I've been reading some thinkers like Mengel, Mises, and others, who are all Austrian School theorists. But I have also been reading Milton Friedman and Thomas Sowell works, who are proponents of the Chicago School. That being said, they don't seem to disagree on anything. So I have to ask, what are the primary differences in thought between the Chicago and Austrian school?
Before answering, I think it is worth while to slightly discuss what the schools of thought are and what they aren't.
Schools of thought in economics refers to the methodological framework they prefer. An analogue of in physics would be the physicists who prefer modified Newtonian dynamics as a framework to explain galactic structures (you could think of it as a 'MOND school') vs physicists who prefer dark matter (you could think of it as a 'dark matter school').
Also, no matter what methodological framework one selects people can always agree or disagree on normative questions. You can for example even fully accept postulates of Marxian economics but when it comes to policy be advocate for some sort of 'rapture' style anarcho-capitalism. Schools of thought are not really defined by their policy stances. This being said people often shape their normative views based on what they believe is true so it would not be likely to find such Marxian economist, but point is that the schools have nothing to do with policies they advocate per se. For example, Joseph Stiglitz, who in past even endorsed the socialism of XXI century in Venezuela (although now he distances himself) is Neoclassical economist, whereas Gregory Mankiw who is strong free market advocate is New Keynesian.
Austrian School of Economics
Austrian School of Economics started as an offshoot of marginalism and neoclassicism.
Menger, Von Bohm-Bawerek, von Wieser who are considered to be forerunners of the 'Austrian School of Economics' are more properly classified as marginalists or neoclassists (at least according to commonly used textbooks such as Grant & Brue The History of Economic Thought pp 211 -248).
Till about 1920s it was actually closely aligned with above mentioned marginalism. Marginalism, posits that value is determined by marginal utility and hence all value is subjective. Marginalism is still both part of Austrian economics and mainstream economics, part of which is the Chicago School which could be more appropriately called 'New Classicism' (see Grant and Brue The History of Economics Thought pp 493).
However, post 1920s-50s Austrian School of Economics went separate way. This was because of its insistence on:
- (radical) methodological individualism - This is an approach that argues that models should be based ground up by analyzing individual actors/actions. Now I put radical in brackets because mainstream economics also to an extent applies methodological individualism but it is not as strict about it as Austrians. For example, in mainstream economic models we typically work with representative firm, representative households etc. However, Austrians like Hayek were firmly in favor of agent-based modelling (see the Austrian economics chapter of this entry in Standford's Encyclopedia of Philosophy).
- Austrian School also mostly dismisses mathematical modelling and econometrics (statistics applied to economics), which over time lead Austrian School to become heterodox school (since originally it was mainstream and barely distinguishable from marginalism) - see Meijer (1995).
Chicago School (properly known as New Classicism)
New Classicism AKA Chicago School (see Grunt& Brue pp 493), is a school that developed around 1950s.
Chicago School also developed from marginalism and neoclassical economics, but whereas Austrian School emerged from early marginalism and neoclassical economics, Chicago School emerged from more mature and developed marginalsim and neoclasical economics after both marginalism and neoclasical economics got heavily influenced by mathematical economics (Walras, Von Neumann, Morgenstern, Hicks) as well as later Neoclassical economists such as Samuelson or Edgeworth.
Consequently some similarities are not surprising.
The main tenets of the Chicago School according to Grant & Brue are:
- Focus on optimizing behavior of (representative) agents - let's call it weak methodological individualism as at a core it is still methodological individualism but not as radical as that of Hayek or other Austrians.
- Observed prices and wages are good approximation of their long-run competitive counterparts. Prices and wages reflect opportunity cost to society at the margin (you can see here the influence of marginalism).
- Mathematical and empirical observation. Instrumentalists like Milton Friedman went even so far as to claim that it does not matter if assumption (axioms) of model are true as long as it gives good empirical predictions (Friedman 1953). This strong empirical and mathematical orientation could not stand in starker contrast to Austrian economics which rejects these tools.
As you can see there are quite large differences between Austrian School and Chicago School.
Similarities exists because both schools are offshoots of marginalism and neoclassical economics. However, in some aspects they are diametrically opposed such as Austrian School's rejection of mathematical and statistical analysis which is embraced and strongly emphasized by Chicago School.
Furthermore, Austrian School is, because of it's opposition to mathematical modeling and rejection of modern macro, heterodox school. Chicago School has a fringe taste to it but it would still fit the mainstream.
People often ask me, "How are the Austrians different from the Chicago School economists? Aren't you all free market guys who oppose big-government Keynesians?"
In the present article I'll outline some of the main differences. Although it's true that Austrians agree with Chicago economists on many policy issues, nevertheless their approach to economic science can be quite different. [...]
Keep on reading at the Mises Institute: The Chicago School versus the Austrian School by Robert P. Murphy.