The Chicago Economics Tradition
George Shultz taught economics at the University of Chicago and eventually became Dean of the Business School. The Chicago years were an extremely formative time for Shultz. He was influenced a great deal by economic lights such as Milton Friedman – and emerged as a pragmatic free-marketer who would serve in many roles as a scholar and statesman economist.
George Shultz with Bob Chitester and Milton Friedman
Origins of the Chicago School of
Economics - Frank Knight

Economists use a shorthand method to identify one another. They divide economic theory—and its practitioners —into various "schools" of thought. One of the most famous collections of thinkers and theoreticians is the Chicago school, housed at the University of Chicago. The cofounder of this school, along with Jacob Viner, was Frank Hyneman Knight. Because of his position at Chicago and the quality of his students, Knight became quite influential, although today his name is generally unknown to the public.

From his earliest days as a teacher, Knight's defining approach to economic theory—and most everything else—was a hard-nosed, often entertaining skepticism. Despite his idiosyncrasies and curmudgeonly demeanor, Knight's students continually bestowed on him the distinction of having greatly influenced their thinking. Among these students were empiricists Milton Friedman and George Stigler, whose own approaches to economic problem solving were often attacked by their mentor. Many of his students disagreed with him on [economic theory]; yet as a teacher Knight must be judged a great success if for no other reason than that he taught four future Nobel Memorial Prize winners in economics: Friedman, Stigler, James Buchanan and Paul Samuelson. Knight himself would probably have gotten the award had he not died shortly after it was added in 1969. The recipient must be living when the award is made.

- from Economic Insights, Federal Reserve Bank of Dallas

Interviewer: In the '50s, '60s, and '70s, people were talking about the Chicago School of economics and politics. What did that phrase come to stand for?

George Shultz: Well, it stands for the fundamental value of freedom and, of course, in the economics realm it's free markets, freedom of enterprise, freedom from undue regulation. So [it stands for] all of those kinds of things, I think.

Interviewer: Why did the Chicago School sort of equate free markets with personal freedom, or political freedom? What's the connection?

George Shultz: I think they are equated in the sense that if you have a society that doesn't put any value on personal freedom, it's going to be hard for that society to have genuinely free markets. And I think as societies try to have free markets without more individual freedom, what happens over time is that the market pushes into the political system and changes it, as we have seen on a number of instances.

“Everybody loves to argue with Milton, particularly when he isn't there.”

Interviewer: Where have you seen that?

George Shultz: Well, for example in Chile we had a regime with a prime minister named [Allende], which was governmentalizing the Chilean system, and the economic system was declining and in disarray. At the request of the Chilean legislator, the armed forces took over and no doubt did some unnecessarily brutal things in the process, but nevertheless they took over and I think didn't know quite what to do about the economy. So there were in Chile some people who came to be called Chicago Boys, they had studied economics at the University of Chicago. And when the cry went out "What shall we do?" they raised their hands and said, "We know what to do." And so a Chicago School-like economy gradually evolved in Chile. It worked. They had the only decent economy in South America in the mid-80s and on. Over time, I think it had its impact on the political system. We did see, in the end, a peaceful transition to a democracy and general Pinochet, to his credit, did allow that to happen.

Interviewer: Very interesting. Going back to Chicago, you talked about the core values, if that's the right word, of Chicago. What was the intellectual atmosphere like? Can you describe the kind of discussions that would be held at the Quadrangle Club?

George Shultz: Well, the general atmosphere was very combative. It wasn't like a bunch of people who are always saying yes to each other. People love to argue. And another attribute of the Chicago School was to always test things. That is, a theory by itself doesn't cut much ice. You have to test it. You have to get data, empirical data, gather it together, and put it against your ideas to see if the ideas hold up. And so that was another attribute of the Chicago School, always to be testing, always to be questioning. One of the reasons why it was so much fun at the University of Chicago in those days, and still is, is that general atmosphere of back and forth and argument -- it was fun.

Interviewer: I'm sure that one of those who took a prominent role in these debates and wasn't afraid to fight with anybody was Milton Friedman.

George Shultz: Milton Friedman. Milton Friedman is a wonderful man. He and his wife, Rose, are just great people. A lot of people disagreed with Milton, some people agreed with him, but somehow Milton managed to set the agenda of argument. So there was a saying: Everybody loves to argue with Milton, particularly when he isn't there. He's a good arguer, and he gives a good account of himself, and he epitomizes the values in the Chicago School, but also the very serious mass of efforts to test ideas. So his Monetary History of the United States is a massive examination in empirical terms of what actually happened when he [tested] his ideas about the significance of monetary policy. So it isn't just ideas, it's testing the ideas and seeing if they hold up under examination.

Interviewer: You said that Milton Friedman set the agenda. How do you sum up Friedman's achievement?

George Shultz: His achievements in professional terms were his work on monetary policy, his work on consumption, and his general impact in terms of professional ideas. But also Milton Friedman is a brilliant teacher. He has a capacity to explain something and expound on something, and he's devoted a lot of attention to that. So he and Rose together collaborated, for example, on this wonderful documentary about economics, Free To Choose. And his book, [Capitalism and Freedom] is a classic -- it sold millions of copies all over the world. And the book [Free To Choose] that Rose and Milton authored accompanying the documentary has been widely read and widely sold on a worldwide basis. It's been translated into I don't know how many languages. So his impact was tremendous professionally, strictly professionally. But then his impact was far greater on the general population and thinking around the world because he was such a good teacher, and is such a good teacher.

Interviewer: One of our interviewees described him as "the economist of the century." Is that overstating it?

George Shultz: Well, he certainly ranks right up there at the top, without a doubt. That's just my opinion.

Interviewer: Right until about the mid-70s the kind of ideas being advanced by Milton Friedman or [Friedrich] Hayek, when he was at the university, and other people at the school were considered as sort of lunatic fringe ideas, far right, out there. Can you describe in your own words the degree to which those ideas were not being accepted by the mainstream and why?

George Shultz: People in the mainstream of economics were deeply affected by the depression of the 1930s, and the writings of Keynes became sort of a central feature. People tended to emphasize fiscal policy -- that is the importance of the governments' revenue and spending and the relationships of those things and the capacity. And there was necessity in their view of the government to try to manage the economy through fiscal policy. And that, I think, became a sort of central focus. And that's a focus that put monetary policy in a secondary position and doesn't pay the kind of attention that the Chicago School of people would place on markets and how the markets operate.

Interviewer: How did people, enemies of the Chicago School, if you like, view people like Milton Friedman?

George Shultz: Well, I don't know that there were enemies. After all, economics has always had microeconomics and price theory and so on as part of it, and all economists acknowledge that. So Milton was good in a way. If you disagree with somebody, but you find yourself always losing arguments to him, you're not going to like that very much -- not that he would (laughs).

This interview is excerpted from Commanding Heights, a PBS companion website to the film of the same title. Find the full George Shultz interview here. Hyperlinks have been added for information access.

Home  |  Video Showcase  |  George Shultz  |  The Cold War  |  Reagan Years  |  More to Explore  |  Press & Promotional  |  Buy
© 2017 Free To Choose Network. All Rights Reserved.