The Chicago School is an economic school that started at the University of Chicago that incorporates monetarist convictions about the economy. As per Chicago School, cash supply ought to be kept in harmony with the interest for cash. Chicago School hypothesis is additionally connected in account and law. The earlier establishment of the Chicago school is that the allotment of free markets is one of the assets in the economy, and the best part is government mediation.
Definition of Chicago School/Chicago School of Economics
Chicago School is a neoclassical economic school of thought that originated at the University of Chicago in the 1940s. It has four basic tenets that can be read as follows:
- Markets are better than government when it comes to allocating resources
- Monopolies are a result of the government's attempt to regulate an economy
- The government shouldn't waste time managing aggregate demand
- A steady and low rate of growth of the money supply should be the main focus of the government.
The Chicago School includes monetarist beliefs about the economy, contending that the money supply should be kept in equilibrium with the demand for money. Chicago School theory is also applied in finance and law.
Who Founded the Chicago School?
The Chicago school of economics was founded in the 1930s, mainly by Frank Hyneman Knight. It went on to produce multiple Nobel Prize winners. Some of the most important members of Chicago School include Ronald Coase, Aaron Director, Gary S. Becker, Milton Friedman, Richard Posner, Merton H. Miller, and George J. Stigler.
How Does the Chicago School Work?
The focus of Chicago school is on the deduction of regulations on business and his belief in a laissez-faire approach to competition.
Theories of Chicago School
The Chicago School explained criminal activities through its theories stating the idea of socialization. Here are the three theories proposed by the school:
- Social disorganization theory:
The social disorganization theory takes into account:
- the disproportionate amount of social and economic hardship
- the dimension of crime that happens in inward urban communities contrasted with different regions.
The theory states that criminal values are more comfortable to sustain in areas with a high degree of social disorganization ads compared to areas with high social cohesion.
- Differential association Theory:
According to Differential association theory, when groups supporting criminal activities are given more importance such that they are more influential than the institutions that counter criminal activity, people tend to inculcate criminal behaviors. The theory further states that the choices of people engaging into either of these two groups depend upon the peer groups they interact with the most.
- Social learning theory:
This theory can be regarded as an elaborated form of the differential association theory. Social learning theory focuses on learned delinquency or imitation. Notwithstanding the idea of impersonation, social learning hypothesis centers around the subsequent social fortifications that react to these reprobate practices.
Breaking Down Chicago School
Chicago school gets its most significant contribution from Milton Friedman, an American economist, and statistician who strongly believed in free-market capitalism. While working as a professor at the University of Chicago, he developed numerous free-market theories that opposed the views of traditional Keynesian economists. One such method was the quantity theory that proposes that the general price levels in the economy are determined by the amount of money in circulation. So, to control economic growth, it is imperative that general price levels are managed efficiently. The theory further states that the economy can further be strengthened by eliminating regulations on business.
Milton Friedman was not the only economist to develop economic theories at Chicago school. George Stigler, another Nobel Laureate, also proposed theories relating to the impact of government regulation on businesses. This doesn't end here. The Chicago School is also known for its contributions to finance theory.
Criticisms faced by Chicago School
The Chicago School had to face a lot of criticism from various personalities/critics. Here's what the major critics had to say about the theory:
- Paul Douglas (Economist and Democratic senator from Illinois)
While at the University of Chicago, Paul Douglas could never agree with the teachings that everybody else at the university believed in. He disagreed with the concept that market decisions were always correct and profit values were the supreme ones. The fact that bothered him the most was that people out there refused to use statistical data to develop an economic theory or accept the critical analysis of the economic system.
- Brad DeLong (Economist, University of California, Berkeley)
Brad believes that Chicago School has experienced an "intellectual collapse".
- Paul Krugman (Nobel laureate)
Paul Krugman of Princeton University believes that Chicago School economists have been wrong in their conclusions. According to him, the reason for such comments is probably those economists following useless macroeconomic research from the mid-1960s which was developed using models developed in 1930.
At long last, the school likewise has been condemned for preparing business analysts who exhorted the generally oppressive Chilean military junta (and, to a lesser degree, other, comparatively ultra-patriot South American routines) amid the 1980s.
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