THE CHICAGO SCHOOL’S RECORD OF INFAMY

September 16, 2008 – 4:51 am

Thanks to Chicago School economics, where lobbying rhetorics and not real analysis seem to rule the day, the US financial market may self-destruct in no time in the current economic crisis. Economist Michael Hudson explains.

As a graduate of the University of Chicago (1959) and also of its Laboratory School (1955-56), I think my experience there confirms the picture portrayed by Henry Liu in his wonderful essay last week on Milton Friedman and the “Money Matters Controversy”.

My introduction to the University of Chicago (UC) was via the Manhattan Project around 1948. I lived in the Chicago neighborhood of Kenwood, just north of Hyde Park. We rented the top floor of our house to a physicist, Shuki Hayashi, who worked on the project at Stagg Field, under whose bleachers the project’s atomic pile still continued. To bring me to the Lab School, he would put me on his bike (a Raleigh DL-1 28-incher) and drive me up to the field. Only much later in my life was I left to wonder what has been more dangerous to humanity: the A-bomb or Chicago School monetarism?

My father was a labor leader and we often had UC professors over to the house for discussions in the early 1950s. In contrast to today, the Chicago faculty from the 1930s through early 1960s included such men as Maynard Krueger (a vice presidential candidate on the Socialist Party ticket behind Norman Thomas), and Rexford Tugwell, a Roosevelt brain truster and former governor of Puerto Rico (and protege of Simon Patten). The post-Keynesian economist Hyman Minsky told me that it was Krueger who converted him to socialism. Minsky later became the godfather of the present post-Keynesian faculty providing an alternative to Chicago-style monetarism at the University of Missouri - Kansas City, where I now teach.

Today, the Chicago School is known for its censorial intolerance. The first thing the “Chicago Boys” did in Chile after 1974, for example, was to close down every economics and social science department in the country, except at the Catholic University where they had a foothold with “the brick”, that is, Friedmanite doctrine.

All this was foreshadowed at the Lab School in the 1950s. Its social science teacher, Curtis Edgett, posted a long banner up in his room saying “Give ‘em all what the Rosenbergs got”. I thought he meant communists, but on talking privately with him, some of my classmates and I discovered that he meant Jews.

In class, he regularly called me a “commie”. (One of our texts was Mein Kampf.) There was a real Stalinist in the class. We always argued, and he called me a fascist. It was in fact at the Lab School that I recruited a number of leaders of the Young Peoples’ Socialist League (Shachtmanites). It was the only time in my life where I was the voice of reason in the middle.

The next day or so, I asked him how things went. “She was so dumb,” the guy said. “She even gave me the wrong phone number. It turned out to be the Fire Department.”
“What was her name?” I asked.
“Martha Washington, she said,” he replied.
To me, this was one of my first examples of GIGO (garbage in, garbage out): the unthinking acceptance of anything as a fact.

The Lab School at the time stopped at 10th grade, and students went directly to the college. However, I wasn’t accepted in 1954 to the university on graduating from 10th grade. I was told that Mr Edgett had turned in the names of myself and a number of my friends to the Federal Bureau of Investigation (FBI) as “commies” and sent copies to the college.

There was a ruckus, and the Lab School added on an extra grade to help resolve matters, and I was accepted to UC the following year, and took the “comprehensives” to skip the first two years, so no time really was lost. But one of my schoolmates chose to enroll in Shimer, a secondary college that UC set up. About a decade ago, when he managed to get his FBI file, it turned out that Shimer’s dean continued to file regular FBI reports on him, his friends and classmates.

My own field changed from chemistry to history and German literature, and I never took an economics class there. I believe that professors Tugwell and Krueger were in the political science department, not the business school. Although I never went near the Business School in my four years at UC, although I subsequently took a PhD in economics elsewhere, I do remember that the business school students I met were about the only students who regularly wore suits and neckties on campus. They had the reputation for being somewhat dense. One encounter in particular is memorable. There was a party, and one of business school students was coming on to an attractive woman.

The next day or so, I asked him how things went. “She was so dumb,” the guy said. “She even gave me the wrong phone number. It turned out to be the Fire Department.”

“What was her name?” I asked.

“Martha Washington, she said,” he replied.

To me, this was one of my first examples of GIGO (garbage in, garbage out): the unthinking acceptance of anything as a fact. [Editor’s note: Martha Washington was also Mrs George Washington, the first president of the United States.]

I recognized that from the UC’s vantage point, a “free market” in ideas was one where students were only free to choose the ideology that the UC supported. Their teaching was like the Terminator. You can’t reason with it. It’s just there to kill the opposition.

I was a music student at the time, and it says something about UC’s philosophy that there was no practical musical performance or analysis taught at all. Only theory, forget practice. So even before registering as a freshman in 1955, I enrolled at DePaul and Roosevelt Universities in music at the graduate level (having completed the BA requirements while waiting to graduate from the high school).

UC had the same philosophy of theory, not practice, for language. I learned to read and write French and Italian as well as German, but no practice in actually speaking the Romance languages. (My BA graduation orals were in German, to be sure.)

In the 1990s I sought to publish my history of international trade theory, and contacted the editor of University of Chicago Press, who had just come from Pantheon in New York, with which I was on good terms before the mass resignations in the late 1980s. The editor came back to me somewhat chagrined, and said that the entire board of the UC Press had threatened to resign if they published my book. It was a critique of free-trade theory, especially of Jacob Viner’s censorial history of trade theory.

So I recognized that from the UC’s vantage point, a “free market” in ideas was one where students were only free to choose the ideology that the UC supported. Their teaching was like the Terminator. You can’t reason with it. It’s just there to kill the opposition.

After graduation, my only contact with the UC Business School occurred indirectly, after I became the balance-of-payments economist for Chase Manhattan in the mid-1960s. My boss, John Deaver, was a protege of Milton Friedman, who had recommended him to David Rockefeller. On one fateful Friday, I was having lunch with John Exter of Citibank, who told me that earlier in the day his bank had sold sterling short when Harold Wilson had said there was no way he would devalue. Deaver had advised Chase that Wilson had staked his reputation on preserving sterling’s exchange rate. It turned out that Chase had bought the sterling that Citibank had sold, in effect.

Milton Friedman has said famously - perhaps infamously - that “There is no such thing as a free lunch.” But the economy today is all about how to get a free lunch. That is what Fannie Mae and Freddie Mac were all about, and what government bailouts of the financial sector tend to be about.

In the aftermath, I was told that Rockefeller finally told Deaver over a golf meeting that he had a good future as an economics professor. Instead, Deaver went to work for GM, which quickly (in about three months, I think) fired him and put his assistant in charge; then, Deaver went to Philips Endhoven, where his tenure also was short.

Chase decided to merge the Economic Research department (where I worked) into “Public Relations and Publications” under John Wilson. As it adopted Chicago School economics, it was used only for rhetoric, not for actual internal bank decisions. The same thing happened at Citibank. Wall Street came to use Chicago monetarism only as lobbying rhetoric, not as real analysis.

One friend of mine who became a sociology instructor at Chicago told me that he began one class trying to explain whether there was such a thing as an ideology of the vested interests might be. “That’s what we’re here to learn,” a student replied.

The upshot may help promote public relations and turn economic analysis into euphemism. But it is not much help in understanding how the real world works. Milton Friedman has said famously - perhaps infamously - that “There is no such thing as a free lunch.” But the economy today is all about how to get a free lunch. That is what Fannie Mae and Freddie Mac were all about, and what government bailouts of the financial sector tend to be about.

The most important reason why it is against business’ true long-term interest to support a Friedman Center that supports economic euphemism is that it degrades economic thought into ideological rhetoric, not real analysis.

So I was glad to sign the petition that Professor Lincoln is circulating deploring the Friedman Center. And glad to read Henry Liu’s article explaining how destructive a role it may play.

Note: Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JPMorgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, [email protected]. The above article was posted on Counterpunch.com. A shorter version of this essay originally appeared in Asia Times.

Related articles:

The Worsening Debt Crisis: Who Got Us into This Mess and What are the Real Political Options?
How The Chicago Boys Wrecked The Economy
The Game Is Over. There Won’t Be A Rebound

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