"One thing is clear to me: the orthodox and unvarnished Chicago School of economic theory is on life support, if it is not dead"

Josh Wright —  5 February 2009

More settling economic debates by declaration and without regard to the evidence.  When you make declarations like this it is best to do your homework.  Consider the following:

  • The Post-Chicago theoretical advances are well known to be built upon the foundation laid by Chicago School founders like Aaron Director — it is simply misleading to argue that Chicago School economists did not understand that certain business practices could lead to inefficient outcomes.  Rather, the Chicago version of these models was that they were empirically irrelevant.
  • Speaking of empirical evidence, it is instructive to note that it is Chicagoan (or at least Chicago friendly) authors like Ben Klein (on Standard Oil) and Tom Hazlett (on predation) who have offered two of the only existing real world empirical accounts of the Post-Chicago “raising rivals’ cost” phenomenon, not to mention fundamental contributions to its theoretical development by Chicagoan Dennis Carlton.
  • There is no attempt in the article to distinguish between the Chicago School generally and the Chicago School of antitrust economics.  Apparently, because Alan Greenspan abandoned “the Chicago School theory” and now rejects it, and because of a financial crisis over which substantial debate still exists as to its causes, we are to believe that the substantial body of theory and evidence supporting Chicagoan views of predation, vertical restraints, exclusive dealing, tying, shelf space contracts, and other business practices is now irrelevant to modern antitrust enforcement (tell me again why Fannie Mae and asset bubbles are relevant to monopolization policy and the economics of exclusive dealing?).
  • Once more on the actual evidence, recent comprehensive literature surveys from folks who are not Chicagoans (that shouldn’t matter but maybe it does) conclude that most forms of single firm conduct are (as hypothesized by Chicagoans) predominantly pro-competitive in practice (See great slides here from Lafontaine & Slade, Dan O’Brien or the paper from Froeb, et al — btw, the last two are by enforcement agency economists!).
  • The consensus on these issues is easily observed from recent economist amicus briefs on issues like predatory pricing, price squeezes, refusal to deal and RPM which consistently reveal views that are consistent with a constrained approach to antitrust enforcement of these business practices but represent a mix of economists.

The irresponsible use and mischaracterization of the Chicago School in antitrust has been somewhat of a pet peeve of mine (see, e.g. here):

I do not claim any authority or special ability to describe what “Chicago School” price theory is.  There are more worthy authorities for that.  But I had thought that the “Chicago School” stood for the proposition that microeconomic theory should be applied rigorously, with care and attention to institutional detail, and with an eye towards producing testable implications.  These are qualities, especially empiricism, that do not lend themselves to a reflexive “faith” that markets will produce only efficient behavior.  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.  George Stigler, a Chicago economist if ever there was one, described what is now known as industrial organization economics as “Microeconomics-with-evidence.”  I love this description.  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.

But we all agree, don’t we, that predictive power matters?  “Conservative economists” have always highly valued empirical evidence and predictive power.  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.  The respective models either improve our understanding of real world economic phenomena or they do not.  They are either consistent with the evidence or they are not.

And with all due respect to the Commissioner, an intellectually honest survey of the state of evidence concerning the actual competitive effects of antitrust-relevant business practices reveals that the Chicago School isn’t close to dead.  In fact, Chicago School principles are alive as ever in the Supreme Court’s jurisprudence.  Perhaps this disappoints the Commissioner and others who might like economics (and particularly Chicago School antitrust economics) to be a lesser constraint on antitrust enforcement decisions.  But it’s the state of play in both the federal courts and in the empirical antitrust literature.  The debate over whether to deviate from the state of play should be determined by the quality of theory and evidence.   A rigorous review of the empirical evidence suggests not only that the Chicago School of antitrust is alive, but in my view, that it is the “best available” mode of analysis for understanding many business practices relevant to antitrust enforcement.

The search for evidence-based antitrust cannot be conducted by assertion.  Instead, if it is to be fruitful, it must take a more scientific approach.

3 responses to "One thing is clear to me: the orthodox and unvarnished Chicago School of economic theory is on life support, if it is not dead"


    I think he makes a more basic error, which is to confuse macroeconomics with microeconomics. His neo-Nixonian “we’re all Keynesians now” does not have much to say about the microeconomics relevant to antitrust analysis. He fixes this somewhat by later discussing behavioral economics, but that and Keynes are not too closely tied together.

    Another disturbing point is his proposition on p. 9 that suggests that the Clayton Act can prevent the formation of a firm because if ultimately fails, thus having a catastrophic effect on the market, it will substantially lessen competition. It’s pretty tough to predict failure for a merging company–if the stockholders can’t do that, how can the FTC?

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  1. TRUTH ON THE MARKET » Correcting the Record: AAG Varney and the Chicago School’s Premature “Retirement” - February 3, 2010

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  2. TRUTH ON THE MARKET » Neo-Chicago Meets Evidence-Based Antitrust - September 17, 2009

    […] I’m not sure what that means, but there is a more serious point underlying all of this that goes beyond semantics.  I think that Dan and Evans & Padilla both have it right that this theory + empiricism + error-cost framework is the most intellectually powerful approach to generating a coherent approach to antitrust based on the best available theory and evidence.  In my recent work, including the Pitofsky book review linked above, I’ve calling this approach “evidence based antitrust” largely to avoid the whole Chicago v. Post-Chicago debate which has become so loaded that folks often use it as an excuse to say unreasonable or simply incorrect things. […]