages reporting fighting, bullying and finding peers not kind and helpful). Israel recognized for a long time. In the 1940s, sociologists of the Chicago School described how some neighbourhoods had persistent reputations for violence over the years – different populations moved in and out but the same poor neighbourhoods remained dangerous, whoever was living in them.223 In Chicago, neighbourhoods are often identified with a particular ethnic group. So a neighbourhood which might once have been an enclave of Irish immigrants and their descendants later becomes a Polish community, and later still a Latino neighbourhood. What the Chicago school sociologists drew attention to was the persistent effect of deprivation and poverty in poor neighbourhoods – on whoever lived there. In neighbourhoods where people can’t trust one another, where there are high levels of fear and groups of youths hanging around on street corners, neighbours won’t intervene for the common good – they feel helpless in the face of public disturbance, drug dealing, prostitution, graffiti and litter.


pages: 338 words: 106,936

The Physics of Wall Street: A Brief History of Predicting the Unpredictable by James Owen Weatherall

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Albert Einstein, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Asian financial crisis, bank run, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, butterfly effect, capital asset pricing model, Carmen Reinhart, Claude Shannon: information theory, collateralized debt obligation, collective bargaining, dark matter, Edward Lorenz: Chaos theory, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial innovation, George Akerlof, Gerolamo Cardano, Henri Poincaré, invisible hand, Isaac Newton, iterative process, John Nash: game theory, Kenneth Rogoff, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, martingale, new economy, Paul Lévy, prediction markets, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, statistical arbitrage, statistical model, stochastic process, The Chicago School, The Myth of the Rational Market, tulip mania, V2 rocket, volatility smile

For instance, one consequence of the hypothesis is that there can’t be any speculative bubbles, because a bubble can occur only if the market price for something becomes unmoored from the thing’s actual value. Anyone who remembers the dot-com boom and bust in the late nineties/early 2000s, or anyone who has tried to sell a house since about 2006, knows that prices don’t behave as rationally as the Chicago School would have us believe. Indeed, most of the day-to-day traders I’ve spoken with find the idea laughable. But even if markets aren’t always efficient, as they surely aren’t, and even if sometimes prices get quite far out of whack with the values of the goods being traded, as they surely do, the efficient market hypothesis offers a foothold for anyone trying to figure out how markets work.

But in the 1960s — indeed, for much of the practice’s history — it was viewed as dangerous at best, and perhaps even depraved or unpatriotic. The short seller was perceived as a blatant speculator, gambling on market moves rather than investing capital to spur growth. Worse, he had the nerve to take a financial interest in bad news. This struck many investors as déclassé. Views on short selling changed in the 1970s and 1980s, in part because of Thorp’s and others’ work, and in part because of the rise of the Chicago School of economics. As those economists argued at the time, short selling may seem crude, but it serves a crucial social good: it helps keep markets efficient. If the only people who can sell a stock are the ones who already own it, people who have information that could be bad for the company often don’t have any way of affecting market prices. This would mean that information could be available that isn’t reflected in the stock price, because the people who have access to the information aren’t able to participate in the market.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

These so-called ‘supply side’ reforms would improve productivity. By the early 1980s, with Margaret Thatcher in power in Britain and Ronald Reagan in America, Friedman’s influence was at its peak. The government role in the economy was to control inflation and to ensure the rule of law and property rights. Otherwise, markets should be given free rein to allocate resources, which they would inevitably do in a more efficient way than bureaucrats. The Chicago school also argued that lower taxes would result in a ‘supply-side boost’ to economic activity, as businessmen and workers were given incentives to work harder. The same critics argued that the government had interfered too much in the private sector by nationalizing industries and raising taxes. Economic growth would improve if regulations were reduced and taxes cut. This was the birth of the neo-liberal school of economics.

It was not for Alan Greenspan to second guess the decisions of smart fund managers – the Howard Roarks of their day – who had spent their lives analysing the data. This analysis reflected the general reaction against the Keynesian consensus of the post-war period, which seemed to end in significant parts of industry being under government control. An academic fight back was led by Milton Friedman of the Chicago school of economics, who argued that governments were poor at allocating capital. The free market view certainly had some justification; government projects are often marked by bloated spending and ‘white elephants’ such as Concorde. Bureaucrats are unlikely to devise such popular products as the iPod or the Nintendo Wii. Markets are inherently better at innovating since they can respond to pricing and demand signals sent every day by individual consumers.


pages: 318 words: 85,824

A Brief History of Neoliberalism by David Harvey

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affirmative action, Asian financial crisis, Berlin Wall, Bretton Woods, business climate, capital controls, centre right, collective bargaining, crony capitalism, debt deflation, declining real wages, deglobalization, deindustrialization, Deng Xiaoping, Fall of the Berlin Wall, financial deregulation, financial intermediation, financial repression, full employment, George Gilder, Gini coefficient, global reserve currency, illegal immigration, income inequality, informal economy, labour market flexibility, land tenure, late capitalism, Long Term Capital Management, low-wage service sector, manufacturing employment, market fundamentalism, means of production, Mexican peso crisis / tequila crisis, Mont Pelerin Society, mortgage tax deduction, neoliberal agenda, new economy, phenotype, Ponzi scheme, price mechanism, race to the bottom, rent-seeking, reserve currency, Ronald Reagan, Silicon Valley, special economic zone, structural adjustment programs, the built environment, The Chicago School, transaction costs, union organizing, urban renewal, urban sprawl, Washington Consensus, Winter of Discontent

Bush, ‘Securing Freedom’s Triumph’, New York Times, 11 Sept. 2002, A33. The National Security Strategy of the United State of America can be found on the website: www.whitehouse.gov/nsc/nss. 8. M. Fourcade-Gourinchas and S. Babb, ‘The Rebirth of the Liberal Creed: Paths to Neoliberalism in Four Countries’, American Journal of Sociology, 108 (2002), 542–9; J. Valdez, Pinochet’s Economists: The Chicago School in Chile (New York: Cambridge University Press, 1995); R. Luders, ‘The Success and Failure of the State-Owned Enterprise Divestitures in a Developing Country: The Case of Chile’, Journal of World Business (1993), 98–121. 9. R. Dahl and C. Lindblom, Politics, Economy and Welfare: Planning and Politico-Economic Systems Resolved into Basic Social Processes (New York: Harper, 1953). 10.

., Your Money or Your Life: The Tyranny of Global Finance (London: Pluto Press, 2003). United Nations Development Program, Human Development Report, 1996 (New York: Oxford University Press, 1996). ——Human Development Report, 1999 (New York: Oxford University Press, 1999). ——Human Development Report, 2003 (New York: Oxford University Press, 2003). Valdez, J., Pinochet’s Economists: The Chicago School in Chile (New York: Cambridge University Press, 1995). Vasquez, I., ‘The Brady Plan and Market-Based Solutions to Debt Crises’, The Cato Journal, 16/2 (online). Wade, R., Governing the Market (Princeton: Princeton University Press, 1992). ——and Veneroso, F., ‘The Asian Crisis: The High Debt Model versus the Wall Street–Treasury–IMF Complex’, New Left Review, 228 (1998), 3–23. Wallace, T., ‘NGO Dilemmas: Trojan Horses for Global Neoliberalism?’


pages: 281 words: 86,657

The Great Inversion and the Future of the American City by Alan Ehrenhalt

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anti-communist, big-box store, British Empire, crack epidemic, David Brooks, deindustrialization, Edward Glaeser, Frank Gehry, haute cuisine, Honoré de Balzac, housing crisis, illegal immigration, Jane Jacobs, manufacturing employment, McMansion, New Urbanism, postindustrial economy, Richard Florida, The Chicago School, The Death and Life of Great American Cities, too big to fail, transit-oriented development, upwardly mobile, urban decay, urban planning, urban renewal, walkable city, white flight, working poor, young professional

In 2002, Mayer had a white student population of 12.5 percent. In the past decade, that began to change. By 2007, the school was 27 percent white. It was in the process of conversion to magnet status, as a Montessori school in the lower grades and an International Baccalaureate program in the higher grades, with neighborhood residents guaranteed a place. This move generated criticism that the Chicago school system was mainly trying to make Mayer more attractive to affluent white families living around it, luring them away from private schools. That has been borne out only in a selective way. There are white majorities in kindergarten and first grade, and sizable numbers of white pupils through the early primary school years. But as the children grow older, the percentages change. In eighth grade, Mayer remains a minority-dominated school.

By 1980, more were settling in the suburbs, although relatively few demographers were paying much attention. Today, the numbers aren’t even close. In 2005, it is estimated, 4.4 million immigrants went to suburbs and 2.8 million to cities. This is far less dramatic than what has happened in metropolitan Atlanta, but it is a powerful statistic nevertheless. It essentially violates the theories of immigration and living patterns that were developed by Ernest Burgess and the Chicago school of sociologists in the early twentieth century and were rarely questioned for decades after that: Foreigners came to this country, found marginal places to live in the center of big cities, close to the industrial core, and then gradually moved farther out as their savings enabled them to purchase or rent property separated from the noise, dirt, smells, and dangers of the inner city. This theory applied to New York, where the newly arrived residents of the Lower East Side moved out to the Bronx along the subway line, and then, a generation later, to Long Island or New Jersey.


pages: 98 words: 29,610

From Bauhaus to Our House by Tom Wolfe

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Bonfire of the Vanities, Buckminster Fuller, Plutocrats, plutocrats, The Chicago School, urban renewal

All architecture became nonbourgeois architecture, although the concept itself was left discreetly unexpressed, as it were. The old Beaux-Arts traditions became heresy, and so did the legacy of Frank Lloyd Wright, which had only barely made its way into the architecture schools in the first place. Within three years, every so-called major American contribution to contemporary architecture—whether by Wright, H. H. Richardson, creator of the heavily rusticated American Romanesque, or Louis Sullivan, leader of the “Chicago School” of skyscraper architects—had dropped down into the footnotes, into the ibid. thickets. Wright himself was furious and, for one of the few times in his life, bewildered. It was hard to say what got under his skin more: the fact that his work had been upstaged by the Europeans or the fact that he was now treated as a species of walking dead man. He was not deprived of honor and respect, but when he got it, it often sounded like a memorial service.


pages: 654 words: 191,864

Thinking, Fast and Slow by Daniel Kahneman

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Albert Einstein, Atul Gawande, availability heuristic, Black Swan, Cass Sunstein, Checklist Manifesto, choice architecture, cognitive bias, complexity theory, correlation coefficient, correlation does not imply causation, Daniel Kahneman / Amos Tversky, delayed gratification, demand response, endowment effect, experimental economics, experimental subject, Exxon Valdez, feminist movement, framing effect, hindsight bias, index card, job satisfaction, John von Neumann, libertarian paternalism, loss aversion, medical residency, mental accounting, meta analysis, meta-analysis, nudge unit, pattern recognition, pre–internet, price anchoring, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, Ronald Reagan, The Chicago School, The Wisdom of Crowds, transaction costs, union organizing, Walter Mischel, Yom Kippur War

Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for tru S th17;e believers in human rationality. No behavioral economist favors a state that will force its citizens to eat a balanced diet and to watch only television programs that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes.

Libertarian policies are further bolstered by admiration for the efficiency of markets in allocating goods to the people who are willing to pay the most for them. A famous example of the Chicago approach is titled A Theory of Rational Addiction; it explains how a rational agent with a strong preference for intense and immediate gratification may make the rational decision to accept future addiction as a consequence. I once heard Gary Becker, one of the authors of that article, who is also a Nobel laureate of the Chicago school, argue in a lighter vein, but not entirely as a joke, that we should consider the possibility of explaining the so-called obesity epidemic by people’s belief that a cure for diabetes will soon become available. He was making a valuable point: when we observe people acting in ways that seem odd, we should first examine the possibility that they have a good reason to do what they do. Psychological interpretations should only be invoked when the reasons become implausible—which Becker’s explanation of obesity probably is.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

The timing was ironic: American courts were buying into notions that markets were “naturally” competitive and placing a high burden of proof on anyone claiming otherwise just as the economics discipline was exploring theories that explain why markets often were not competitive, even when there were seemingly many firms. For instance, a new and powerful branch of economics called game theory explained how collusive behavior could be maintained tacitly over extended periods of time. Meanwhile, new theories of imperfect and asymmetric information showed how information imperfections impaired competition, and new evidence substantiated the relevance and importance of these theories. The influence of the Chicago school should not be underestimated. Even when there are blatant infractions—like predatory pricing, where a firm lowers its price to force out a competitor and then uses its monopoly power to raise prices—they’ve been hard to prosecute.34 Chicago school economics argues that markets are presumptively competitive and efficient. If entry were easy, the dominant firm would gain nothing from driving out a rival, because the firm that is forced out would be quickly replaced by another firm.

The banks set a critical rate, called the London Interbank Offered Rate, or Libor. Mortgages and many financial products are linked to Libor. It appears that the banks worked to rig the rate, enabling them to make still more money from others who were unaware of these shenanigans.) Of course, even when laws that prohibit monopolistic practices are on the books, these have to be enforced. Particularly given the narrative created by the Chicago school of economics, there is a tendency not to interfere with the “free” workings of the market, even when the outcome is anticompetitive. And there are good political reasons not to take too strong a position: after all, it’s antibusiness—and not good for campaign contributions—to be too tough on, say, Microsoft.43 Politics: getting to set the rules and pick the referee It’s one thing to win in a “fair” game.

,” Economics Letters 20, no. 1 (1986): 67–70; J. E. Stiglitz, “Technological Change, Sunk Costs, and Competition,” Brookings Papers on Economic Activity 3 (1987), pp. 883–947; and P. Dasgupta and J. E. Stiglitz, “Potential Competition, Actual Competition, and Economic Welfare,” European Economic Review 32, nos. 2–3 (March 1988): 569–77. 33. For discussion and examples of conservative foundations’ contribution to the Chicago school law and economics programs, see Alliance for Justice, Justice for Sale: Shortchanging the Public Interest for Private Gain (Washington, DC: Alliance for Justice, 1993). 34. The Department of Justice brought a case against American Airlines in the early years of this century. I thought the evidence that American Airlines had engaged in predatory behavior was especially compelling, but the judge didn’t need to look at the evidence: the Supreme Court had ruled that there was just too strong a presumption against the existence of predatory pricing to make prosecution possible. 35.


pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, conceptual framework, corporate governance, cuban missile crisis, currency peg, debt deflation, falling living standards, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, payday loans, Plutocrats, plutocrats, price stability, pushing on a string, quantitative easing, rent-seeking, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

They go further, however, and state that “the collapse from 1929 to 1933 was neither foreseeable nor inevitable.”50 All of these arguments may seem quite reasonable from the perspective of an economist, especially revered economic researchers such as Milton Friedman and Anna Schwartz, but when their conclusions are viewed from the point of view of a credit officer or trader, a different analysis emerges. Economists from the Chicago School such as Friedman have long believed that the market price of a security and the intrinsic value of a security in a long-term sense are equivalent, but this view seems to ignore the transient factors such as the availability of credit, which can greatly affect demand for stocks. The market action in the later part of the 1920s had all of the attributes of a nineteenth century speculative market movement where the only real driver was the irrational exuberance of the participants and particularly their belief that prices would move higher.

Once you know value, everything happens. Cash moves for value. More price does not mean more value. If you do not recognize the difference, the fundamental difference between price and value, then you are doomed. Now it didn’t really matter in corporate finance because the two were supposed to remain equal forever. Who has been telling us that? These people do not live in New York. They live in Chicago. The Chicago School of Economics has been telling us for a century that price and value are identical, i.e., they are the same number. What this means is that there is no such thing as a good deal, there is not such a thing as a bad deal, there are only fair deals.51 As already noted, many “investors” during this period had already dispensed with the old fashioned idea of using fundamental factors such as profits or earnings to assess the relative value of a security.


pages: 449 words: 127,440

Moscow, December 25th, 1991 by Conor O'Clery

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Anton Chekhov, Berlin Wall, central bank independence, Dissolution of the Soviet Union, Donald Trump, Doomsday Clock, Fall of the Berlin Wall, Francis Fukuyama: the end of history, haute couture, land reform, Mikhail Gorbachev, Ronald Reagan, Sinatra Doctrine, The Chicago School

As a former Russian presidential chief of staff, Alexander Leontiyev, put it not long afterwards, “Americans got so drunk at the USSR’s funeral that they’re still hung over.” Indeed what is remarkable is the number of Americans who gather around the deathbed for the obsequies for communist power. Never before or since are Russian and American interests so intertwined. The distrust and enmity of the long Cold War dissolves into a remarkable dalliance between the competing nuclear powers. Americans from the International Monetary Fund and from the Chicago School of Economics are to be found in Moscow collaborating with Russian policymakers on a new direction for the Russian economy. Their guiding hands are at the elbow of Yeltsin’s ministers as they embark on a mission unprecedented in economic history: the dismantling of the communist model and its substitution with the raw capitalism of neoliberal economics. During a visit to Russia just days before Gorbachev’s resignation, U.S. secretary of state James Baker marvels at how, in all his meetings, one theme is uniform: “the intense desire to satisfy the United States.”3 With each of the new republics trying to establish positive relations with America, he reckons that “our ability to affect their behavior” will never be greater than at this time.

They also sought advice from Harvard economics professor Jeffrey Sachs, who assisted the Polish government with its shock therapy.4 Sach’s attitude, according to Chernyaev, was “If you don’t become like us, you’ll get no dollars.” Gorbachev vetoed the plan, and no dollars were forthcoming. Having persuaded the Russian parliament to give him special powers, Yeltsin is ready to make the leap to capitalism. He has given the task to a small and radical group of young economists, led by Gaidar, a devotee of the Chicago school of monetarist economics. Short, chubby, intellectually gifted, and nicknamed Guboshlyop because of the way his lips flap when he talks, the thirty-five-year-old Gaidar is to be found on the evening of December 25, 1991, in the long, whitewashed Hall of Meetings, where a drugged and distressed Yeltsin was brought from his hospital bed four years ago to be shamed by party leader Mikhail Gorbachev for daring to challenge his leadership and privileges.


pages: 489 words: 148,885

Accelerando by Stross, Charles

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call centre, carbon-based life, cellular automata, cognitive dissonance, Conway's Game of Life, dark matter, dumpster diving, Extropian, finite state, Flynn Effect, glass ceiling, gravity well, John von Neumann, knapsack problem, Kuiper Belt, Magellanic Cloud, mandelbrot fractal, market bubble, means of production, packet switching, performance metric, phenotype, planetary scale, Pluto: dwarf planet, reversible computing, Richard Stallman, SETI@home, Silicon Valley, Singularitarianism, slashdot, South China Sea, stem cell, technological singularity, telepresence, The Chicago School, theory of mind, Turing complete, Turing machine, Turing test, upwardly mobile, Vernor Vinge, Von Neumann architecture, web of trust, Y2K

Oh, and he's promised to invent three new paradigm shifts before breakfast every day, starting with a way to bring about the creation of Really Existing Communism by building a state central planning apparatus that interfaces perfectly with external market systems and somehow manages to algorithmically outperform the Monte Carlo free-for-all of market economics, solving the calculation problem. Just because he can, because hacking economics is fun, and he wants to hear the screams from the Chicago School. Try as he may, Manfred can't see anything in the press release that is at all unusual. It's just the sort of thing he does, and getting it on the net was why he was looking for a CIA stringer in the first place. He tries to explain this to her in the bath as he soaps her back. "I don't understand what they're on about," he complains. "There's nothing that tipped them off – except that I was in Paris, and you filed the news.

A pause for a sip of coffee, and to think, one honest statement deserves another: "And to pay off a divorce settlement." "Ye-es? Well, let me show you my library, my friend," he says, standing up. "This way." Gianni ambles out of the white living room with its carnivorous leather sofas, and up a cast-iron spiral staircase that nails some kind of upper level to the underside of the roof. "Human beings aren't rational," he calls over his shoulder. "That was the big mistake of the Chicago School economists, neoliberals to a man, and of my predecessors, too. If human behavior was logical, there would be no gambling, hmm? The house always wins, after all." The staircase debouches into another airy whitewashed room, where one wall is occupied by a wooden bench supporting a number of ancient, promiscuously cabled servers and a very new, eye-wateringly expensive solid volume renderer.


pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

In other words, the Coase theorem worked in theory, when trading for tokens redeemable for cash, but it did not work in practice, when trading for real-world objects like coffee mugs. Questioning the Coase theorem at a law and economics workshop! That was high treason. One of the unfortunate aspects of the University of Chicago at that time, one that is thankfully no longer the case, was that there was an undue tolerance for scholars who would spout the Chicago School traditional lines, loudly and frequently. One example was the economist John Lott, who had strung together a series of visiting appointments allowing him to be at the university for several years. Lott is most famous for writing a book entitled More Guns, Less Crime. As the title suggests, the thesis of the book is that if we just made sure every American was armed at all times, no one would dare commit a crime, a claim that other researchers have strongly disputed.§ Lott was a frequent attendee and active participant at workshops.

Law professor Ward Farnsworth documented this reluctance by interviewing attorneys from over twenty civil cases in which injunctive relief was sought and either granted or denied after full litigation before a judge. In not a single case did the parties even attempt to negotiate after the court had issued its order. In addition to the Coase theorem, the other part of the paper that got people’s blood boiling was something we left for the very end of it—the topic of paternalism. The core principle underlying the Chicago School’s libertarian beliefs is consumer sovereignty: the notion that people make good choices, and certainly better choices than anyone else could make for them. By raising the specters of bounded rationality and bounded self-control, we were undercutting this principle. If people make mistakes, then it becomes conceivable, at least in principle, that someone could help them make a better choice.

Multicultural Cities: Toronto, New York, and Los Angeles by Mohammed Abdul Qadeer

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affirmative action, call centre, David Brooks, deindustrialization, desegregation, edge city, en.wikipedia.org, Frank Gehry, game design, ghettoisation, global village, immigration reform, Jane Jacobs, knowledge economy, market bubble, McMansion, new economy, New Urbanism, place-making, Richard Florida, risk tolerance, Silicon Valley, Skype, telemarketer, the built environment, The Chicago School, The Death and Life of Great American Cities, the scientific method, urban planning, urban renewal, working-age population, young professional

The Cultures of Cities and Theoretical Discourse Ethno-racial diversity spawns the multiplicity of cultures and lays the basis of demands for the recognition of the identities of their bearers. This brings up the question of the cultures of a city and what are their bases. Theoretical interest in the culture or cultures of cities has a long history. At the dawn of the modern period, theorists such as Max Weber, Emile Durkheim, and Georg Simmel were occupied with exploring the cultural elements of city life. The Chicago School of urban sociology in the early twentieth century identified urbanism as a distinct way of life and urban social organization as the embodiment of its culture and social relations. Urban theory continues to command interest in the culture of cities right up to the present time, as reflected in the writings of David Harvey, Manuel Castells, Anthony Giddens, and the purveyors 12 Multicultural Cities of the theory of postmodern urbanism, sometimes called the Los Angeles school of urbanism, namely, Michael Dear, Edward Soja, Allen Scott, and others.

To understand how ethno-racial differences affect the internal structure and inject pluralism into it, I will begin with a brief review of those theories and models. The most common image of a city is that of a circular built-up area, divided into residential zones of decreasing densities from the centre to the periphery. At the centre of this built-up area is a high-density district of commercial-business activities. This image owes its origin to the Chicago school’s Ernest Burgess, whose concentric zone hypothesis (1923) conceived the city as a product of ecological processes.2 Other classical models include (1) Homer Hoyt’s sector theory (1939), envisioning the city as made up of pie-shaped sectors differentiated by high, medium, and low rental housing, which corresponded to the residences of the associated social classes; and (2) Chauncy Harris and Edward Ullman’s multiple-nuclei hypothesis (1945), which postulates the city as structured around multiple centres that serve as the anchors of its development and expansion.3 From these models the analytical parameters of urban structure can be deduced, that is, functions (residential, commercial, industrial), socioeconomic characteristics of residents, density of development, locations of activities, and interrelations.


pages: 475 words: 149,310

Multitude: War and Democracy in the Age of Empire by Michael Hardt, Antonio Negri

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affirmative action, Berlin Wall, Bretton Woods, British Empire, conceptual framework, David Graeber, Defenestration of Prague, deskilling, Fall of the Berlin Wall, feminist movement, Francis Fukuyama: the end of history, friendly fire, global village, Howard Rheingold, Howard Zinn, illegal immigration, Joseph Schumpeter, labour mobility, land reform, land tenure, late capitalism, means of production, Naomi Klein, new economy, private military company, race to the bottom, RAND corporation, reserve currency, Richard Stallman, Slavoj Žižek, The Chicago School, The Structural Transformation of the Public Sphere, Thomas Malthus, Thorstein Veblen, Tobin tax, transaction costs, union organizing, War on Poverty, Washington Consensus

It is still possible when economic intervention, either through welfare (even in its crisis) or warfare (in its crude effectiveness), has invested all the contradictory forces that constitute social life? Keynesianism, putting an end to the naturalist illusion, opened an insolvable problem that political economy would have to face. By the 1970s Keynes’s rethinking of economics was showing negative results. With the expansion of the cold war, Keynesianism was first scaled back by Paul Samuelson to resemble the old mainstream neoclassical doctrine, and then Milton Friedman and the Chicago School arrived to undermine it completely, proposing to establish certain measures of equilibrium by confiding every power of regulation to money, that is, to the market. We were thus taken back, one might say, to the science of economics—but what a strange science! It is now based on a kind of “monetary essentialism” in which the standards of measure no longer have any relationship with the real world of production and exchange, except according to the norms that the Central Bank or the Federal Reserve dictate.

While we wait for an Imre Lakatos or a Paul Feyerabend to overturn economics, it is interesting to note how even though the discipline is lost in its dogmatic slumber some economists reach conclusions close to what we suggest here. Take Gary Becker, for example, who for a half century has been asking the same question: what can it mean to ask if humans can be content or fulfilled in purely economic terms without investing the entire field of biopolitical existence? Surely, the methodological individualism of the Chicago School cannot solve such problems, even if they add new concepts like human capital and cognitive capital. The dismal science, as Thomas Carlisle called it, however, is not doomed. It can be reborn when it takes stock of the new common anthropology and the intellectual and affective power of productive labor, and when it can in addition to capitalists and wage laborers account for the poor and the excluded who nonetheless always constitute the productive articulations of social being.


pages: 160 words: 46,449

The Extreme Centre: A Warning by Tariq Ali

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Affordable Care Act / Obamacare, Berlin Wall, bonus culture, BRICs, British Empire, centre right, deindustrialization, Edward Snowden, Fall of the Berlin Wall, financial deregulation, first-past-the-post, full employment, labour market flexibility, land reform, means of production, Mikhail Gorbachev, Monroe Doctrine, mortgage debt, North Sea oil, obamacare, offshore financial centre, reserve currency, Ronald Reagan, South China Sea, The Chicago School, The Wealth of Nations by Adam Smith, trade route, trickle-down economics, Washington Consensus, Wolfgang Streeck

They had always known that, sooner or later, reviving these economies would produce countries that would rival the US, at least on the economic and trade fronts. They had been prepared to take that risk because, while the Soviet Union persisted, it seemed as if there was no other effective way to shore up the frayed postwar capitalist system. But when the Soviet Union self-destructed and was dismantled, new problems arose, partially political, but mostly social and economic. With the victory of Hayek and the Chicago School came the birth of what became known as neoliberalism. Accordingly, the European Union began to determine the social and economic policies of its member states. This meant ending state control of industries, and slowly but inexorably dismantling the social welfare state by bringing the market into what had until now been the most hallowed domains of social provision. Thus when the 2008 crisis exploded, the result was pure panic in EU headquarters.


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

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affirmative action, Asian financial crisis, Bretton Woods, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, invisible hand, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

The 1980s also saw the rise of the neo-liberal thinking which argued that governments should liberalize their economies in favour of the laissez-faire paradigm, which encompassed (and indeed acknowledged the importance of) the private market. The experience of the newly industrializing economies of Asia gave these market-based ideas a popularity boost in policy circles in the United States and Europe. The Asian tigers seemed to have achieved high growth rates and unprecedented poverty reduction with free-market policies and an outward orientation. As free-market proponents, Milton Friedman and the Chicago School of Economics had great influence on the policies and thinking of the US President, Ronald Reagan, and the UK’s Prime Minister, Margaret Thatcher. The policies that ensued (Reaganomics and Thatcherism) bore all the hallmarks of an economic revolution, and there was little room for compromise; so too in Africa, where these free-market polices were packaged and sold as the new development agenda.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

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Affordable Care Act / Obamacare, bank run, big-box store, bonus culture, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

Among that institution’s celebrated champions of efficient market theory, the Nobel laureate Robert Lucas was reported in 2008 to be doubting his former belief in bank deregulation.4 The Nobel laureate Gary Becker confessed in 2009, “There are a lot of things that people got wrong, and I got wrong, and Chicago got wrong.”5 But the most astonishing conversion was that of Richard Posner, another knight-errant of the Chicago school. His 2009 book, A Failure of Capitalism, placed the blame for the cataclysm squarely on his former comrades in the deregulation movement. The collapse “hit economic libertarians in their solar plexus,” he wrote, because it had discredited their free-market philosophy so utterly, so undeniably.6 In 2010, Posner called for the revival of thirties-era banking rules and penned the unthinkable: an homage to John Maynard Keynes, the genius of deficit spending and the bête noire of the free-market crowd.


pages: 237 words: 64,411

Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence by Jerry Kaplan

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Affordable Care Act / Obamacare, Amazon Web Services, asset allocation, autonomous vehicles, bank run, bitcoin, Brian Krebs, buy low sell high, Capital in the Twenty-First Century by Thomas Piketty, combinatorial explosion, computer vision, corporate governance, crowdsourcing, en.wikipedia.org, Erik Brynjolfsson, estate planning, Flash crash, Gini coefficient, Goldman Sachs: Vampire Squid, haute couture, hiring and firing, income inequality, index card, industrial robot, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Loebner Prize, Mark Zuckerberg, mortgage debt, natural language processing, Own Your Own Home, pattern recognition, Satoshi Nakamoto, school choice, Schrödinger's Cat, Second Machine Age, self-driving car, sentiment analysis, Silicon Valley, Silicon Valley startup, Skype, software as a service, The Chicago School, Turing test, Watson beat the top human players on Jeopardy!, winner-take-all economy, women in the workforce, working poor, Works Progress Administration

It’s a mystery to me why we seem to treat occupational skills differently than other assets, like some sort of medieval barter system, at great cost to society. If major-league sports figures can securitize their future earnings, why can’t the average person do the same?44 My specific concept of a job mortgage might be new, but the basic approach certainly isn’t. Milton Friedman, leader of the Chicago school of economics, wrote an essay entitled “The Role of Government in Education” in 1955, in which he draws a distinction between “general education for citizenship” and “vocational or professional education.” He recommends that the latter should be subject to analysis as an investment, similar to physical assets, and that government policies be put in place to facilitate investment (as opposed to subsidies) in such training.


pages: 309 words: 78,361

Plenitude: The New Economics of True Wealth by Juliet B. Schor

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Asian financial crisis, big-box store, business climate, carbon footprint, cleantech, Community Supported Agriculture, credit crunch, Daniel Kahneman / Amos Tversky, decarbonisation, dematerialisation, demographic transition, deskilling, Edward Glaeser, en.wikipedia.org, Gini coefficient, global village, income inequality, income per capita, Isaac Newton, Joseph Schumpeter, knowledge economy, life extension, McMansion, new economy, peak oil, pink-collar, post-industrial society, prediction markets, purchasing power parity, ride hailing / ride sharing, Robert Shiller, Robert Shiller, sharing economy, Simon Kuznets, single-payer health, smart grid, The Chicago School, Thomas L Friedman, Thomas Malthus, too big to fail, transaction costs, Zipcar

It’s time to become far more discriminating, and reframe the debate to figure out what needs to grow and what needs to shrink. To unpack the growth imperative, we can start by differentiating among households, firms, and the economy as a whole. Households (or individuals) are the easiest case. In its most abstract form, mainstream economic theory centers on the idea that people maximize their well-being, and that they do so through exchanges with others. The influential formulations of Gary Becker and the Chicago school hold that this economic approach to human behavior can be applied to anything. People can decide that what matters most to them is preserving nature, raising children, or having a leisurely work environment. Income growth is in no way integral to or even implied by the model. Evidence of widespread downshifting, or voluntary trade-offs of money for time, makes clear that maximizing income is by no means a universal desire.


pages: 1,042 words: 266,547

Security Analysis by Benjamin Graham, David Dodd

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asset-backed security, backtesting, barriers to entry, capital asset pricing model, carried interest, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fear of failure, financial innovation, fixed income, full employment, index fund, invisible hand, Joseph Schumpeter, locking in a profit, Long Term Capital Management, low cost carrier, moral hazard, mortgage debt, p-value, risk-adjusted returns, risk/return, secular stagnation, shareholder value, The Chicago School, the market place, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, zero-coupon bond

Was this something that a prudent person would do, judged in the light of the circumstances under which the decision was made and in the context of the portfolio as a whole? Thus individual losing investments need not give rise to penalties if the fiduciary’s decisions and results were acceptable in toto. • As part of the development of the finance theory that is attributed to the “Chicago School,” in the 1950s Harry Markowitz contributed the notion that, based on an understanding of correlation, the addition of a “risky asset” to a portfolio could reduce the portfolio’s overall riskiness by increasing its diversification. • Finally, the ultimate contribution of the Chicago School came through the assertion that the “goodness” of an investment—and of a performance record—had to be evaluated based on the relationship between its risk and its return. A safe investment is not a good investment, and a risky investment is not a bad investment.

They famously analogized the market to a voting machine, producing results that are the product partly of reason and partly of emotion, rather than an exact and impersonal weighing machine. (p. 70) The authors relied on a “twofold assumption: first, that the market price is frequently out of line with the true value; and, second, that there is an inherent tendency for these disparities to correct themselves.” (pp. 69–70) Before anyone from the Chicago School has a coronary, let’s hear some more from Graham and Dodd on the first assumption: “As to the truth of the former statement, there can be very little doubt—even though Wall Street often speaks glibly of the ‘infallible judgment of the market’ and asserts that ‘a stock is worth what you can sell it for—neither more nor less.’” (p. 70) If the market gets the “correct” price “wrong” in ordinary investing, such error occurs even more frequently in distressed investing.


pages: 603 words: 182,781

Aerotropolis by John D. Kasarda, Greg Lindsay

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3D printing, air freight, airline deregulation, airport security, Akira Okazaki, Asian financial crisis, back-to-the-land, barriers to entry, Berlin Wall, big-box store, blood diamonds, borderless world, British Empire, call centre, carbon footprint, Clayton Christensen, cleantech, cognitive dissonance, conceptual framework, credit crunch, David Brooks, David Ricardo: comparative advantage, Deng Xiaoping, deskilling, edge city, Edward Glaeser, failed state, food miles, Ford paid five dollars a day, Frank Gehry, fudge factor, full employment, future of work, Geoffrey West, Santa Fe Institute, George Gilder, global supply chain, global village, gravity well, Haber-Bosch Process, Hernando de Soto, hive mind, if you build it, they will come, illegal immigration, inflight wifi, interchangeable parts, intermodal, invention of the telephone, inventory management, invisible hand, Jane Jacobs, Jeff Bezos, Kangaroo Route, knowledge worker, kremlinology, labour mobility, Marshall McLuhan, Masdar, McMansion, megacity, Menlo Park, microcredit, Network effects, New Economic Geography, new economy, New Urbanism, oil shale / tar sands, oil shock, peak oil, Peter Thiel, pets.com, pink-collar, pre–internet, RFID, Richard Florida, Ronald Coase, Ronald Reagan, savings glut, Seaside, Florida, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, smart cities, smart grid, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, spinning jenny, stem cell, Steve Jobs, supply-chain management, sustainable-tourism, telepresence, the built environment, The Chicago School, The Death and Life of Great American Cities, The Nature of the Firm, thinkpad, Thomas L Friedman, Thomas Malthus, Tony Hsieh, trade route, transcontinental railway, transit-oriented development, traveling salesman, trickle-down economics, upwardly mobile, urban planning, urban renewal, urban sprawl, walkable city, white flight, Yogi Berra

Once Britain had run out, its ability to sustain 10 percent population growth each decade (as it had done for the previous seven) would collapse under its inability to grow or transport enough food. Worse, there appeared to be no alternatives—no fuels to replace it, in Jevons’s estimation—and any increases in the steam engine’s efficiency would only make it cheaper and easier to use, thus stoking greater demand and faster depletion. These were not the ravings of a fringe theorist. Jevons was as sober and as mainstream an economist as any Nobel-winning member of the Chicago School today. His suggestion made its way onto the floor of the House of Commons, where no less than future prime minister William Gladstone—then chancellor of the exchequer—referred to the looming peak coal crisis in his budget speech of 1866. A “coal panic” ensued, leading to the appointment of a blue-ribbon royal commission. Five years later, it published the first detailed estimate of Britain’s coal reserves but managed to sidestep Jevons’s conclusions altogether.

The Economist story that name-checked Kasarda as the plan’s architect was “City of the Future” (December 4, 2008). Details on Ørestad are mostly drawn from the Port & City Development Corporation’s report “Urban Development—in Ørestad and in the Harbour Areas of Copenhagen.” 5: The Aerotropolist John Kasarda most closely identifies with the intellectual tradition of the University of Chicago’s urban sociologists. Influential figures of the Chicago School include Robert E. Park and Ernest Burgess, who developed the concentric ring model of urban growth in such works as “The Growth of the City” in The City. One of their intellectual heirs was Roderick D. McKenzie, who studied metropolitan growth and urban hierarchies in The Metropolitan Community. McKenzie’s student, in turn, was Amos Hawley, who was Kasarda’s own mentor and the author of Human Ecology.


pages: 336 words: 90,749

How to Fix Copyright by William Patry

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A Declaration of the Independence of Cyberspace, barriers to entry, big-box store, borderless world, business intelligence, citizen journalism, cloud computing, crowdsourcing, death of newspapers, en.wikipedia.org, facts on the ground, Frederick Winslow Taylor, George Akerlof, Gordon Gekko, haute cuisine, informal economy, invisible hand, Joseph Schumpeter, Kickstarter, knowledge economy, lone genius, means of production, new economy, road to serfdom, Ronald Coase, Ronald Reagan, semantic web, shareholder value, Silicon Valley, The Chicago School, The Wealth of Nations by Adam Smith, trade route, transaction costs, trickle-down economics, web application, winner-take-all economy

If those who stand the most to benefit from the assertion and who are in the position to know whether the assertion is true fail to provide any data, how, in the absence of any relevant data, are policymakers to make effective policy? The economic models typically used for such matters are not only so theoretical as to be practically worthless, but they assume away the very issue to be proved. Harold Demsetz, a major figure in the Chicago school of economics, whose pioneering work in property rights provided a key foundation for the law and economics movement, argued in 2009 that the dominant neoclassical approach had sought to understand the exploitation of privately owned resources wholly in terms of prices.151 Meaningful creativity, he wrote,“necessarily involves differences between a new work and old works, and this implies that the new and the old are imperfect substitutes.”152 Neoclassical economics is centered, however, on perfect competition, and therefore “does not and cannot embrace creative activity.”153 In plain English, Professor Demsetz was admitting that neoclassical economics can’t measure creativity, yet neoclassical economics underlies much of the current economic copyright theorizing.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Support for communism grew and it was considered a very acute challenge for the Western economic model even among leading economists (Amadae 2003). Joseph Schumpeter (1943/2003), famous for describing entrepreneurship as a process of creative destruction, expressed his conviction that “a socialist form of government will inevitably emerge from an equally inevitable decomposition of capitalist society.” Frank Knight of the Chicago School, which later became famous for its uncompromising support of free markets, also expressed serious doubts. “Economics and politics based on competitive mass selling is bankrupt and it is only the question of a successor to bid in the effects of the defunct at a nominal figure,” he wrote in 1933 and argued that elites under communism might be well suited to provide the government control that markets needed (Amadae 2003).


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

According to the Basel market risk amendment, which was now part of U.S. banking regulations, BofA could in principle hold four times this VAR as trading risk capital, a tiny fraction of the 8 percent of loan value in risk capital it would have held as a lending bank. The only caveat was that regulators had to approve the VAR model, and Alfriend’s team rejected it. The Richmond Fed staffers argued that a year’s worth of loan price data didn’t reflect what was likely to happen to the debt in a full recession. The BofA officials responded by channeling the Chicago school of market-efficient economics, insisting that market prices reflected all possible information about the loans, including their potential for default. Alfriend’s team held their ground, doubting that BofA had any intention of trading the loans it was holding. The Fed examiners also spotted an analogous case where VAR was inconveniently big for Bank of America. The bank was making proprietary investments in exchange-traded funds (ETFs), a popular way of gaining exposure to equities using derivatives.


pages: 262 words: 83,548

The End of Growth by Jeff Rubin

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Ayatollah Khomeini, Bakken shale, banking crisis, Berlin Wall, British Empire, call centre, carbon footprint, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, decarbonisation, deglobalization, energy security, eurozone crisis, Exxon Valdez, Fall of the Berlin Wall, fiat currency, flex fuel, full employment, ghettoisation, global supply chain, Hans Island, happiness index / gross national happiness, housing crisis, hydraulic fracturing, illegal immigration, income per capita, Jane Jacobs, labour mobility, McMansion, Monroe Doctrine, moral hazard, new economy, Occupy movement, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, quantitative easing, race to the bottom, reserve currency, Ronald Reagan, South China Sea, sovereign wealth fund, The Chicago School, The Death and Life of Great American Cities, Thomas Malthus, Thorstein Veblen, too big to fail, uranium enrichment, urban planning, urban sprawl, women in the workforce, working poor, Yom Kippur War

More human beings means more brainpower is available to tackle any problem, much like adding RAM to a computer. Simon and Ehrlich came from completely different academic disciplines, which clearly shaped their attitudes to the issue of population growth. Simon completed his doctoral degree in economics at the University of Chicago in 1961. In his research, he was drawn to exploring the economic effects of population change. His free-market upbringing at the Chicago School clashed with Ehrlich’s stance on demographics. Ehrlich, now head of Stanford’s Center for Conservation Biology, did his graduate work in entomology at the University of Kansas, studying with renowned bee researcher Charles Michener. Along the way, Ehrlich’s ecological interests dovetailed with demographics and the study of population. Here’s where the bet comes in. Simon believed that Ehrlich’s environmental approach to the consequences of population growth failed to account for the way prices motivate human behavior.


pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, clean water, collapse of Lehman Brothers, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

IF WE USE THESE POLICIES as building blocks for creating a new economics of creativity model, what policies might flow from it? What can we all do, in our lives and our businesses, to promote Indie Capitalism? Introducing uncertainty into our economic model may appear difficult because it is so unfamiliar to our thinking but, surprisingly enough, the foundation for an economy that centers around innovation and creation might well lie in the ideas of the man whose thinking paved the way for the Chicago School of Economics. Though he’s best known for work on risk and options theory, which helped establish the foundation for financial capitalism and the efficient market theory, Chicago economist Frank Knight also did important research on the role of uncertainty and the entrepreneur in economic growth. In his book Risk, Uncertainty and Profit, Knight argues that significant, expanding profits come from entrepreneurs finding new opportunities in the messiness of our lives.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

The ultimate watershed on business’s long march from pariah status towards semi-respectability came when the Chinese leader Deng Xiaoping declared, after starting to open up China’s economy in 1978, that ‘to get rich is glorious’. Nuances may have been lost in the translation, but this embrace of capitalist values by a hardened veteran of the Communist struggle definitively put the big battalions behind the materialist side of the moral argument and appeared to draw down the curtain on the socialist backlash. It is no coincidence that Deng’s conversion broadly coincided with the ascendancy of the Chicago school of economics and the presidency of Ronald Reagan, who oversaw the conclusion of the Cold War. Reagan lauded ‘the magic of the market’. Like Margaret Thatcher in Britain, he ushered in an era of liberalisation and neo-conservatism, policies favoured by economists at the University of Chicago. Other intellectual champions of this ethos included Ayn Rand, mentor of the subsequent chairman of the Federal Reserve Alan Greenspan.


pages: 398 words: 108,889

The Paypal Wars: Battles With Ebay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson

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bank run, business process, call centre, disintermediation, Elon Musk, index fund, Internet Archive, iterative process, Joseph Schumpeter, market design, Menlo Park, moral hazard, Network effects, new economy, offshore financial centre, Peter Thiel, Sand Hill Road, shareholder value, Silicon Valley, Silicon Valley startup, telemarketer, The Chicago School, Turing test

With the help of several engineers, the displaced ping pong table made its way into David Sacks’s cube. Taped to it was a copy of a commentary he had penned for The San Francisco Chronicle extolling the virtues of firms that empower young employees by giving them stock options and letting them do informal things like play ping pong. The engineers gleefully noted that since they had never actually seen the Chicago School of Law graduate set foot in the ping pong room, they wanted to help Sacks out by bringing the game to him. My unnerving hiring experience and disorderly first day on the job suggested that Confinity wasn’t exactly a structured environment. While a young company with few resources devoted to HR and IT can be forgiven for not planning an orientation session for its new employees, this apparent chaos was still a little unsettling.


pages: 391 words: 102,301

Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent

Chile’s policies of slashing tariffs and taxes, inflation fighting, privatization, and pension reform were regarded as a model by free-market reformers around the world. But they took place against a background of the imprisonment, torture, and murder of dissidents. General Pinochet’s embrace of the market and assault on inflation came in 1975, after a visit by Milton Friedman, the doyen of the Chicago school of economists, who was to receive the Nobel Prize for economics the following year. Under the Pinochet government, Friedman’s “Chicago boys,” many of them Chilean economists who had trained at the University of Chicago, were given a whole country as their canvas.9 Margaret Thatcher was a strong admirer of both Friedman and Pinochet. When the retired general visited Britain in 1999, the retired prime minister entertained him to tea.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, working poor, yield curve

Tim Harford is a riveting expositor of the field, lively and fair-minded, and his books The Undercover Economist and its macroeconomic companion piece The Undercover Economist Strikes Back are excellent places to start, both because they are so interesting in themselves and because they give a good initiation in how economists think and study these sorts of questions. Freakonomics, by Steven D. Levitt and Stephen J. Dubner, is a highly successful study of a number of contentious political and social questions from a microeconomic perspective. The work of the Chicago school of economists on areas such as rational choice is worth a look too, perhaps starting with Gary Becker’s Nobel Prize lecture, “The Economic Way of Looking at Life.” Behavioral economics, which has a particular interest in how people think and act, has grown out of microeconomics. You Are Not So Smart, by David McRaney, is an introduction to cognitive mistakes—though that makes it sound a lot drier than it is.


pages: 320 words: 86,372

Mythology of Work: How Capitalism Persists Despite Itself by Peter Fleming

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1960s counterculture, anti-work, call centre, clockwatching, corporate social responsibility, David Graeber, Etonian, future of work, Goldman Sachs: Vampire Squid, illegal immigration, late capitalism, Mark Zuckerberg, market bubble, market fundamentalism, means of production, neoliberal agenda, Parkinson's law, post-industrial society, profit maximization, profit motive, quantitative easing, Results Only Work Environment, shareholder value, The Chicago School, transaction costs, working poor

Why would anyone rejoice in the fact that they have no life outside their job? Would this not denote a special kind of madness? A good deal of ideological effort had to be conducted to pave the way for people like James to make an appearance in the world. The branded self or the ‘I, Job’ function is an intense fantasy in the neoclassical mindset. As Foucault (2008: 28) noted in his lectures on the birth of biopolitics, ultra-right-wing economists of the Chicago School like Gary Becker attempted to create a social prototype that would allow economic reason to ‘generalize the enterprise from within the social body … the individual’s life itself – must make him into a sort of permanent and multiple enterprise’. In the United Kingdom, following the rise of coercive-state, Thatcherism and the barbarism of subsequent neoliberal governmental reform programmes, we now see the true consequences of this desire to transform us all into little one-person corporations.


pages: 306 words: 85,836

When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants by Steven D. Levitt, Stephen J. Dubner

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Affordable Care Act / Obamacare, airport security, augmented reality, barriers to entry, Bernie Madoff, Black Swan, Broken windows theory, Captain Sullenberger Hudson, Daniel Kahneman / Amos Tversky, deliberate practice, feminist movement, food miles, George Akerlof, invisible hand, loss aversion, mental accounting, Netflix Prize, obamacare, oil shale / tar sands, peak oil, pre–internet, price anchoring, price discrimination, principal–agent problem, profit maximization, Richard Thaler, security theater, Ted Kaczynski, the built environment, The Chicago School, the High Line, Thorstein Veblen, transaction costs

Though on Tuesday, acting D.C. schools chancellor Kaya Henderson did request a review. When Brian Jacob and I investigated teacher cheating in Chicago schools, which we described in Freakonomics, we didn’t use erasure analysis. Rather, we developed new tools for identifying strings of unlikely answers. You might ask why we didn’t use erasures, when it is such an obvious approach. The answer: unlike the D.C. schools, the Chicago schools did not farm out grading of the test exams to a third party. What got the D.C. schools in trouble is that the third party routinely analyzed erasure patterns. The internal group that scored the exams in Chicago did not routinely look for erasures; that was only done when there were suspicions about particular classrooms. Conveniently, there was an acute shortage of storage space in the Chicago warehouse where the test forms were graded.


pages: 421 words: 110,406

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You by Sangeet Paul Choudary, Marshall W. van Alstyne, Geoffrey G. Parker

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3D printing, Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, Apple's 1984 Super Bowl advert, autonomous vehicles, barriers to entry, big data - Walmart - Pop Tarts, bitcoin, blockchain, business process, buy low sell high, chief data officer, clean water, cloud computing, connected car, corporate governance, crowdsourcing, data acquisition, data is the new oil, discounted cash flows, disintermediation, Edward Glaeser, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, financial innovation, Haber-Bosch Process, High speed trading, Internet of things, inventory management, invisible hand, Jean Tirole, Jeff Bezos, jimmy wales, Khan Academy, Kickstarter, Lean Startup, Lyft, market design, multi-sided market, Network effects, new economy, payday loans, peer-to-peer lending, Peter Thiel, pets.com, pre–internet, price mechanism, recommendation engine, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Coase, Satoshi Nakamoto, self-driving car, shareholder value, sharing economy, side project, Silicon Valley, Skype, smart contracts, smart grid, Snapchat, software is eating the world, Steve Jobs, TaskRabbit, The Chicago School, the payments system, Tim Cook: Apple, transaction costs, two-sided market, Uber and Lyft, Uber for X, winner-take-all economy, Zipcar

However, in countries with more accountable governments, such as those seen in northern Europe, higher levels of regulation appear to be relatively free of such corruption, which reduces the level of regulatory capture. In these circumstances, Shleifer argues, regulation can be compatible with promotion of social welfare and economic growth. Shleifer notes, moreover, that the reliance of the Chicago School on litigation as an alternative to regulation assumes and depends upon the existence of an independent and honest judiciary. This ignores the fact that judges and lawyers are just as subject to manipulation and capture as other government employees.13 More broadly, Shleifer’s argument is consistent with the argument made by Laffont and Tirole in favor of regulation that is specific to countries and technologies.14 In general, the historical record doesn’t support the arguments of people who favor no regulation of business.


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

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availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, laissez-faire capitalism, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, payday loans, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

The important thing is that Savage failed the test. Savage was a brash statistician, then at the University of Chicago. He had gone into statistics on the advice of John von Neumann himself. Visually, the most remarkable thing about him was his eyeglasses. Their lenses packed enough diopters to reveal the space behind his head. At Chicago, Savage had acquired a second mentor, Milton Friedman—founding father of the Chicago school of economics, future Nobel laureate, and veritable saint to Reagan-era capitalists. Friedman knew quite a bit of statistics for an economist. He and Savage had begun a peripatetic collaboration. Savage was attempting to devise a theory of how people make decisions. The decisions that concerned him tended to be about money. He was interested in how people assign prices to goods and services and how they make choices between them.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

He wrote the influential book The Economics of Trade Unions.1 In 1966 he left Chicago for Princeton, and shortly thereafter he began taking on increasing administrative responsibilities. He was eventually tapped by President Gerald Ford to be the director of the Council on Wage and Price Stability. He later returned to Princeton, where he became provost, and finally he served as president of the Alfred P. Sloan Foundation. Shortly before his death, Rees wrote a paper for a conference in honor of his old friend Jacob Mincer, also a distinguished labor economist of the Chicago School. (Rees himself had been honored by a similar conference three years earlier.) He used this occasion to look back on his former life as an economist. He made a remarkable confession: that in his later life as an administrator he discovered a devastating omission from his earlier analyses. As an administrator he constantly had to decide what was and was not fair. Yet as an economist the concept of fairness had been totally absent from his analysis.


pages: 374 words: 114,600

The Quants by Scott Patterson

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Albert Einstein, asset allocation, automated trading system, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Nash: game theory, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, NetJets, new economy, offshore financial centre, Paul Lévy, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

Hanging on the wall of his office, situated next to the firm’s trading floor, was a poster of a man jogging along a dirt road that read: “The race is not always to the swift but to those who keep running.” He could often be seen typing away on his Compaq Deskpro 386 computer, obsessively entering notes into a program called Think Tank as he swigged bottle after bottle of water kept in an office credenza. His job was simple: figure out how to turn his quantitative theories into cold hard cash for Goldman. There was something of a problem, however. Black hewed to the Chicago School notion that markets are efficient and impossible to beat. In one of his first attempts to trade, he lost half a million for the firm. But he soon realized, watching Goldman’s traders make millions of dollars from an endless cycle of inefficiencies, that the market might not be quite the perfect humming machine he’d thought back in his ivory towers in Cambridge and Chicago. Slowly but surely, Black was turning into one of Fama’s piranhas.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

This meant shedding the morbid features of the dying species and evolving a new means of survival in the world as it was, not as the previous generation had imagined and hoped it would be. Although some business leaders and politicians continued to proclaim the slogans of the Thatcher-Reagan era—“you can’t buck the market,” “we can’t spend our way to prosperity,” “the market is always right”—the repetition was mechanical and lacked conviction. The remaining free-market zealots, whether in the Chicago School, in the Republican Party, or on talk radio and in the conservative blogosphere, were like Wile E. Coyote or the septuagenarian Russian communists who parade every May in Red Square. Their belief in themselves was immoveable, but the world had moved on. Market fundamentalism had entered what George Soros, in his analysis of boom-bust cycles, calls the Twilight Period. This is the penultimate phase of a long-expanding bubble, as the air begins to leak out; the point “when people continue to play the game although they no longer believe in it.”


pages: 366 words: 117,875

Arrival City by Doug Saunders

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agricultural Revolution, Ayatollah Khomeini, Berlin Wall, Branko Milanovic, call centre, credit crunch, Deng Xiaoping, desegregation, ghettoisation, Gini coefficient, guest worker program, Hernando de Soto, Honoré de Balzac, illegal immigration, immigration reform, income inequality, informal economy, Jane Jacobs, Kibera, land reform, land tenure, low skilled workers, megacity, microcredit, new economy, pensions crisis, place-making, price mechanism, rent control, Silicon Valley, special economic zone, the built environment, The Chicago School, The Death and Life of Great American Cities, upwardly mobile, urban planning, urban sprawl, white flight, working poor, working-age population

Should they be encouraged and promoted, or should governments find ways, if they can, to prevent the great migration from forming enclaves of newcomers in their less-popular urban spaces? To embrace the arrival city is to put aside generations of thinking, which held that success is measured by dispersal. The original theory of urban assimilation, developed by the sociologist Robert E. Park and his colleagues of the Chicago School, beginning in the 1920s, is built around the earliest understanding of the arrival city. Based on an analysis of U.S. cities (especially Chicago) during a period of heavy rural-origin migration, Park concluded that immigrants start out in highly concentrated populations in rented quarters in poor inner-city areas with low property prices but become integrated and successful only as they leave the ethnic enclave behind and disperse into integrated mainstream society.


pages: 613 words: 151,140

No Such Thing as Society by Andy McSmith

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anti-communist, Ayatollah Khomeini, Berlin Wall, Big bang: deregulation of the City of London, British Empire, call centre, cuban missile crisis, Etonian, F. W. de Klerk, feminist movement, Francis Fukuyama: the end of history, friendly fire, full employment, glass ceiling, greed is good, illegal immigration, index card, means of production, Mikhail Gorbachev, mortgage debt, mutually assured destruction, North Sea oil, Northern Rock, Ronald Reagan, South Sea Bubble, strikebreaker, The Chicago School, union organizing, upwardly mobile, urban decay, Winter of Discontent, young professional

The loss-making steelworks in Shotton, North Wales, was also closed at the immediate cost of 6,000 jobs, driving male unemployment in the nearby town of Flint up to 32 per cent.21 Corby in Northamptonshire fared only marginally better, losing 7,000 jobs by 1981, pushing the unemployment rate above 21 per cent. More jobs went later. By 1987, the town’s population had fallen from 54,000 to 50,000. Against this background, it is not difficult to see why some Conservative radicals were drawn to the new ideology called ‘monetarism’. Milton Friedman and other members of the ‘Chicago School’ argued that governments should not have prices or incomes policies, which only interfered with the free market. A government’s first and almost its only economic duty was to make sure that the currency was sound: stabilize the pound, and leave prices and incomes to the market. In 1974, there had been no monetarists in the leadership of the Conservative Party. If the old guard had handled the circumstances of Edward Heath’s resignation with more skill, Margaret Thatcher would never have been prime minister and there would never have been monetarists operating out of Downing Street.


pages: 418 words: 128,965

The Master Switch: The Rise and Fall of Information Empires by Tim Wu

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accounting loophole / creative accounting, Alfred Russel Wallace, Apple II, barriers to entry, British Empire, Burning Man, Cass Sunstein, Clayton Christensen, don't be evil, Douglas Engelbart, Howard Rheingold, Hush-A-Phone, informal economy, intermodal, Internet Archive, invention of movable type, invention of the telephone, invisible hand, Jane Jacobs, Joseph Schumpeter, Menlo Park, open economy, packet switching, PageRank, profit motive, road to serfdom, Ronald Coase, shareholder value, Silicon Valley, Skype, Steve Jobs, Steve Wozniak, Telecommunications Act of 1996, The Chicago School, The Death and Life of Great American Cities, the market place, The Wisdom of Crowds, too big to fail, Upton Sinclair, urban planning

As we shall see, the Supreme Court would in 1948 and again in 1962 agree with Harrison and other independent exhibitors that block booking did indeed violate the antitrust laws.33 How? By “add[ing],” the Court found, “to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first.”34 Most economists who have studied block booking since the 1960s, however, have tended to defend it as harmless and in some ways efficient. Most famously, in 1963 George Stigler, a Nobel Prize–winning star of the Chicago school of economics35 disputed the idea that bundling could “extend” a monopoly, arguing it did not confer any advantage or leverage a firm holding copyrights didn’t already have.36 In 1983, the economist Benjamin Klein suggested as justification the avoidance of “oversearching”—the time and expense of bargaining over particular films, which he called “goods of uncertain and difficult to measure quality.”37 Stigler and Klein might be right that block booking cannot, by itself, extend or expand the monopoly power of a particular copyright, and that selling by giant lots can be efficient for a studio supplying thousands of theaters.


pages: 494 words: 142,285

The Future of Ideas: The Fate of the Commons in a Connected World by Lawrence Lessig

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AltaVista, Andy Kessler, barriers to entry, business process, Cass Sunstein, computer age, dark matter, disintermediation, Erik Brynjolfsson, George Gilder, Hacker Ethic, Hedy Lamarr / George Antheil, Howard Rheingold, Hush-A-Phone, HyperCard, hypertext link, Innovator's Dilemma, invention of hypertext, inventory management, invisible hand, Jean Tirole, Jeff Bezos, Joseph Schumpeter, linked data, Menlo Park, Network effects, new economy, packet switching, price mechanism, profit maximization, RAND corporation, rent control, rent-seeking, RFC: Request For Comment, Richard Stallman, Richard Thaler, Ronald Coase, Search for Extraterrestrial Intelligence, SETI@home, Silicon Valley, smart grid, software patent, spectrum auction, Steve Crocker, Steven Levy, Stewart Brand, Ted Nelson, Telecommunications Act of 1996, The Chicago School, transaction costs

Whinston, “Tying, Foreclosure, and Exclusion,” American Economic Review 80 (1990): 837 (demonstrating multiple situations in which foreclosure of the tied market can occur, including a case where the monopolist can precommit to the tie through product design or production processes); Janusz A. Ordover, Garth Saloner, and Steven C. Salop, “Equilibrium Vertical Foreclosure,” American Economic Review 80 (1990): 127 (integration across multiple products permits competitor to exclude uninte-grated rival). See also Louis Kaplow, “Extension of Monopoly Power Through Leverage,” Columbia Law Review 85 (1985): 515 (expressing early skepticism about the Chicago school analysis). See also Dennis W. Carlton and Michael Waldman, “The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries” (September 1998 working paper) (arguing that tying deters entry in primary tying markets in addition to providing leverage into tied markets). 23 See Douglas Abell, “Pay-for-Play,” Vanderbilt Journal of Entertainment Law & Practice 2 (2000): 52. 24 See 17 U.S.C. §111 (2000).


pages: 606 words: 157,120

To Save Everything, Click Here: The Folly of Technological Solutionism by Evgeny Morozov

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3D printing, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, augmented reality, Automated Insights, Berlin Wall, big data - Walmart - Pop Tarts, Buckminster Fuller, call centre, carbon footprint, Cass Sunstein, choice architecture, citizen journalism, cloud computing, cognitive bias, crowdsourcing, data acquisition, Dava Sobel, disintermediation, East Village, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, Firefox, Francis Fukuyama: the end of history, frictionless, future of journalism, game design, Gary Taubes, Google Glasses, illegal immigration, income inequality, invention of the printing press, Jane Jacobs, Jean Tirole, Jeff Bezos, jimmy wales, Julian Assange, Kevin Kelly, Kickstarter, license plate recognition, lone genius, Louis Pasteur, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Narrative Science, Nicholas Carr, packet switching, PageRank, Paul Graham, Peter Singer: altruism, Peter Thiel, pets.com, placebo effect, pre–internet, Ray Kurzweil, recommendation engine, Richard Thaler, Ronald Coase, Rosa Parks, self-driving car, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Skype, Slavoj Žižek, smart meter, social graph, social web, stakhanovite, Steve Jobs, Steven Levy, Stuxnet, technoutopianism, the built environment, The Chicago School, The Death and Life of Great American Cities, the medium is the message, The Nature of the Firm, the scientific method, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, transaction costs, urban decay, urban planning, urban sprawl, Vannevar Bush, WikiLeaks

But the institutional and political logics—and the plural here is deliberate, for it would be incorrect to blame them on capitalism or neoliberalism or globalization—that are quietly inserting these approaches into the policymaking tool kit are hardly novel and don’t have all that much to do with “the Internet.” If, like some of the most prominent adherents of Internet-centrism, we believe that Steve Jobs was the greatest enemy of freedom or creativity, we risk misunderstanding—and even understating—the enemy. To talk about gamification without also discussing B. F. Skinner’s behaviorism or to talk about digital preemption without bring up rational-choice theory and the Chicago school of economics seems misguided; the nearly universal excitement about “the Internet,” mobile phones, and Wikipedia distracts us from noticing that many of the underlying phenomena are anything but new. As someone who grew up in the final years of the Soviet Union, even I remember the penchant that Soviet managers had for gamification: students were shipped to the fields to harvest wheat or potatoes, and since the motivation was lacking, they too were assigned points and badges.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population

The summit witnessed the birth of a hyperpower, yes, but also the beginning of a hyperbubble, as, in a mood of triumphalism, borrowing, debt and deregulation all swelled to unsustainable dimensions – hence the scale of the subsequent financial calamity. In the official photographs from the Reagan–Gorbachev summit there was a third man. This was the then mayor of Reykjavik, Davíð Oddsson, who was playing host to the two superpowers. A decade later, Oddsson – now prime minister – had followed the Chicago-school formula for growth and had stopped most regulation of Iceland’s banks. Two decades on came my uncomfortable interview with a man in denial about the coming financial collapse of his institution, his financial system – and his nation. Meet Davíð Oddsson, the Forrest Gump of the financial crisis. The extraordinary tale of how Iceland had got to this point, of the global pressure placed on this tiny country immediately after the crash, and of how it subsequently began to extract itself from the mess, is one with lessons well beyond its own shoreline.


pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, Monroe Doctrine, moral hazard, mortgage debt, new economy, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

Milton Friedman, a conservative economist whose work combined emphasis on the nation’s money supply as the key to inflation with a staunch belief in the market as a self-correcting mechanism, began to sell these positions within the Republican Party. So did other colleagues from the academic seat of American free-market economics, the University of Chicago. From Barry Goldwater and Ronald Reagan in the United States to Margaret Thatcher in Britain, conservatives harked to Friedman’s and the Chicago School’s essential message: that government interference with the operation of the market was ill-advised and doomed to failure. They also took quiet and secondary comfort from his defense of speculators and greed, a tolerance welcomed by party contributors. By the end of the 1970s, Friedman was probably the world’s most famous economist, and two of his admirers, Thatcher and Reagan, were on the cusp of power.

Goddess of the Market: Ayn Rand and the American Right by Jennifer Burns

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anti-communist, bank run, barriers to entry, centralized clearinghouse, collective bargaining, desegregation, feminist movement, financial independence, George Gilder, invisible hand, jimmy wales, Joseph Schumpeter, knowledge worker, laissez-faire capitalism, lone genius, Menlo Park, minimum wage unemployment, Mont Pelerin Society, new economy, offshore financial centre, Ponzi scheme, profit motive, RAND corporation, rent control, road to serfdom, rolodex, Ronald Reagan, side project, Stewart Brand, The Chicago School, The Wisdom of Crowds, union organizing, urban renewal, white flight, Whole Earth Catalog

Although Rand despised Hayek, his classical liberal views were a species of libertarianism to all but the purists, and his public recognition was an index of the increased respectability of antistatism. Hayek’s prize also brought attention and prestige to his overlooked mentor, Ludwig von Mises, who remained a favorite of Rand’s, and gave a boost to the fourth-generation Austrian School clustered around NYU. During this time the libertarian-inflected law and economics movement, an outgrowth of the Chicago School, made inroads at several important law schools.65 In 1975 libertarians won another coveted prize when Harvard Professor Robert Nozick was awarded the National Book Award for Anarchy, State, and Utopia, a philosophic defense of the limited state. Nozick had been introduced to libertarianism through Murray Rothbard and cited both Rothbard and Rand in his pathbreaking book. Typically understood as a response to the egalitarianism of his Harvard colleague John Rawls, Anarchy, State, and Utopia must also be recognized as the fullest intellectual flowering of the libertarian subculture.

The Great Turning: From Empire to Earth Community by David C. Korten

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Albert Einstein, banks create money, big-box store, Bretton Woods, British Empire, clean water, colonial rule, Community Supported Agriculture, death of newspapers, declining real wages, European colonialism, Francisco Pizarro, full employment, George Gilder, global supply chain, global village, Hernando de Soto, Howard Zinn, informal economy, invisible hand, joint-stock company, land reform, market bubble, market fundamentalism, Monroe Doctrine, Naomi Klein, neoliberal agenda, new economy, peak oil, planetary scale, Plutocrats, plutocrats, Ronald Reagan, Rosa Parks, South Sea Bubble, stem cell, structural adjustment programs, The Chicago School, trade route, Washington Consensus, World Values Survey

Of the contemporary stories of Empire, the New Right prosperity story is the most often repeated and celebrated in policy papers and scholarly publications, taught in universities, and recited by pundits of 240 PART III: AMERIC A, THE UNFINISHED PROJECT the corporate media. Corporate globalists subscribe to it as their catechism. They differ among themselves mainly on their views of the extent to which it is appropriate for government to subsidize private corporations or to provide safety nets to cushion the fall of the losers in the market’s relentless competition. Neoliberal Elitism Economist Milton Friedman, the leader of the Chicago school of monetary economics, and technological futurist George Gilder played leading roles in legitimating and popularizing the neoliberal story. They were favorites of President Ronald Reagan (1981–89), who presented both with presidential awards. Friedman’s most influential work, Capitalism and Freedom, first published in 1962, argues that individual freedom is the inviolate moral absolute of economic life and that it is best secured through markets that guarantee the freedom of persons of wealth to use their money and property in whatever way they consider most beneficial to their individual interest.


pages: 482 words: 147,281

A Crack in the Edge of the World: America and the Great California Earthquake of 1906 by Simon Winchester

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Albert Einstein, butterfly effect, California gold rush, Golden Gate Park, index card, indoor plumbing, Loma Prieta earthquake, Menlo Park, place-making, risk tolerance, Silicon Valley, South of Market, San Francisco, supervolcano, The Chicago School, transcontinental railway, wage slave, Works Progress Administration

The proposed epicentre of it all, City Hall, remained unbuilt, a ruin, for years; and even today, though immense in scale and tricked out with acanthus leaves in marble and fineries of gold leaf, it has dark alleys beside it full of unfortunates, lacks charm and grandeur, and possesses little sense of once having been central to something great, imperial and intended to last for all time. And without Burnham, without a settled sense of urban purpose, the city allowed itself to grow organically, with neither direction nor design. Architects today mourn the fact that no San Francisco school of architecture was ever allowed or encouraged to flourish – in the way that the Chicago School, with Burnham one of its members, did so energetically in the aftermath of that city’s destruction by fire in 1871. The city-centre’s commercial buildings were hastily put back up, with very few of them either nobly or loftily made; and the houses that were then crowded into the outer boroughs were made less lovely than they might have been, their architectural styles often merely sentimental, nostalgic or plain faux.


pages: 598 words: 172,137

Who Stole the American Dream? by Hedrick Smith

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Affordable Care Act / Obamacare, airline deregulation, anti-communist, asset allocation, banking crisis, Bonfire of the Vanities, British Empire, business process, clean water, cloud computing, collateralized debt obligation, collective bargaining, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Deng Xiaoping, desegregation, Double Irish / Dutch Sandwich, family office, full employment, global supply chain, Gordon Gekko, guest worker program, hiring and firing, housing crisis, Howard Zinn, income inequality, index fund, informal economy, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, laissez-faire capitalism, late fees, Long Term Capital Management, low cost carrier, manufacturing employment, market fundamentalism, Maui Hawaii, mortgage debt, new economy, Occupy movement, Own Your Own Home, Peter Thiel, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, Ralph Nader, RAND corporation, Renaissance Technologies, reshoring, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Steve Jobs, The Chicago School, The Spirit Level, too big to fail, transaction costs, transcontinental railway, union organizing, Unsafe at Any Speed, Vanguard fund, We are the 99%, women in the workforce, working poor, Y2K

“Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible,” Friedman asserted. Ghoshal disagreed. Employees as well as shareholders create value, he argued, and they should share more equally in corporate gains. But Friedman’s views turned out to be much more influential than Ghoshal’s. The aggressive management notions of the Chicago school of economists took root at prominent East Coast business schools, causing Ghoshal to complain years later, after the Enron and WorldCom scandals, that “many of the worst excesses of recent management practice have their roots in a set of ideas that have emerged from business school academics over the last 30 years.” Al Dunlap: Wall Street Cult Figure The New Economy model suited Al Dunlap.


pages: 780 words: 168,782

Strange Rebels: 1979 and the Birth of the 21st Century by Christian Caryl

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anti-communist, Ayatollah Khomeini, Berlin Wall, Bretton Woods, British Empire, colonial rule, Deng Xiaoping, financial deregulation, financial independence, friendly fire, full employment, income inequality, industrial robot, Internet Archive, land reform, land tenure, Mahatma Gandhi, means of production, Mikhail Gorbachev, Mohammed Bouazizi, Mont Pelerin Society, new economy, New Urbanism, oil shock, open borders, open economy, Plutocrats, plutocrats, price stability, rent control, road to serfdom, Ronald Reagan, single-payer health, special economic zone, The Chicago School, union organizing, upwardly mobile, Winter of Discontent, Xiaogang Anhui farmers, Yom Kippur War

The main intellectual alternative to the reigning consensus in global economics emerged from the so-called Chicago School, a term that was first applied in the 1950s to a group of free-market economists who came together at the University of Chicago. Their most famous theoretician was Milton Friedman, a founding member of the Mont Pèlerin society and a gifted polemicist for the cause of economic liberalism. The Chicago School did not content itself with merely generating ideas. It also turned out an enormously influential crop of international economists who later played direct roles in the process of economic reform in their home countries.23 Friedman and his colleagues did much to prepare the way for Thatcher’s economic counterrevolution by promoting the new thinking during the 1970s. Friedman’s Nobel Prize in 1976 (coming two years after the one received by Friedrich von Hayek, who also taught for a time at Chicago) signaled the shift in thinking that was already under way.


pages: 903 words: 235,753

The Stack: On Software and Sovereignty by Benjamin H. Bratton

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1960s counterculture, 3D printing, 4chan, Ada Lovelace, additive manufacturing, airport security, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, algorithmic trading, Amazon Mechanical Turk, Amazon Web Services, augmented reality, autonomous vehicles, Berlin Wall, bioinformatics, bitcoin, blockchain, Buckminster Fuller, Burning Man, call centre, carbon footprint, carbon-based life, Cass Sunstein, Celebration, Florida, charter city, clean water, cloud computing, connected car, corporate governance, crowdsourcing, cryptocurrency, dark matter, David Graeber, deglobalization, dematerialisation, disintermediation, distributed generation, don't be evil, Douglas Engelbart, Edward Snowden, Elon Musk, en.wikipedia.org, Eratosthenes, ethereum blockchain, facts on the ground, Flash crash, Frank Gehry, Frederick Winslow Taylor, future of work, Georg Cantor, gig economy, global supply chain, Google Earth, Google Glasses, Guggenheim Bilbao, High speed trading, Hyperloop, illegal immigration, industrial robot, information retrieval, intermodal, Internet of things, invisible hand, Jacob Appelbaum, Jaron Lanier, Jony Ive, Julian Assange, Khan Academy, linked data, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Masdar, McMansion, means of production, megacity, megastructure, Menlo Park, Minecraft, Monroe Doctrine, Network effects, new economy, offshore financial centre, oil shale / tar sands, packet switching, PageRank, pattern recognition, peak oil, performance metric, personalized medicine, Peter Thiel, phenotype, place-making, planetary scale, RAND corporation, recommendation engine, reserve currency, RFID, Sand Hill Road, self-driving car, semantic web, sharing economy, Silicon Valley, Silicon Valley ideology, Slavoj Žižek, smart cities, smart grid, smart meter, social graph, software studies, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Startup school, statistical arbitrage, Steve Jobs, Steven Levy, Stewart Brand, Stuxnet, Superbowl ad, supply-chain management, supply-chain management software, TaskRabbit, the built environment, The Chicago School, the scientific method, Torches of Freedom, transaction costs, Turing complete, Turing machine, Turing test, universal basic income, urban planning, Vernor Vinge, Washington Consensus, web application, WikiLeaks, working poor, Y Combinator

See also Methaven's “ultraminimal state” and its Facestate project: Andrea Hyde, “Metahaven's Facestate,” Walker Art Center, December 13, 2011, http://www.walkerart.org/magazine/2011/metahavens-facestate. 41.  The confusion this sows is readily apparent in both attempts to curtail Google under the rubric of a trust “monopoly” and in the awkward rationales for why Google is actually not a monopoly. See judicial “originalist” Robert Bork's back-bending “What Does the Chicago School Teach About Internet Search and the Antitrust Treatment of Google,” Robert H. Bork and J. Gregory Sidak, Journal of Competition Law & Economics 8 (2012): 663–700. 42.  In a way, geopolitical reality is only catching up with the anticipations of the science fiction that has already explored the proliferation and institutionalization of data havens and data infrastructures, “community clouds,” cloud-based microreligions and macrostates, and others.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

But all this indicated the extent to which the Fed was by now “pursuing several, often incompatible, objectives simultaneously.”58 The inability to stem the inflationary pressures and balance-of-payments deficits of the mid 1960s, combined with the impact on US gold reserves of the British devaluation in late 1967, finally pushed the Johnson administration into imposing statutory controls on the outflow of capital in 1968, for the first time since World War II. Once again, not only the Chicago School but also many Keynesian economists vociferously opposed this on the grounds that it undermined the liberal international economic order that Bretton Woods had been designed to foster. Writing in the Wall Street Journal, John Kenneth Galbraith declared: “[T]he fruits of great strenuous private efforts and of the most carefully conceived public policy extending over the last several decades are about to be extinguished.”59 Although Galbraith complained of the weakness of American business in failing to stop the controls program, Wall Street’s reaction to them (like that of the central bankers in Europe) was to demand instead higher American interest rates to cope with the problem, and these were indeed instituted in the Fed by 1969, as we shall see in the next chapter.


pages: 558 words: 168,179

Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right by Jane Mayer

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affirmative action, Affordable Care Act / Obamacare, anti-communist, Bakken shale, bank run, battle of ideas, Berlin Wall, Capital in the Twenty-First Century by Thomas Piketty, carried interest, centre right, clean water, Climategate, Climatic Research Unit, collective bargaining, crony capitalism, David Brooks, desegregation, diversified portfolio, Donald Trump, energy security, estate planning, Fall of the Berlin Wall, George Gilder, housing crisis, hydraulic fracturing, income inequality, invisible hand, job automation, low skilled workers, market fundamentalism, Mont Pelerin Society, More Guns, Less Crime, Nate Silver, New Journalism, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, oil shock, Plutocrats, plutocrats, Ralph Nader, Renaissance Technologies, road to serfdom, Ronald Reagan, school choice, school vouchers, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, the scientific method, University of East Anglia, Unsafe at Any Speed, War on Poverty, working poor

“Law and Economics is neutral, but it has a philosophical thrust in the direction of free markets and limited government. That is, like many disciplines, it seems neutral, but it isn’t in fact.” The Olin Foundation’s route into the country’s best law schools was circuitous. The foundation began by financially supporting an early leading figure in Law and Economics, the libertarian Henry Manne, an acolyte of the Chicago school of free-market economics. Brilliant, impolitic, and an ideological purist, Manne “was considered a marginal, even eccentric character in the legal academy,” according to Teles, when the Olin Foundation first started funding him in the early 1970s. To the frustration of the foundation, though, he didn’t teach at high-prestige schools. In 1985, however, the foundation seized a golden opportunity to establish a beachhead at the pinnacle of legal prestige.


pages: 1,157 words: 379,558

Ashes to Ashes: America's Hundred-Year Cigarette War, the Public Health, and the Unabashed Triumph of Philip Morris by Richard Kluger

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air freight, Albert Einstein, California gold rush, cognitive dissonance, desegregation, double entry bookkeeping, family office, feminist movement, full employment, ghettoisation, Indoor air pollution, medical malpractice, Mikhail Gorbachev, Plutocrats, plutocrats, Ralph Nader, Ralph Waldo Emerson, RAND corporation, rent-seeking, risk tolerance, Ronald Reagan, The Chicago School, the scientific method, Torches of Freedom, trade route, transaction costs, traveling salesman, union organizing, upwardly mobile, urban planning, urban renewal, War on Poverty

His appearance, manner, and philosophy of advertising were the polar opposite of the usual Madison Avenue huckstering. Among his first accounts had been the Minnesota Valley Canning Company, for whom Burnett’s agency had created the symbol of a jolly green giant. The image worked so well that the company changed its name accordingly and stayed on ever after as a client while Burnett became the embodiment of the “Chicago school of advertising,” which in contrast to New York-style slick-ness stressed what its roly-poly exponent called “finding the inherent drama in the product and writing the ad out of that drama rather than using mere cleverness. … You have to be noticed, but the art is in getting noticed naturally, without screaming and without tricks.” He favored directness, horse sense, and conversational language over the mannered and cute.