This paper examines the Chicago School of economic thought and its arguments against government intervention in the economy. Drawing on Milton Friedman's concept of neighborhood effects and the distinction between negative and positive liberties, the paper contrasts the Chicago School position with Keynesian economic theory. It argues that economic freedom — defined as the right to manage one's capital without government interference — is a core political value, and that government intervention in recessions misallocates wealth by substituting political judgment for market-driven pricing. The paper concludes that such intervention prolongs rather than resolves economic crises.
Recent economic difficulties have shaken the confidence of free marketeers. Everyone from the media to the President has argued that the crippling recession we are living through was caused by unregulated businesses acting greedily and without concern for their customers or stockholders. This has created a debate swirling around the proper role of government in the economy. From the perspective of a Chicago School economist, our political freedoms are now under attack every day, and our economic freedoms are slowly dwindling away as well.
Economic freedom can be viewed through the lens of negative liberties. The best way to define negative liberties is to first elaborate on their opposite. Positive liberties are the same as Roosevelt's third of his Four Freedoms: "…freedom from want…." This freedom is a positive freedom in that it requires a third party — in this case the government — to act in order to make it a reality. Rather than simply enforcing laws to ensure no other individual inhibits or prohibits your freedoms, this "freedom from want" demands affirmative action by the government. Thus, a negative liberty is protection from the actions of others, whereas a positive liberty is protection from circumstances.
Economic liberty is the ability to manage your capital however you wish. This means that the government should not interfere in transactions of wealth, goods, or services without overwhelming justification. Before acting, the government should always weigh the benefits and costs of a proposed action, with economic liberty counting heavily in that calculation.
The Chicago School differed markedly from Keynesian theorists in the most fundamental way. Keynesians argue from the perspective of centralized planning — a view that gained credibility from the success of centralized planning in helping the Allied Powers win World War II. Keynesians specifically argued that during recessions markets would fail, and that government spending could jump-start the economy back to strength.
In other words, spend money during bad times and build reserves during good times (Federal Reserve Bank of San Francisco, 2010). This theory was born from the crucible of the Great Depression and a World War. Chicago theorists vehemently disagreed. They argued that the wealth of nations increases when the market is allowed to price goods and services naturally. Government spending would unnaturally distort those prices, alter the market's response to goods, and cause a misallocation of wealth and resources.
According to the Chicago theorists, the role of government was to ensure that individual rights were not trampled during market interactions and to mitigate the damage of neighborhood effects. Neighborhood effects are defined by Milton Friedman, the godfather of Chicago economics, as situations in which "the action of one individual imposes significant costs on other individuals for which it is not feasible to make him compensate them or yields significant gains to them for which it is not feasible to make them compensate him" (Friedman, 1955, para. 3). This represents a significantly reduced conception of the purpose of government, especially when compared to the Keynesian view.
"Friedman defines limited government via neighborhood effects"
"Intervention misallocates wealth and prolongs recessions"
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