page_title: Chicago school of economics
section_title: History and terminology
hierarchical_section_title: Chicago school of economics / History and terminology
caption_attribution_description: Saieh Hall for Economics, location of the Becker Friedman Institute for Research in Economics at the University of Chicago.
context_page_description: The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles.
  In the context of macroeconomics, it is connected to the freshwater school of macroeconomics, in contrast to the saltwater school based in coastal universities. Chicago macroeconomic theory rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. The freshwater-saltwater distinction is largely antiquated today, as the two traditions have heavily incorporated ideas from each other. Specifically, new Keynesian economics was developed as a response to new classical economics, electing to incorporate the insight of rational expectations without giving up the traditional Keynesian focus on imperfect competition and sticky wages.
  Chicago economists have also left their intellectual influence in other fields, notably in pioneering public choice theory and law and economics, which have led to revolutionary changes in the study of political science and law.
context_section_description: The term was coined in the 1950s to refer to economists teaching in the Economics Department at the University of Chicago, and closely related academic areas at the University such as the Booth School of Business and the Law School. They met together in frequent intense discussions that helped set a group outlook on economic issues, based on price theory. The 1950s saw the height of popularity of the Keynesian school of economics, so the members of the University of Chicago were considered outside the mainstream.
  Besides what is popularly known as the "Chicago school", there is also an "Old Chicago" or the first-generation Chicago school of economics, consisting of an earlier generation of economists such as Frank Knight, Henry Simons, Lloyd Mints, Jacob Viner, Aaron Director and others. This group had diverse interests and approaches, but Knight, Simons, and Director in particular advocated a focus on the role of incentives and the complexity of economic events rather than on general equilibrium. Outside of Chicago, these early leaders were important influences on the Virginia school of political economy. Nonetheless, these scholars had an important influence on the thought of Milton Friedman and George Stigler who were the leaders of the second-generation Chicago school, most notably in the development of price theory and transaction cost economics. The third generation of Chicago economics is led by Gary Becker, as well as macroeconomists Robert Lucas Jr. and Eugene Fama.
  A further significant branching of Chicago thought was dubbed by George Stigler as "Chicago political economy". Inspired by the Coasian view that institutions evolve to maximize the Pareto efficiency, Chicago political economy came to the surprising and controversial view that politics tends towards efficiency and that policy advice is irrelevant.
caption: Department of Economics at the University of Chicago.
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