The End of the Chicago Cult

Well, back in 1978, Jonestown came to a bad end – Jim Jones, the funky Kool-Aid, all the dead people. In 1993 there was that Waco businessseventy-six people dead in the fire, including twenty-one children and two pregnant women, along with Branch Davidian leader Vernon Wayne Howell, who was actually one David Koresh (or the other way around). It seems the Second Coming of Jesus Christ was about to take place and everyone had been told to gather at the Waco center to await the event, but things got a bit out of hand – these folks had secretly accumulated sophisticated high explosives and advanced automatic weapons, enough to overthrow most small governments, all quite illegal, and they preferred to die rather than give all that up, which may or may not have been what Jesus would do. And in 1997, down the coast here in Rancho Santa Fe, there was the Heaven’s Gate thing – the UFO didn’t come, the world didn’t end, so massive disappointment and thirty-nine dead in that group suicide. Cults are no fun at all.


But everyone has their enthusiasms. Enthusiasm is good – you don’t want the morose running things, for the distracted and bored. The entire sports and entertainment industry, of course, depends on rather irrational enthusiasm – on people still cheering the Chicago Cubs, and others, for no real reason, still buying tickets to Tom Cruise movies. In Canada there seem to be curling enthusiasts. There are miniature train enthusiasts, and those who collect Liberace memorabilia, and others who collect rare books or ceramic cow figurines – the list is endless. And of course enthusiasm is fine – the whole economy depends on a vast of array of distinct irrational enthusiasms, and matching up the right goods and services with the corresponding whimsy, or if you’re into marketing, creating that whim. Sometimes that seems all of modern life.


But sometimes enthusiasm gets out of hand, as with cults. There we’re not talking whimsy. Chicago fans know the Cubs aren’t that good, and even if they were wonderful, it’s just a game played by mercenaries. Tom Cruise fans probably know he’s a hack of limited range, but they like the guy anyway, and do know he’s just an actor. Cults are different – you get the charismatic leader, to whom followers literally give up everything, and the disconnection from what everyone else has generally decided is reality. It may be the UFO coming to take all of you away just before the world ends, or some other doomsday scenario. It may be someone claiming they are God incarnate, or as with Charles Manson, claiming the opposite. All skepticism falls away – critical thought drops away. And irony is out of the question. There’s a fine line between any religion and a cult – we have that talking snake and the naked woman, the burning bush and the fellow in the belly of the whale, all not exactly rational, along with this miracle and that – but that line may be critical thought and a bit of skepticism. It’s okay to step back and say you want to think about some of this stuff. That’s okay – you’re allowed. God gave you a brain, after all. It doesn’t work that way with cults.


The odd thing is, however, that cults aren’t that rare, and sometimes they’re not that easily recognized, as no one is dying. But you do sense something is wrong – you sense a certain sort of madness in the air.


For example – it was 1967 or so, back in that small liberal arts college in central Ohio, where you had to take all sorts of courses outside your major, to make you that well-rounded, liberally-educated person you should be. The course was the one everyone dreaded – Economics 101, basic macro economics. Science and pre-med majors scoffed – like sociology, this wasn’t hard science, just loosely organized anecdotal information crammed into some attitude masquerading as some big theory. It was nonsense. To those of us in languages and the arts, Economics 101 wasn’t even that – it was like a faint radio broadcast from a different world, in a foreign language, and not a particularly interesting broadcast. But there we were.


The young assistant professor, new that year, would show up for that eight in the morning class – nice shirt, nice enough necktie, sometimes a plaid vest, but in his pajama pants and slippers, and with his tiny pet dachshund tucked under one arm (eyeing us with those beady little eyes), and the guy seemed always to be still a tad drunk from the night before. We all thought he was crazy, but not in that charming, eccentric-academic way. He was well-fed and mean, and perhaps a bit mad. He told us the world was changing, and new people were taking over – he seemed to think he was one of those, or at least a foot soldier for the cause. He’d tell us that, you see, he had studied under Milton Friedman at the University of Chicago. Then he’d pause, waiting for that to sink in. It never did. We didn’t get it. So he’d wax poetic about the supernatural wisdom of markets and how no one should ever do anything much in terms of economic policy, as no man was as wise as the market forces, and we’d take notes. We all made it out alive.


But it seems we had met our first cult member. And after all the years he came to mind, those dreaded early morning classes of his came to mind, reading John Lippert’s recent long Bloomberg piece on how things are going in Freidman territory:


John Cochrane was steaming as word of U.S. Treasury Secretary Henry Paulson’s plan to buy $700 billion in troubled mortgage assets rippled across the University of Chicago in September.


Cochrane had been teaching at the bastion of free-market economics for 14 years and this struck at everything that he – and the school – stood for.


“We all wandered the hallway thinking, How could this possibly make sense?” says Cochrane, 51, recalling his incredulity at Paulson’s attempt to prop up the mortgage industry and the banks that had precipitated the housing market’s boom and bust.


During a lunch held on a balcony with a view of Rockefeller Memorial Chapel, Cochrane, son-in-law of Chicago efficient-market theorist Eugene Fama, and some colleagues made their stand.


They wrote a petition attacking Paulson’s proposal, sent it to economists nationwide and collected 230 signatures. Republican Senator Richard Shelby of Alabama waved the document as he scorned the rescue. When Congress rejected it on Sept. 29, Cochrane fired off congratulatory e-mails.


The victory was short-lived. Lawmakers approved the plan four days later, swayed by what Cochrane calls a piñata of pork-barrel amendments.


“We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”


Yeah – screw the home construction works in Las Vegas. Let’s have a recession – bring it on. Maybe this is a doomsday cult, or just this:


At the University of Chicago, once ascendant free-market acolytes are finding themselves in an unusual role: They’re battling a wave of government intervention more sweeping than any since the Great Depression as the US struggles with the worst recession in seven decades.


By the end of November our government had committed almost nine trillion dollars, “or more than half the value of everything produced in the country in 2007” – simply to save the financial system. And the EU committed three trillion on that side of the pond, and China said they’d soon spend six hundred brillion on their stimulus plan, and cut interest rates.


The Chicago School of economics and “its patriarch” – the late Milton Friedman – are looking mighty isolated now.


But they had a good run:


For half a century, Chicago’s hands-off principles have permeated financial thinking and shaped global markets, earning the university 10 Nobel Memorial Prizes in Economic Sciences starting in 1969, more than double the four each won by Columbia University, Harvard University, Princeton University and the University of California, Berkeley.


Chicago’s laissez-faire imprint underpins everything from U.S. President Ronald Reagan’s 1981 tax cuts and the fall of communism that decade to quantitative investment strategies.


In 1972, Friedman helped persuade US Treasury Secretary George Shultz, former dean of Chicago’s business school, to approve the first financial futures contracts in foreign currencies.


Such derivatives grew more complex after Chicago economists created the mathematical formulas to price them, helping spawn a $683 trillion market that’s proved to be a root of today’s financial system breakdown.




But we have a cult leader:


Friedman, who died in 2006 at age 94, defined the Chicago School in 1974 as he spoke to a board of trustees dinner.


“‘Chicago’ stands for a belief in the efficacy of the free market as a means of organizing resources, for skepticism about government intervention into economic affairs,” he said.


And we have acolytes:


“By the mid-1970s, there was a whole generation in government and academia who’d trained at Chicago or places influenced by it,” says Ross Emmett, a Michigan State University professor who’s written three books on the school.


Today, 10 percent of Chicago undergraduates study economics. Alumni of Chicago’s graduate business school, now called the Booth School of Business, run states and companies.


Jon Corzine, the former chief executive officer of Goldman, Sachs & Co. who earned his MBA in 1973, is governor of New Jersey. Peter Peterson, who graduated with an MBA in 1951, co-founded Blackstone Group LP, the world’s largest private equity firm.


David Booth, a 1971 MBA graduate for whom the school is now named, donated $300 million in November, the largest endowment given to the university.  


And this last one is a true believer:


Booth, who founded Dimensional Fund Advisors Inc., bases his funds on Fama’s theory that a market digests information affecting prices so well that even professional investors can’t outsmart it for long. Even with his US Micro Cap Portfolio fund down 40 percent in 2008 through Dec. 22, Booth says quantitative investing is less vulnerable during a slump than stock picking that relies on human judgment.


“This supports our theory in that predicting the market is even more difficult than we expected,” he says.


Yes, the market passes all understanding, so be in awe.


There is much more, but a key passage is this:


“When Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed – whose remedies, ironically, entail countermeasures of nationalization,” Marshall Sahlins, an emeritus professor of anthropology, said during the debate, speaking in a room adorned with murals of female students parading through the campus in medieval gowns. Sahlins, 77, noted a few weeks later socialist and capitalist countries alike are regulating or nationalizing financial institutions in a rebuff to Friedman.


Off campus, the global meltdown is stirring anti-Chicago economists, who were voices in the wilderness during decades of lax government oversight of markets. Joseph Stiglitz, who won one of Columbia’s economics Nobels, says the approach of Friedman and his followers helped cause today’s turmoil.


“The Chicago School bears the blame for providing a seeming intellectual foundation for the idea that markets are self- adjusting and the best role for government is to do nothing,” says Stiglitz, 65, who received his Nobel in 2001.


University of Texas economist James Galbraith says Friedman’s ideology has run its course. He says hands-off policies were convenient for American capitalists after World War II as they vied with government-favored labor unions at home and Soviet expansion overseas.


“The inability of Friedman’s successors to say anything useful about what’s happening in financial markets today means their influence is finished,” he says.


Instead, Galbraith, 56, says policy-makers are rediscovering the ideas of his father, Harvard professor John Kenneth Galbraith, and economist John Maynard Keynes of the University of Cambridge. Keynes, who died in 1946, argued that governments should spend to combat the unemployment that free markets tolerate. Galbraith, who died in 2006, rejected mathematical models and technical analyses as divorced from reality.


Well, cults are like that. You get divorced from reality. Freidman always argued minimum wage laws really hurt workers – demand for their services would decrease if by law they had to be paid a minimum amount per hour, and then they wouldn’t work at all, so they should be paid as little as possible, for their own good. That was puzzling in 1967, and it’s puzzling now.


Barry Ritholtz had a parallel experience:


I first encountered the Chicago theory in law school. The Chicagoists somehow read into law a market efficiency component that was never there. I recoiled against it – not because of the libertarianism, which I embraced. Rather, it seemed a backdoor way to circumvent democracy, and force into the legal system rules that were never debated, voted on, or agreed to by a representative government. I found the extremist legal theories of Judges like Richard Posner and Frank Easterbrook intellectually repulsive. They were undemocratic, anti-representative government. When I told a professor that the law and economics movement was an attempt at a political coup, he laughed and said, try to stop it.


I disliked the neoclassical price theory. It was authoritarian, a worship of a form of mob rule outside of the usual legal channels. The view that regulation and other government intervention is always inefficient compared to a free market has now been made laughable. It’s always the extremists that seem to control a discipline or school of thought. If I have any dogma, it’s extremism in all forms is undesirable (I know, radical, huh).


If there is one silver lining in the entire collapse, it’s that this group of intellectual charlatans has been revealed as utterly wanting. Oh, there will be some pushback by the Chicagoans. (Watch the comments for the cute little protests from law students who never practiced a day in their lives, and the biz school kiddies who never executed a single trade).


Ritholtz says this comeuppance is long overdue:


From the efficient-market theories, to the concept of man as rational profit maximizers, much of the edifice that is was the Chicago school of economics is based on a foundation that is false, disproven or otherwise questionable. …


That’s the phrase that best sums up the Chicago School: “Divorced from Reality.”


Chicago School repudiation? Good riddance!


The only place they live on is on Fox News.


But if they do want a depression – because that is the market’s will, and mere men shouldn’t mess around with the market – the Wall Street Journal points out they’ll get one:


Corporate-turnaround experts and bankruptcy lawyers are predicting a wave of retailer bankruptcies early next year, after being contacted by big and small retailers either preparing to file for Chapter 11 bankruptcy protection or scrambling to avoid that fate. …


AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010….Recent changes in the bankruptcy code make it more difficult for retailers to emerge from bankruptcy reorganization. …


Lawrence Gottlieb, a New York bankruptcy attorney at Cooley Godward Kronish LLP says that only two retailers have successfully emerged from bankruptcy proceedings since the amendments to the code were passed.


Let’s see – one quarter of all major retailers may be in either Chapter 11 or liquidation next year. Yeah, bring it on.


Cults really are no fun at all.


About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
This entry was posted in Chicago School of Economics, Economic Meltdown, Economic Theory, Milton Freidman, Supply-Side Economics Discredited, The Economy, The Limits of Capitalism. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s