David Friedman maintains that the “Austrian Test” (the short edition that he took; here is the long version) is not a good means to evaluate views on economics, particularly as it relates to the Chicago School. Actually it is, and any problems that arise from it are caused by the unclear and incomplete answers given by Chicago economists. Although I’m not defending every Chicago answer on the test as perfect representations of the Chicago view, nevertheless all of them can be found find in Chicago Schoolworks. A good place to start is Milton Friedman’s writings.
David Friedman says that Chicago answer B in the first question ( which says, in part, “Property does not arise naturally, but is the end product of the legal system”) does not “accurately represent” the Chicago position. Let’s look at Capitalism and Freedom (M. Friedman, Chicago 1982, p.34). “Government would clearly have important functions to perform.” What functions? Such as: “maintain law and order, define property rights.” For further evidence that Chicagoschool considers property as a product of government intervention see Coase’s works. The Austrian position is that private property arises from the natural order. See G. North, “Undermining Property Rights“: Coase and Becker, JLS Vol. 16, Num. 4.
The Chicago answer in the second question includes this sentence: “At any given time, the best explanation or ‘theory’ of a certain economic phenomenon is that model which yields the best fit between predictions and actual data.” David Friedman says that this “does not represent my [his] view nor (…) that of other Chicagoschool economists.”
Let’s see his father’s Nobel Lecture: “In both social and natural sciences, the body of positive knowledge grows by the failure of a tentative hypothesis to predict phenomena that the hypothesis professes to explain; by the patching up of that hypothesis until someone suggests a new hypothesis that more elegantly or simply embodies the troublesome phenomena, and so on ad infinitum.” See also his “Essays in Positive Economics” and this essay online: “Economics as a positive science is a body of tentatively accepted generalisations about economic phenomena that can be used to predict the consequences of changes in circumstances.” This is certainly a Chicagoanswer, and it is reflected in the test. For a critique see Mises’s works on methodology (such as this one).
The sixth question Chicago answer includes this sentence: “Monetary authorities should not increase the money supply at their discretion. They should increase it at a steady rate, matching the long term growth rate of the economy.” According to David Friedman, this position wouldn’t be close to “that of many other Chicagopeople.” Actually, his father exactly supports this view. In many of his works he finds it necessary to manipulate the money supply so as to establish “stabilized price-level” (see his “Program for Monetary Stability,” “Capitalism and Freedom” pp.37-55). For an Austrian position see Rothbard’s “What Has Government Done to Our Money.”
In the eighth question, the suggested Chicagoanswer is: “A balanced relationship between aggregate demand and aggregate supply is the leading determinant of economic growth. Because private markets cannot always provide this, stable institutional environments are necessary. The public sector plays a vital role in securing economic growth by providing a framework of legal and financial institutions. A variety of public-sector efforts such as low-interest rates and subsidies may also play a positive role. A limited amount of regulation is necessary, but this is not necessarily true.”
To David Friedman, it makes no sense to call this a Chicagoposition. Again, let’s see an interview with Milton Friedman in “Commanding Heights.” Apart from his statist position on money, he says: “The other part of the new deal policy was relief and recovery... providing relief for the unemployed. Providing jobs for the unemployed and motivating the economy to expand. . . an expansive monetary policy. Those parts of the new deal I did support.” And why did he supported them? “Because it was a very exceptional circumstance. We’d gotten into an extraordinarily difficult situation, unprecedented in the nation’s history. You had millions of people out of work. Something had to be done; it was intolerable.” Now, tell me that an answer in the test does not perfectly fit into it! For a critique see “Milton Friedman Unraveled.”
Another three controversies mentioned by David Friedman (”equality,” “Marshall, price, utility and cost,” “forced savings”), I think, can be defended, but they cannot be supported by Milton Friedman’s quotes (he believes that free market tends to bring more “equality” in the levels of consumption, he is not concerned with microeconomic problems and he wants to cut all taxes, not only levied on capital accumulation). However, it should be clear that any problems that arise are caused by inconsistency of Chicagoeconomists themselves, who often see the ball as a red one (support the free market) and as a blue one at the same time (government intervention is necessary here, because…). See the JLS symposium on the Chicago School.
