Ebenstein argues that classical liberalism as defended by 18th‐ and 19th‐century economists such as Adam Smith and John Stuart Mill was far from today’s libertarianism and the Chicago school. Classical liberals favored “a wide and appropriate area for government activity in a prosperous and just modern society.” Classical liberalism, Ebenstein writes, “is not ‘libertarianism’ as the latter term is used today. It is important to be crystal clear on this point.”
Contemporary libertarians, he continues, are neoanarchists and government haters. Many are “ideological crackpots and even charlatans.” “Contemporary libertarianism too often denotes cranky obscurantism, intolerance, irrelevance, and, frankly, poor scholarship and manipulation of data.” Murray Rothbard was “a crackpot ideologically.” To be fair, Ebenstein only claims that “many contemporary libertarians” are “too often” cranks (my italics).
He does not apply this diagnosis to major economists of the Chicago school. But he does blame them for becoming more libertarian than classical liberal.
Cranky libertarians / We probably have to admit with Ebenstein that there was an ambiguity in classical liberalism. Classical liberals wanted both individual liberty and (some degree of) government intervention. This ambiguity persists in our own time. Today’s social democrats can be viewed as classical liberals who want more government intervention and less individual liberty. Today’s libertarians can be seen as classical liberals who want less government intervention and more individual liberty. The argument for a total break between classical liberals and libertarians does not quite work.
As much as he imagines a chasm between classical liberals and libertarians, Ebenstein, on the contrary, sees a smooth continuity between classical liberals and their more interventionist successors. He tells us that “Keynes was a classical liberal,” even if Keynes himself did not accept that label (see his 1925 speech, “Am I a Liberal?”). Ebenstein also declares Paul Samuelson a classical liberal, but the author of Chicagonomics also quotes the 1989 version of Samuelson’s popular textbook Economics as pontificating that the “Soviet economy is proof that … a socialist command economy can function and even thrive.”
Chicagonomics suggests that classical liberalism has evolved only along the statist branch of its divide. I think a better case can be made that Chicago school economists were the real heirs of the classical liberals.
Made up of all those who embrace the laissez‐faire strand in classical liberalism, libertarians are a diversified bunch. Like social democrats, they have their fair share—and perhaps more than their fair share—of cranks. Ebenstein’s criticisms must not be discounted. Is he wrong in claiming (along with Milton Friedman) that Austrian economists have evolved little in decades (which is not surprising if you think your whole system logically derives from self‐evident premises)? “There hasn’t been an iota of progress,” Friedman said. But there is more to libertarianism than a particular school of economic thought.
The author of Chicagonomics explains that decades before the “Chicago school” appeared, the University of Chicago’s Department of Political Economy—rechristened the Department of Economics in 1925—was a heterogeneous place. Its first chairman, James Laughlin, established himself, says Ebenstein, “as a strong classical liberal” and “a staunch opponent of government intervention in the economy and as a proponent of laissez‐faire,” which illustrates that laissez‐faire is not inconsistent with classical liberalism. But the department also harbored figures such as progressive economists Thorstein Veblen and far‐left labor economist Robert Hoxy.
The department’s 1930s stars, such as Frank Knight and Henry Simons, were classical liberals in the ambiguous sense of their forebears. Ebenstein also lists Jacob Viner, whom Friedman apparently did not consider a classical liberal. Of all these pre‐war Chicago economists, Ebenstein emphasizes their belief in certain forms of government intervention. They favored stimulative fiscal and monetary policies during the Great Depression: “They were more Keynesian at times than Keynes himself.” But they viewed these policies as temporary and opposed New Deal regulations. Viner thought that the U.S. welfare state, coexisting with a market economy, was “really worth fighting for and dying for as compared to any rival system.” Knight believed that “every member of society has a right to live at some minimum standard, at the expense of society as a whole.” Of course, these Chicago economists were free traders.
Perhaps contradicting again his chasm between laissez‐faire and classical liberalism, Ebenstein explains that Simons claimed to believe in both. Simons said that his “underlying position may be characterized as severely libertarian or, in the English‐continental sense, liberal.” According to John Hopkins University history professor Angus Burgin, Simons was the “first significant economist to refer to himself as ‘libertarian’ ” (quoted by Ebenstein). Yet, the author of Chicagonomics insists, Simons favored progressive taxation and government services. George Stigler, a later Chicago economist who was more libertarian than Simons, thought that much of the latter’s proposals were “almost as harmonious with socialism as with private‐enterprise capitalism.” As presented in Chicagonomics, Simons illustrated the continuity between classical liberalism and libertarianism.
Enter the Chicago school / The Chicago school took off after the arrival of Milton Friedman in 1946 and only got its label in the 1950s. Friedman, who stayed at Chicago until 1976, “was the heart and soul of the Chicago school.” Aaron Director and Allen Wallis also arrived at Chicago in 1946. Other Chicago school economists included Stigler and Gary Becker. The fact that Friedman, Stigler, and Becker each won a Nobel Economics Prize illustrates the remarkable intellectual contribution of the Chicago school.
The Chicago school also comprised scholars outside the Department of Economics. Director and Ronald Coase (another Nobel laureate) held appointments in the Law School. Friedrich Hayek, who taught at Chicago under the aegis of the Committee on Social Though between 1950 and 1962, was indirectly related to the Chicago school and occupies a large place in Ebenstein’s book.
Like Friedman himself, the Chicago school had two intellectual thrusts: one academic and methodological, the other more normative and popular.
The methodological school was centered in the Department of Economics and revolved around monetarism, Marshallian neoclassical economics, the use of empirical and statistical methods, skepticism toward mathematical economic theory and perhaps especially large macroeconomic models, and the rejection of Keynesianism. Ebenstein is right to clearly distinguish between, on the one hand, mathematical economics, which is the mathematical modeling of economic theory (which the Chicago school was suspicious of), and on the other hand the use of statistical measurement and empirical analysis (which the school embraced).
The popular face of the Chicago school was the normative defense of free markets. Its main representative was Friedman, who played a major role as a public intellectual, but Becker and others had an impact. Ebenstein criticizes “the Friedman Chicago school of economics” for being “more ideological than scientific, at least in addressing the general public.” That qualification is important.
Hayek was on the normative side of the Chicago school. Ebenstein correctly emphasizes how Hayek’s methodology diverged from Friedman’s. A member of the Austrian school of economics, Hayek did not espouse Friedman’s positivism. But he defined himself as a classical liberal and was a great defender of economic freedom. Chicagonomics gives him a lot of attention, perhaps because the book is as much interested in libertarianism as it is in economics.
Much of Hayek’s work dealt with political philosophy. Friedman discounted much of Hayek’s work in economics and claimed that his capital theory was “unreadable.” By a quirk of history, however, Hayek earned his Nobel Prize (shared with socialist economist Gunnar Myrdal) in 1974, two years before Friedman got his.
Ebenstein makes much of the ideological evolution of Friedman and Hayek who, he tells us, both started as classical liberals but became more and more libertarian as they grew older, up to espousing a “virtual neoanarchism.” It is unclear what Ebenstein means by that expression, other than that it is terminologically two steps removed from anarchism.
In the 1940s, according to Ebenstein, Hayek agreed with Simon’s brand of classical liberalism. Hayek declared he was “in favor of a minimum income for every person in the country.” Ebenstein blames the later Hayek for opposing compulsory participation in any sort of monopolistic government program except for law enforcement and national defense purposes.
For Ebenstein, a similar evolution is even more obvious in the case of Friedman. Friedman’s Capitalism and Freedom (University of Chicago Press, 1962) “is clearly a successor to John Stuart Mill’s On Liberty,” but it already “displayed a largely anarchist streak,” suggesting again a connection between the two strands of thought. Capitalism and Freedom approved many traditional functions of the contemporary state, while the later Friedman, Ebenstein explains, came to favor a night watchman state, a low‐level negative income tax, less government expenditure, and an almost totally private education system.
Ebenstein may not be consistent in his evaluation of the later Friedman. Quoting a personal letter that Friedman wrote one year before his death, Ebenstein writes that “Friedman was, ultimately, a man of the left.” Or else, as I would argue, libertarianism is as much on the left as it is on the right, like classical liberalism was. But then, there is no real chasm between the two strands of thought.
A natural evolution / Friedman’s and Hayek’s intellectual evolutions are easy to understand. From classical liberalism, one can easily move to libertarianism, especially with hindsight about the consequences of following the do‐gooder branch of classical liberalism. Looking at today’s Leviathan, it is quite understandable that Friedman and Hayek outgrew the naivety of their classical liberal forebears. The state is not so nice after all.
When he was (according to Ebenstein) still a classical liberal, Friedman explained how one can become more distrustful of government:
If, for example, existing government intervention is minor, we shall attach a smaller weight to the negative effects of additional government intervention. This is an important reason why many earlier liberals, like Henry Simons, writing at a time when government was small by today’s standards, were willing to have government undertake activities that today’s liberals would not accept now that government has become so overgrown. (Capitalism and Freedom, p. 32)
As government continued to grow, Friedman thought that the cost of new intervention in terms of freedom was rising and he thus naturally became radicalized.
Classical liberalism is closer to anarchism than Ebenstein realizes. A French philosopher, Raymond Ruyer, suggested an interesting reconciliation in his 1969 book Éloge de la société de consommation (In Defense of the Consumer Society): liberalism, he wrote, meaning classical liberalism, is “real anarchism, feasible and realized, as opposed to mere emotional declarations.”
Despite his obvious learnedness, does the author of Chicagonomics really understand libertarianism and current politics? He approvingly quotes George Nash, “the great historian of modern conservatism,” who claims that the mindset dominating the thought of “mainstream Republican organizations” is that of “radical libertarian anarchists,” while anarcho‐capitalist slogans have become mainstream in the Tea Party if not in the Republican Party itself. This must occur in another dimension of the universe. And although Ayn Rand, whom Ebenstein—not without justification—puts among the cranks, was influential in bringing a whole generation to question the politically correct justifications of the state, she refused the libertarian label and little of today’s libertarianism rests on her shoulders.
Pink elephant / Ebenstein is too knowledgeable to be “red” in the socialist sense. Yet, we can see a pink elephant in Chicagonomics: an overwhelming concern for economic equality. Ebenstein constantly laments growing inequality and repeats that higher marginal tax rates and government redistributive policies are needed to fight it. He blames libertarians for ignoring the problem. Without discussing the extent or evolution of income inequality, we can easily find flaws in his arguments.
Ebenstein does not seem interested in the sources of inequality. He repeats some statistics about unequal incomes and wealth, stressing that wealth has become even more unequal than income. But how is that possible? Since income is the return on wealth (including human capital), the distribution of wealth correctly measured should parallel the distribution of income—or else the statistics are missing something. This something could be the depreciation of the human capital of the poorly educated in the face of technological progress, coupled with unsatisfactory public education.
Another possible source of inequality, which Ebenstein mentions in passing, is the lower fertility of richer families. Still another factor is the change in the marriage market, where assortative marriage means that the rich (including in human capital) are now marrying more among themselves: male physicians marry female physicians, instead of nurses as before. The human‐capital poor are left to marry among themselves, thereby increasing inequality. (See the work of Jeremy Greenwood, Nezih Guner, Georgi Kocharkov, and Cezar Santos on this.) Why and how should inequality stemming from such individual choices be corrected?
A related point is that one should distinguish clearly between formal equality under the law, which is clearly a classical liberal ideal, and material equality, which is probably not.
Ebenstein focuses on relative inequality, not on poverty. Even if “a rising tide lifts all boats,” he would still, I surmise, dislike inequality. It is not clear whether the classical liberals, living in an era where dire poverty existed, would have followed him. After all, 99% of American households own a TV set, and more than three‐fourths own more than one.
Ebenstein underestimates the increase in state power that is needed to correct income inequality. As French political philosopher Bertrand de Jouvenel wrote, “The more one considers the matter, the clearer it becomes that redistribution is in effect far less a redistribution of free income from the richer to the poorer, as we imagined, than a redistribution of power from the individual to the State” (The Ethics of Redistribution, Cambridge University Press, 1952).
Adam Smith himself, even if he did argue for taxing the rich more and perhaps even for progressive taxation, saw the danger. In The Wealth of Nations, he wrote:
The tax upon shops, it was intended, should be the same upon all shops. It could not well have been otherwise. It would have been impossible to proportion with tolerable exactness the tax upon a shop to the extent of the trade carried on in it, without such an inquisition as would have been altogether insupportable in a free country. … For these reasons, the project of a tax upon shops was laid aside.
In his 1763 Lectures on Jurisprudence, Smith had already noted: “No doubt the raising of a very exorbitant tax, as the raising as much in peace as in war, or the half or even the fifth of the wealth of the nation, would, as well as any other gross abuse of power, justify resistance in the people.”
I am not as sure as Ebenstein that Smith, if he were to come back to life, would not become a radical libertarian.
On the problem of inequality, the author of Chicagonomics makes 13 practical proposals, which range from raising the federal minimum wage to steep increases in tax rates for the rich. From a Chicago‐school viewpoint, a few of his proposals are good, but others are questionable or incompatible with his proposal to “reduce regulation.”
Ebenstein underestimates the role of regulation in fueling inequality. And he does not mention the role of crony capitalism or the fabrication of a large class of criminals (partly because of the vicious war on drugs) who, with their criminal records, often cannot earn an honest living. The solution seems to reside in less government power, not more. Mistrusting the state has its advantages.
Conclusion / Chicagonomics is an instructive book about the history of economics at the University of Chicago. It raises interesting and challenging questions, but takes many shortcuts. Among the missing elements, the reader might have liked to hear Ebenstein’s take on why the Chicago school as we knew it seems to have vanished.
As I have tried to show, two of the book’s main theses are overdone. Most of contemporary libertarianism is in continuity with classical libertarianism. And even if (a certain sort of) equality is a classical liberal value, a call for still more redistribution and government power ignores how far contemporary governments have drifted away from classical liberalism.
