The Chicago school of economics may be the most effective academic source of American economic policy.
“It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements. Such a view is a delusion,” Milton Friedman said. “There is an intimate connection between economics and politics, and only certain combinations of political and economic arrangements are possible.”
Universities have an important effect on our national economic policy debates, and one of the most influential for the United States has been from the University of Chicago (UChicago) and its economics department. President-elect Trump’s economic strategy is straight out of UChicago in ways that may not be fully recognized. The progressive Democratic party, by comparison, does not seem to draw on any specific university academic economic theory. It broadcasts more of a social philosophy and ideology and relies on law rather than economics. This distortion among the “law and economics” schools also affects how we should be managing our higher education system, which needs significant economic reform rather than more rules and government legal interference in how it operates and what information it transmits.
President-elect Trump explained why tariffs in foreign trade are such an effective market-based economic tool. His thinking is pure “Chicago School” economics—based on markets, competition, and related incentives rather than using government regulations and controls to oversee industrial activity. Some will say that tariffs are themselves government controls, but rather, they are part of reciprocal trade terms. They can also generate billions in revenue for the US and, most of all, motivate companies to operate here, hire American workers, and develop the domestic economy. Tariffs, to use another Chicago economics term, can be a “nudge” to create better voluntary choices through switching and changing behavior.
Tariffs make some of our trading partners, like China, face a pragmatic economic choice between actually engaging in fair trade or continuing to act in predatory ways by stealing our technology and then dumping it back in our markets with massive Chinese government subsidies to displace our own products. This used to be limited to basic consumer goods but has now become vastly more sophisticated, including advanced passenger jet aircraft like the Chinese C919, which the Chinese government wants to export to replace the U.S. Boeing 737. This kind of predatory export tactic has serious national and passenger security implications because the C919 is a largely “electric” aircraft with Chinese computer controls and software that can be corrupted, interrupted, hacked, and even intercepted to control the aircraft remotely.[1]
Trump’s business instincts for markets, competition, and smart trade dealing are straight from the University of Chicago’s Nobel economist, Milton Friedman. Friedman did not care for tariffs or quotas in general, but his view on free trade was specific and did not extend to foreign industrial theft, product dumping by foreign state subsidies, or letting American manufacturing become increasingly outsourced. An alternative view sees the U.S. as the best “outsource” location. The political left does not like to admit that President-elect Trump’s economics are the economics of rational behavior and market incentives and is from one of the most celebrated and respected academic departments in the world. Indeed, his former chief economist of the Council of Economic Advisors was Chicago economics professor Casey B. Mulligan.[2]
By contrast, it is difficult, or impossible, to discern a particular theory, school, or concept of economics by the progressive left. They still envision raising worker taxes, putting government controls on wages and prices, penalizing corporate profits, restricting energy output, and implementing endless new rules. This is a stagflation theory that resembles Latin American authoritarian governments from the 1970s. It is a conceit of government economic control rather than trusting people, markets, and entrepreneurs.[3] That trust is now back in place as a Trump campaign pledge, converted into a White House economic policy. The Trump team has a cautionary model of what happens when government becomes so extreme in economic interference that it has fundamental counterproductive effects—and how the private sector can do many, often most, things that progressive governments assume as state privilege.
One Latin American country, Chile, became famous for reforming its lethargic, overburdened state economy by hiring what became known as “the Chicago Boys.” This was a group of reform-minded economists who were trained at the University of Chicago by Milton Friedman and others. Their economic strategy relied on the private sector, smart trade deals, and competitive markets, including the privatization of state assets like telephone companies, oil, and airports. It is a story worth reading about because, in some troubling ways, the United States economy has been put in the same position by the outgoing Biden-Harris administration.
The best industrial example Trump has given, outside of Detroit and the automotive sector—which is threatened by Chinese auto plants in Mexico—involves the semiconductor industry. He reminded viewers that Taiwan literally stole this American technology, and it makes nearly all our semiconductors—while asking us to defend them from China for free.
In describing how the US can get its own technology back on United States soil, Trump has shown how street smart he is economically—but more, how he instinctively relies on the economic tools of markets, combined with some “nudging” by smartly using tariffs, in order to get foreign nations to stop dumping products on our markets. Good trade deals also make better trade partners, and improve the quality of international relations because they are based on more mutually balanced interests. That makes president-elect Trump a representative of smart international engagement, not isolation.
Indeed, another University of Chicago economist from the Booth School of Business, Ralph Ossa, now at the World Trade Organization and economics professor at the University of Zurich, has argued precisely for the “deep integration” of trade deals among countries, that stems in part from recognizing a number of shared economic interests which select tariffs can facilitate, when combined with pragmatic trade terms, and domestic US industrial reinvestment.
Trump’s policy of lowering corporate and individual tax rates, relieving consumers and workers of excess costs of living, and introducing targeted tariffs to motivate companies to invest and operate here, is not only pure Chicago-school economics, but a proven method of turning around stagnant domestic economies, especially ones that need some “competitive vigor” put back in their collective blood
No country has ever succeeded economically and competitively through a government-run economy—even China figured that out.
Back in academia, it may be noteworthy that among all the professional schools organized in our universities, our capitalist business schools rely, especially at Chicago, on economics. The word “capitalism” is often used derogatorily as a term in anthropology, political science, and even law. Indeed, one of the biggest differences between President-elect Trump and the progressive left is between the culture of business and the culture of law—and, by extension, between university business schools and university law schools, where progressivism has its ideological roots.
This puts business deal bargaining—not just legal adversarialism—at the center of successful economics. President-elect Trump shares his enthusiasm for “the art of the deal” while also drawing on another aspect of University of Chicago economics and business: game theory and the vital skill of negotiation, whether for better trade terms or peace and prosperity. The two go hand in hand in a theory of cooperation.
[1] The expansion of industrial dependency on China underscores a risk that already exists across several key sectors, including parts availability, basic supplies, and manufactured subassemblies. Introducing a Chinese aircraft into the U.S. transportation system creates a complex chain of social, economic, and industrial risks affecting air freight movement of consumer goods and supplies, including food and medical products.
[2] I’m not claiming the Chicago School is without imperfections or contradictions. As economist George Stigler of the Chicago School articulated in his “capture theory of regulation,” industries like trucking, airlines, and others often “capture” government regulatory agencies, originally established to regulate in the public interest. These agencies then act to enforce cartel pricing arrangements, benefiting the industries they were meant to oversee. This theory was solid and applied free-market economics, yet the Chicago School largely overlooked the most significant case of regulatory capture—the Federal Reserve. They ignored the clear reality that the Fed was created as a government-enforced cartel mechanism for the banking industry during a period when similar regulatory institutions were emerging for other “natural monopolies.”—Thomas J. DiLorenzo, The Friedmanite Corruption of Capitalism, Mises Daily (Auburn, AL: Ludwig von Mises Institute, May 31, 2013).
[3] Some of this problem is psychological: “Left-wing intelligentsia perceives the need for a political agenda attuned to the realities of a corporate state for which it has little stomach, and the extent to which it is unwilling to shed its utopian egalitarianism and destructive view of authority. The ability of a largely deranged Left to contribute to, much less lead, a political movement appropriate to the corporatism it woos and fears remains, to say the least, doubtful.” —Eugene D. Genovese, “Critical Legal Studies as Radical Politics and World View,” Yale Journal of Law & the Humanities 3 (1991).
Image of Saieh Hall for Economics, location of the Becker Friedman Institute for Research in Economics at the University of Chicago by Mx. Granger on Wikimedia Commons
