History of Economics Playground

The Dynamics of the Chicago / MIT Dispute (in the Archives)

In his notorious "How Did Economists Get It So Wrong" NYT article in 2009, Paul Krugman relied on the freshwater/saltwater distinction to explain that the economists' inability to predict and solve the current economics crisis was due to the fact that MIT/Harvard economics lost their long dispute against their Chicagoan counterparts. According to many commenters, the controversies that opposed the economists of these institutions (and those that are related to them) are supposed to explain how economic knowledge has been shaped in the postwar period and to this day. Yet, one may wonder what is precisely the nature of these controversies. By "nature" - a term which I have great reluctance to use -, I mean the core of knowledge on which there is a disagreement and also the extent of such disagreement - do they simply disagree on assumptions and/or policy implications, or are we witnessing two different views of the world with absolutely no bridge between them? Most modern economics textbooks seem to want to resolve this issue by employing the quite classical positive vs.normative distinction, arguing that most economists are in agreement about the way economic mechanisms work but differ only in the political implications of these mechanisms. When you add to this bipartite distinction a third dimension, which is what David Colander calls the "art of economics", this dialectics does not seem to be more difficult to articulate: economists agree on the way economic mechanisms work (positive economics) yet they have different views on the goals we should want to attain (normative economics) and from this they derive different political implications (the art of economics).

These distinctions, however, are quite theoretical. In real life, boundaries are much more difficult to trace. We all see that Chicago economists seem to believe that the markets work quite perfecly or at least that if they do not work that way, no public intervention will deliver more good without creating more bad. For MIT economists, on the other hand, markets failures dominate and public intervention may help solve these problems when the market is unable to self-regulate. Who can say in these streams of arguments where positive economics ends and where normative (or the art of) economics starts? What is the core of knowledge that economists agree upon? Are these views reconciliable in any way? I had all these questions in mind when reading (once again) the Samuelson papers at Duke University. Here are a few instances of what I am talking about.

In 1968, Samuelson was consulted by the Nobel committee on who would be worth receiving the first "Prize in Economic Science dedicated to the memory of Alfred Nobel". Samuelson, who would himself become the first American recipient of the Prize two years later, wrote in response a long letter in which he cited many of his colleagues, including a whole lot who would later receive this Prize. I will not mention all of them, because you have to see the archives by yourself if you want this piece of information but I can say that Tinbergen and Frisch were there, along with some others who were among those we may loosely call the Keynesians and who did not win the Nobel (for instance, Alvin Hansen or Abba Lerner). More surprisingly, though, Samuelson cited Milton Friedman and as a justification for the Prize he mentioned Friedman's "philosophical adherence to laissez-faire, work on permanent income and on money." Ok, so here we can see that there is at least a core of agreement, at least on Samuelson's side. He believes that Friedman's work on money and consumption is good, good enough for a Nobel Prize, and that even his "philosophical convictions" are not obstacles on the way of scientific integrity. In fact, they are obviously worth praises. This is all good.

Yet, the same Paul Samuelson had written to his friend Alvin Hansen a couple of years before, in the midst of the Phillips curve controversy, the following sentence: "Milton F. is a bloody nuisance. In the end he is not right in his provocative stands, but it takes valuable time rebutting his arguments." He even added: "Having just returned from UCLA where (as in Virginia and Washington) the place is jumping with energetic libertarian nuts, I realize that so much of one's scientific life has to be occupied in sterile debate." * Ok. Well. I always like to argue that logical consistency is for dummies (or for analytical philosophers, if you wish). But even I have to admit this is quite puzzling. How can you say, on one hand, that Friedman's work is so detrimental that it is not even worth arguing against it and, on the other hand, that even its more ideological side is worth a Nobel Prize? It is arguable that there is a question of audience, here. There is a partisan Paul Samuelson writing to one of his Keynesian friends, especially if we think that Hansen was much involved in politics, and there is a more oecumenical Paul Samuelson who wants to show to the Nobel Committee he can go beyond controversies and recognize "real" scientific achievement. But even if we put it this way, we are left with a few questions. No one jumped at Samuelson with a knife under his throat and forced him to mention Friedman in his Nobel letter. There is at least something that makes Friedman a valuable if definitely annoying fellow. And if we cannot explain the dynamics of this dispute, then, how can we appraise what economics is really about?  More precisely, there seems to be here a nice instance of Samuelson's (and I believe MIT's) "in-between-ness", the fact that his views are not easily indentifiable, that they stand somewhere middle between Chicago pro-market ideological stands and Cowles-Rand-Princeton - by way of mathematization - scientism. We really have to characterize this position in a more subtle way if we want to understand modern economics and its larger societal/political significance.

* Paul Samuelson Papers, Rubinstein Rare Book and Manuscript Library, Duke University, Box 36, Folder "Hansen, Alvin H."



There is great paper waiting to be written: ""Saltwater" v. "Freshwater" Is Historical Nonsense".


I agree and I disagree. I agree because of course, the Saltwater vs. Freshwater distinction is something that does not underwrite historical facts. Yet, you cannot deny that the Chicago vs. MIT dispute did not exist. It is everywhere in Presidential addresses, newspapers columns and  private correspondences. What is not clear, however, is how this dispute was related to the building of economics as a science, as opposed to economics as it is seen in the larger culture. What strikes me for instance is that if I have a conversation with my colleagues at the Cergy economics department about their work - they do mainstream economics, mainstream being defined as "what is published in top economics journals" - it looks a lot like MIT economics - small mathematical models, bits of econometrics and generally mildly liberal ("middle-of-the-road") policy prescriptions - whereas the image of the discipline in the society at large (as conveyed by Naomi Klein & ali.) is that mainstream economics looks like Chicago economics. The history of economics is also the history of the image of economics, as seen both by disciplinary economists but also by their others. There is obviously a divorce between these various visions of the field and it would be interesting to see when and how this divorce occurred. To provide an illustration (and some comical relief): http://bit.ly/yqgecU



Just "Freshwater is nonsense."


UCLA -- that would be Hayek-influenced Armen Alchian.

Virginia -- that would be Hayek-influenced James Buchanan.

And of course, Friedman credits Hayek for his political economy turn after the war.

In later years Samuelson conceded that Hayek was right and his own Harvard teachers were wrong about the relation of economic science to socialist economic planning -- but in 1945 when Hayek presented his argument before Samuelson in Schumpeter's graduate seminar, Samuelson didn't get it.

Evidently even old dogs can update their fundamental understand or core issues.

Samuelson never apologized, however, for presenting a flatly false account of Hayek's argument of The Road to Serfdom in his famous textbook, even after purposely misleading Hayek into the false belief that he had Samuelson's word that the intentionally marginalizing smear against Hayek would be removed.

A man can change his scientific understanding, but it is much harder to get him to change his deepest political drives and impulses,


"We really have to characterize this position in a more subtle way if we want to understand modern economics and its larger societal/political significance." Hardly. The Samuelson and Solow (1960) PC curve has long been in the dustbin of intellectual history, and Friedman's (1968) analysis was the beginning of the end of the S&S exploitable trade-off story. When Samuelson wrote to Hansen, he (Paul), despite his brilliant and infinitely creative mind, simply didn't see this.


I am not sure that the dispute between MIT and Chicago was not related to the building of economics as a science. Sure, on a scientific basis there was a loss of cross influences and many point of agreement. But consider the mutation of macroeconomics in the 1970s. Would Lucas have had the audacity to invent a Walrasian macroeconomics without having been trained at Chicago? Of course, the technical ingredients of his models were very much MIT. Lucas was a fan of Samuelson's Foundations and Patinkin's MIP. Lucas considered that one could analyze macroeconomics phenomenon on the basis of a market clearing hypothesis. And this opened the way to the rebuilding of macro in the 1980s. Whereas, MIT economists were stuck in disequilibrium economics wether old style (IS-LM) or new style (Barro-Grossman-Benassy...).
Thank you for your stimulating posts anyway.
A fan of your collective playground.
Goulven Rubin.


Dear Greg and Goulven, thanks for these comments. In particular, Goulven, your point is well taken and I am conscious I should not try to separate the scientific content of economic knowledge from its more cultural/societal aspects. In fact, it was my argument that the two are subtly intertwined but responding to Roy's comment, I fell into my own trap! 

Just a general remark on comments. It would be very nice for those who post their comments without prior authentification to leave a signature at the end of their texts or to fill out the "name" box, otherwise it will simply appear as "anonymous" on the INET websiste. Thanks. 


{We all see that Chicago economists seem to believe that the markets work quite perfecly or at least that if they do not work that way, no public intervention will deliver more good without creating more bad}

This is a trite bit of nonsense that still provokes the fundamental debate between two opposing schools of thought.

In the mindless rush for market integration over the past half century, America's commerce and industry has shown the very distinct signs of oligopolistic practices. This is true particularly for Health Care, Telecoms, Defense, Retail Distribution, et al.

In such circumstances, where Suppliers "game" the market system by setting the price to consumers, gross unfairness occurs by price-gouging. It is by such means that America has created its Rentier Class and its gross Income Disparity - that even the most cursory look at the Gini Index indicates easily.


You have no idea how bad the Chicago School is from the inside (I completed my MBA there in the mid-1980's). My profs argued that insider trading should be legal because it would improve market efficiency. The place is a nut house.


Dear Yann!

This is a very valuable information in many senses. I'm not sure that I will have a chance to come to Duke, and know its existence, and read it myself.

Do you have a copy of the letter? And if yes, could you please share it?

Best regards!

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