Wednesday, January 15, 2020

Van Horn discusses the legacy of corporate funding for the "Chicago School" of law & economics (Michael Simkovic)

Pro-market, a blog at the Stigler Center at the University of Chicago Booth School of Business, recently published a retrospective by Robert Van Horn discussing the early financial and intellectual ties between the Chicago school of law and economics and powerful corporate interests, and the controversy such ties engendered.  The University of Chicago's work on anti-trust law is often credited with facilitating a waive of M&A, permissive review, and the rise of large corporations and reduced government efforts to regulate them.

It should  be noted that the fact that corporations funded scholarship which supported free-market policies that were in corporate interests does not by itself mean that the scholarship or policies were per se flawed or contrary to social welfare--the answer to that question ultimately turns on the substantive merits. Nor should a scholar changing his views in response to contradictory empirical evidence be attributed to nefarious motives.

It may, however, suggest that certain ideas and perspectives are more heavily funded than others. In a match that is intellectually close to even, or perhaps even where one sides views may more closely reflect reality, funding may tip the balance.

Robert Van Horn, Corporations and the Rise of the Chicago Law and Economics Movement, Pro-Market, January 15, 2020:


"From its birth in 1946 onward, corporations made possible and crucially supported the rise of the Chicago law and economics movement. Aaron Director, who at one point had advocated for curbing corporate power and vigorously enforcing antitrust law, spearheaded the effort to create a [more corporate friendly]“new liberalism.”. . .

[Chicago Professors] Wallis, Aaron Director, and Milton Friedman all gave lectures on the topic of “Conservative Economics” to businessmen. 

In the months that followed their lectures, businesses sent numerous laudatory letters. The Volker Fund, the Foundation for Economic Education, the Rockefeller Building, the Chamber of Commerce, Wealth Incorporated (NYC), and others requested copies of their lectures. Unsolicited copies were mailed to corporations, such as Standard Oil of Indiana, and periodicals such as The Wall Street Journal, which published an abridged version of Wallis’s lecture. Presently appreciative letters arrived in response to the mass mailing. General Motors, Sunkist, and Kellogg were among those that expressed gratitude, and some corporations requested to know more about “conservative economics.” 

From the time of its birth in 1946, there has been a dynamic, mutually beneficial relationship between the Chicago law and economics movement and corporations. The close relationship between Chicago law and economics and the corporate world began when Aaron Director returned to the University of Chicago to lead the Free Market Study (1946-1953)—or the “Hayek Project,” as Henry Simons and Wilber Katz (then Dean of Chicago Law School) called it—and work in the Chicago Law School.

From 1946 throughout the 1950s, corporations made possible and crucially supported the rise of Chicago law and economics through funding and advice, and corporations praised scholarly publications of Chicago law and economics that championed a free market economy. They especially extolled those that challenged the status quo antitrust positions of many government officials and economists that undermined corporate power. 

The Free Market Study examined the legal foundations of capitalism and sought to create a reconstituted [libertarian] liberalism to countervail [progressive economics], giving birth to Chicago “neoliberal” ideas in the early 1950s. Milton Friedman self-referentially used the term “neoliberalism” in 1951. Reflecting later on why the Chicago Law School agreed to the “Hayek Project,” Director asserted: “It was…decided that Chicago was the only place that was likely to accept such a project, and it was also decided that the law school was the only part of the University of Chicago that would accept such a project.”

Once the Free Market Study got underway in the fall of 1946, its members convened regularly to debate how to reconstitute liberalism and create a competitive order and thereby counter collectivism. In a New York Times interview, Director indicated that one criterion for assessing the success of the Free Market Study was its ability to exert political pressure to engender policy change. . ..

[Chicago] saw antitrust law as a centerpiece of the investigation of the legal foundations of capitalism. . . .

From 1950 to 1952, in their effort to combat collectivism, Director and other members of the Hayek Project departed from the [anti-corporate concentration] work of [their Chicago mentor] Simons. For example, in 1951, Director claimed that very large corporations should no longer be considered a threat to competition, but should be considered another feature of a competitive market. The Free Market Study undertook some empirical studies geared toward countervailing collectivism and reinvigorating liberalism. For example, Warren Nutter’s work, The Extent of Enterprise Monopoly in the United States, 1899-1939 (1951), evaluated the extent of industrial monopoly in the United States. Nutter argued that there had been no significant increase in business monopoly since 1900.

Director noted that Nutter’s findings challenged the collectivist claim that the efficiency of large-scale industry would inevitably give rise to more and more business monopoly, thereby resulting in less and less competition and necessitating socialist economic planning. Since collectivists hinged their argument on the premise that industrial monopoly had been significantly increasing and since, as Director pointed out, widespread belief in the inevitability thesis gave rise to collectivist policies, Nutter’s investigation dealt a blow to collectivism. . . .

From their interactions with the Volker Fund, Director, Hayek, and Levi would have realized that to champion Simons would hinder their chances of obtaining resources from private corporations. In the late 1940s and early 1950s, many corporate leaders spoke disparagingly of economists who challenged big business. . . .

Director claimed that competitive forces would control corporations and ensure the markets in which they engaged would be competitive. . . . Just a few years earlier, Director had advocated for curbing corporate power, restraining the growth of business monopoly, and vigorously enforcing antitrust law."


UPDATE 1/24/2020: At Volokh Conspiracy, David Bernstein (George Mason) argues that Van Horn overstates the extent of corporate funding for law & economics and the importance of such funding to its early success.  Bernstein also notes that much of the funding for the law & economics program came from the Volker Fund, a non-profit or foundation that received donations from business leaders to promote free-market ideas, and that the funding therefore did not come directly from corporations.   

Van Horn's full article is available here. Van Horn claims that "The Volker Fund ... paid [Aaron] Director’s salary for seven years straight" and encouraged Chicago to grant him tenure. But Van Horn also acknowledges that much of the work produced at Chicago "contained sophisticated legal analysis and detailed applications of economic theory to legal issues. Most of the articles were published in top law reviews."  He also acknowledges that it contributed to the "creation of the Journal of Law and Economics, which has become a highly respected journal in economics and in law and economics today."

Guest Blogger: Michael Simkovic, Of Academic Interest | Permalink