------------ EH.NET BOOK REVIEW --------------  
Published by EH.NET (March 2006)  
  
Mark Skousen, _Vienna and Chicago, Friends or Foes? A Tale of Two   
Schools of Free-Market Economics_. Washington: Capital Press, 2005. x   
+ 305 pp. $25 (paperback), ISBN: 0-895-26029-8.  
  
Reviewed for EH.NET by Pedro Garcia Duarte, Department of Economics,   
Duke University.  
  
  
Mark Skousen is a professional economist and adjunct professor at   
Barnard College, Columbia University. In 1994 he gave an address to   
the Mont Pelerin Society entitled "I Like Hayek." Much to his   
surprise, his generous comments about Hayek's macroeconomics were not   
music to the attendees' ears, most of whom were followers of Milton   
Friedman. Skousen then wrote _Vienna and Chicago, Friends or Foes?_   
to make sense of his baffling experience.  
  
Hayek was one of the founders and the first president (1947-1960) of   
that Society, created to foster market-oriented economic systems and   
free societies. Among Mont Pelerin's later presidents were three   
Chicago professors: Friedman (1970-1972), George Stigler (1976-1978),   
and Gary Becker (1990-1992).  
  
Skousen's main question is why do followers of the Austrian and   
Chicago schools disagree so much, given that both are "devout   
believers in free markets and free minds" (p. 1)? The author explores   
the points of agreement and disagreement between these schools. In   
doing so, Skousen argues that these economists have more in common   
than not. Moreover, he closes the book defending libertarian ideas   
and expressing his belief that the bridge linking Austrian and   
Chicago schools, to use his metaphor, is coming down "and integrating   
a dynamic prosperous community of scholars in both camps" (p. 291).  
  
Chapters two and three discuss the origins and influences of the two   
schools. According to Skousen, "the Austrian and Chicago schools were   
born in the midst of crises in economic theory, at times when the   
classical laissez-faire model of Adam Smith faced unprecedented   
challenges from the critics of capitalism. The Austrians rescued   
classical economics from the socialist/Marxist threat in the late   
19th century, while the Chicago school countered the Keynesian   
challenge of the 20th century" (p. 15).  
  
After this account, the next four chapters address the points of   
disagreement: whether theories should or should not be empirically   
tested; the concept of the ideal monetary system; the business cycle,   
capital theory, and macroeconomic model; and the role of government   
in a market economy and other microeconomic issues.  
  
In the last three chapters, Skousen broadens the scope of the book by   
contrasting not only each school's view of the great economists, but   
also the view each school has of the other (chapter eight), and by   
exploring the "faith and reason in capitalism" they share (chapter   
nine). The concluding chapter asks "how far is Vienna from Chicago?"   
and ponders the future of free-market economics.  
  
It is perhaps less of a commentary on Skousen than on present-day   
publishing houses to say that the book has a number of typos,   
incomplete reference lists, and missing sources of statements by   
other economists and of data used in the text. It also lacks clear   
definitions of terms that are open to all manner of interpretation,   
as, for instance, "Keynesianism" and "Marxism." Furthermore, chapters   
eight and especially nine repeat ideas already presented and do not   
seem crucial to the main argument of the book.  
  
To the good, Skousen is very familiar with Austrian and Chicago   
school theories. He has "developed close friendships with leaders of   
both camps" (p. 8) and his personal correspondence with them enhances   
the narrative with their personal accounts of issues dealt with in   
the book. This correspondence, together with his familiarity with the   
literature and humorous writing style, are the greatest merits of the   
book.  
  
Skousen's book can be read in at least two ways. One is as a   
libertarian manifesto designed to promote Austrian theory and to   
identify ways in which this theory could be more successful than it   
currently is. This seems to be Skousen's real agenda, especially in   
light of his concluding chapters. On this matter I shall take no   
stand.  
  
The other reading is as a historical account of the resemblance and   
disparity between Austrian and Chicago schools. Comparing schools of   
thought, rather than individuals, as well as exploring their   
development appeals to historians.  
  
However, the problem is that Skousen's narrative is not historical.   
It is rather a search for the "best" argument about the issues   
discussed and the great economists behind them -- on whose shoulders   
prominent economists will now stand to look for the truth -- as he   
clearly states: "This book will analyze all these issues, deciding   
which camp has the most convincing arguments for each" (p. 8). He is   
outspoken about his personal biases and opinions (see the section   
"the author's biases," p. 12), and he is explicit in attaching his   
personal judgment about, among other things, who is the winner in   
each of the points of disagreement: he closes chapters four to seven   
with an "advantage" to Vienna or to Chicago, a battle won twice by   
each of them.  
  
Historians of economics have something to say about the origins of   
the Austrian and the Chicago schools, about the mathematization of   
neoclassical economics and other issues touched on by Skousen (see   
Morgan and Rutherford (1998), Mirowski (2002), Weintraub (2002)). An   
historical understanding of these and other topics would prevent the   
repetition of inaccurate commonplaces such as Keynes being "the   
theoretical spokesman for big government and the Welfare State" (p.   
58). Moreover, it would also prevent flimsy assertions such as the   
rational expectations theory being a Chicago product (p. 75, 85-86)   
(see Sent (2002)).  
  
Furthermore, historical critical reasoning calls for clear   
documentation supporting one's claims, and, therefore, prevents a   
highly implausible statement (as testified by a retired librarian who   
worked at Duke at the time) like: "During [the 1960s], for example,   
Duke University library refused to carry [Friedman's] books" (p. 73),   
presumably because they were at odds with the orthodoxy of the time.   
As Skousen personally informed me, he based that claim on Friedman's   
(1998, pp. 340-341) memoirs, which his book fails to reference.   
Friedman, for his part, heard of the alleged banning from a letter   
written to him by a Duke student. More important than judging its   
veracity (which is hard to do) is to appraise its relevance. Duke's   
Economics Department at the time was far from being a Keynesian   
trench defending orthodoxy against Friedman's ideas.  
  
However, it is important to keep in mind that Skousen wisely titled   
the book "a tale [not a history!] of two schools of free-market   
economics." In writing a tale one is free of historical accuracy.   
Moreover, the opposition tale _versus_ history is appropriate for   
delineating the differences between Skousen's and an historian's   
perspective. For Skousen, "[s]tudying each school brings new insights   
and discoveries into the marketplace of ideas" (p. 247). Surprisingly   
for an Austrian follower, this characterization of the "marketplace   
of ideas" fails to incorporate time and the structure of production   
of ideas in a meaningful way, a task historians of science in   
general, and of economics in particular, try to tackle.  
  
References:  
  
Milton and Rose Friedman (1998). _Two Lucky People: Memoirs_,   
Chicago: University of Chicago Press.  
  
Philip Mirowski (2002). _Machine Dreams_. New York: Cambridge University Press.  
  
Mary Morgan and Malcolm Rutherford (1998). "From Interwar Pluralism   
to Postwar Neoclassicism." _History of Political Economy_ 30   
(supplement).  
  
Esther-Mirjam Sent (2002). "How (not) to Influence People: The   
Contrary Tale of John F. Muth." _History of Political Economy_ 34 (2).  
  
E. Roy Weintraub (2002). _How Economics Became a Mathematical   
Science_. Durham: Duke University Press.  
  
  
Pedro Garcia Duarte is a Ph.D. candidate in economics at Duke   
University with majors in macroeconomics and the history of economic   
thought. He is currently working on the history of modern monetary   
economics, with a working paper entitled "A Feasible and Objective   
Concept of Optimality: The Quadratic Loss Function and U.S. Monetary   
Policy in the 1960s."  
  
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