Over the past few weeks I’ve read at least two dozen papers, mostly by legal scholars (but some by economists) employing or critiquingÂ economic analysis of law,Â that use the term “Chicago School,” in a critical and misleading way.Â Conventionally, use of this nomenclature comes along with a claim that “Chicago School” economics is code for a particular form of non-interventionist, politically conservative philosophy based upon only anÂ unjustified “faith” in markets.
In the antitrust context, the “Chicago School” label is frequently use to contrast against the “Post-Chicago” literature.Â For those unfamiliar with this branch of economics, the main contribution of what is known as the Post-Chicago literature, I think it is fair to say, has consisted primarily of number of possibility theorems suggesting that conduct previously thought to be universally pro-competitive could harm competition under some conditions.Â Frequently, the Post-Chicago narrative goes something like: “Chicago School economists argued that X was always efficient but Post-Chicago authors have shown the Chicago view to be false by demonstrating that X may harm competition.”
Now, there is a substantial value in the Post-ChicagoÂ literature and I do not mean to imply otherwise.Â It has increased our knowledge about what can and sometimes does happen in markets.Â The point of this post is not to disparage what any of these economists have done.Â Quite the contrary, it is to make the point that the Chicago v. Post-Chicago labels are being used in an a manner that is neither productive nor descriptive in a helpful way.Â
Here are a few reasons why I think the distinction is not as useful as it once was and is generally counterproductive unless used carefully by the author.
First, there are a number of issues upon which most economists agree regarding how to think about competitive conduct of antitrust concern. I know at least a few economists that probably qualify as post-Chicago types (I’ve never asked them), and even where we disagree about the utility of intervention in the antitrust context, I’ve never felt like failure to communicate with one another based on “School” affiliation was a real problem.Â We’re all economists.Â Demand curves slope downward.Â The exercise of monopoly power reduces consumer surplus.Â We speak the same language and generally think about problems the same way even if we may differ on the ultimate result.Â In this sense, the label is simply not helpful in dividing economists.Â The label says very little about what the economist actually does.
Second, the label just flat out doesn’t seem useful as applied to a good deal of the current economic debates in antitrust.Â Are unilateral effects models in merger analysis “Chicago”, Post-Chicago, or something entirely different?Â My answer: Who cares.Â Â The question is whether they are useful for answering the ultimate antitrust question: will the merger result in higher or lower prices?Â Will consumers be better or worse off as a result?Â What about the debate over Dr. Miles and minimum RPM?Â Is the view adopted by the Supreme Court that RPM is more frequently efficient a Chicago view?Â Post-Chicago?Â Take a peek at the Economists’ Brief.Â It is not a “Chicago” document by any means.Â Most economists simply agree that RPM does not always or almost always produce anticompetitive effects.Â To be sure, there are lively disagreementsÂ on theÂ margins concerning the probabilities we assign to different explanations.Â This isn’t a “Chicago” or “conservative” issue.Â It’s about theory and evidence.Â
Third, to ascribe to “Chicago” (which should really be Chicago/ UCLA but that is another post for another time) the reflexive laissez-faire non-interventionist position is just plain out wrong in the antitrust context.Â Granitz & Klein’s analysis of Standard Oil remains, I believe, one of the only documented cases of “Raising Rivals’ Costs,” a foundational principle of the “Post-Chicago” movement, in the literature.Â Scholars like DOJ/ Chicago’s Dennis Carlton have contributed important theoretical work on when tying can result in anticompetitive effects.Â So if we have to play the classification game … what to we do about these types?Â Do we say they are Chicago doing “Post-Chicago”?Â They are Chicago except when they aren’t?Â Or can we just call it a day and say that they are economists doing economics and then worry about getting the answer right?
I did not study economics at the University of Chicago — but many of my economics teachers did or have been associated with the “Chicago School,” i.e. Alchian, Demsetz and Klein.Â I do not claim any authority or special ability to describe what “Chicago School” price theory is.Â There are more worthyÂ authorities for that.Â But I had thought that the “Chicago School” stood for the proposition that microeconomic theoryÂ should beÂ applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.Â These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.Â That faith, where it exists, is earned by persuasive theory and evidence.
The focus on empiricism embedded in the Chicago approach, by the way, was not merely lip service.Â George Stigler, a Chicago economist if ever there was one, described what is now known as industrial organization economics as “Microeconomics-with-evidence.”Â I love this description.Â And I would like to think that it is still represents what is the most interesting work being done in industrial organization today — though the editors of the top journals may disagree with me.Â
But we all agree, don’t we, that predictive power matters?Â “Conservative economists” have always highly valued empirical evidence and predictive power.Â Post-Chicago economists who have contributed game theoretic models of unilateral conduct, collusion, and mergers generally motivate these models with the notion that they will improve predictive power relative to the simple Chicago approach — much like the behavioral models now popular in the L&E literature.Â The respective models either improve our understanding of real world economic phenomena or they do not.Â Â They are either consistent with the evidence or they are not.Â
I should be clear that I am NOT saying that these labels cannot be used appropriately in some circumstances, but this silly post-Chicago versus Chicago SchoolÂ nomenclature is a bit passe, not very helpful, and often quite misleading and historically inaccurate in its usage — or at least in the stack of papers on my desk right now.