Welcome everyone to tonight’s constitutional conversation. It is my pleasure to introduce our speaker tonight Jennifer Burns from the history department here. She is a specialist in 20th century intellectual history and especially think people who have done important work in political and economic thought.

She has a biography of Milton Friedman. Biography of Ayn Rand and a number of important articles on history of liberalism, history of conservatism, history of liber of libertarianism. So she’s really a fascinating a person, and has published also, I’m not even going to tick off all of the publications that I’m sure most of you read, in which she has published some of this work.

And tonight she’s going to be talking about the development, or the origins, of the Chicago style law and economics movement and in particular, Freedman, Aaron director and Friedrich Von Hayek. So please join me in welcoming Professor Burns.

Thank you. Thank you everyone for coming out. Thank you, Professor McConnell for inviting me. So what I thought I would do today is give a broad overview of law and economics. From the perspective of the University of Chicago drawing on the research for my recently published biography, Milton Friedman, The Last Conservative.

And so I want to emphasize that law and economics takes place in other institutions besides Chicago. There is you might not know that it’s a discovery I made in my research. It was new to me. There’s a lawn economics wing or movement or faculty at Harvard. And there’s also some at UCLA and this actually is.

success that it’s not just a Chicago project, that it’s happening in multiple universities at the same time. But Chicago is a vital seed bed. And as the Chicago school. of economics is famous, world renowned, its reputation precedes it. I want to argue today there’s also a Chicago School of Law and Economics, and that they’re fundamentally entwined, and there’s a real connection between the economic ideas and the legal thinking, and I will unfold that today.

By highlighting three things, really, I’ll highlight the institutions that undergirded this movement of thought, highlight these ideas, not all of them, but a few select, and then focus in on some of the personalities here that made this set of ideas into a successful political and legal movement. And while I talk about all of this, and while I emphasize that these ideas germinated for decades, They really met their moment in an unpredictable way in terms of the broader landscape eventually shifted to where these ideas became relevant and persuasive to significant numbers of people.

And so if their development was deliberate and had a strategic component to it, there’s a huge component of chance and contingency in this story as well. So I want to leave you with thinking about that sometimes there’s this idea that law and economics was like, cooked up in a test tube, inserted into the body politic with a syringe but there’s a whole bigger story here going on.

And in the biggest picture, I really want to link the birth of law and economics to a broader reformulation of liberalism that took place. Across the 20th century and here I’m talking about the political philosophy of liberalism Not Democratic Party liberalism or New Deal liberalism, although that’s also a part of this story But I really want to root this movement In a broader set of engagement with the liberal tradition by which I mean limited government representative government, individual rights, individual freedom.

That was the broad grounding of law and economics. And there were these urgent fears in the aftermath of World War II about the fate of liberalism. Fears that echo some of our contemporary conversations. And out of these broad conversations came the law and economics movement.

How did this all get connected to lawyers and law school? I’m going to begin. In a place, Chicago, some of you may recognize this building. This is a social sciences building at the University of Chicago and I’m going to start in the Great Depression. Just a few stock photos to remind you of the depth of the economic crisis, which convinced observers in the United States.

that many observers in the United States that capitalism had run its course that was so profound because it was a global phenomenon that was met with a rising tide of authoritarian governments in other parts of the world, not just in Europe, but also in Japan, in Asia. But most of all, I want to start with a person.

Henry Simons. How many people here have heard of Henry Simons? Okay, a handful. Simons was a brilliant and erratic economist and a junior professor at the University of Chicago Economics Department. He was best known for his 19, I think it was 1934, book, A Positive Program for Laissez Faire. This book, if you read it today, you would be like, wow, he says we should nationalize the railroads.

He says we should nationalize what else? Electrical provision. It would read as a very leftist book, but actually in the time that it’s released, it’s taken as a critique of the New Deal. And as in strong advocacy for what Simon’s called old fashioned liberalism. And he thought the problem of monopoly had been misunderstood by the New Deal.

And he was really making an almost argument from the 19th century producerist ethic that in order to support the small entrepreneur or the small businessman, competition needed to be at the heart of the American system. And the government needed to support a program of competition. And it needed to support something that F.A. Hayek would later call the competitive order.

What’s really important about this book is not necessarily its ideological mish mashes from our perspective, although that’s really interesting and this is like a 25 page book, it reads pretty easy if you’re curious. What’s important about it is the title, A Positive Program for Laissez Faire.

Because what Simons intended to do with this was to say, if you were a person who generally gravitated, Towards laissez faire, let’s say that’s a a catch all term for less rather than more government. You could think in positive terms, in terms of reform, amelioration, and improvement, not just in terms of negativity and don’t do this and don’t do that.

So for many of his young readers, especially this book, said almost said you can be, this is simplifying, but almost said you can be progressive and conservative at once. You can care and think about the future using this older set of principles. So this is one part of Simon’s legacy to the Chicago School.

But there’s other things that Simon’s did that were really important. When I first started my research on Milton Friedman, I went into his papers and I actually started with the papers of his professors because I wanted to know what was the intellectual environment. that he arrived into when he went to University of Chicago, arriving in the fall of 1932, really the worst part of the Great Depression.

And I found all these memos for something called the Chicago Plan. And I read the memos of the Chicago Plan, and they basically said abolish the gold standard, rip up the U. S. banking system, and redo it. And fractional reserve banking, these very radical proposals. And I was like, what is this? The Chicago plan was largely promulgated by Henry Simons, and it was a set of banking reforms pushed forward in the early days of the Great Depression.

Most of which were, in fact, enacted in the 1935 banking laws. And the most radical of them was Simon’s pet project, 100 percent Money, which called for the abolition of fractional reserve banking. You would not be able to take a deposit and loan out on the margin. You’d have to keep it. And then he had some plans for another institution that would invest.

But this is Simons enacting his idea of positive programming for laissez faire and targeting the banking system first of all. Simons also published a very influential article looking at rules versus discretion in monetary policy. This is a very early origin point of John Taylor’s Taylor rule.

And it argues that the proper way. The way that the United States should conduct its monetary policy is by rules or heuristics that are clear, that are transparent, rather than discretion. And this idea will feed into Milton Friedman’s ideas, into monetarism, and into the current practice of monetary policy in which discretion is often guided by rules, or rules are used to evaluate the results of discretionary policy.

So all of these And I actually didn’t write this book, but sometimes I think about writing, instead of the last conservative, I should have written the first neoliberal. And it would be Henry Simon because he’s thinking about the ways to address the institutional and legal structures that are needed for competitive economic systems rather than just saying, have no government at all, have no state at all.

We should have an active state, but it should be active in the service of competition, and what. Simon’s really emphasized with what he called the heart of the contract. The ability of free contract, that was what should be placed at the center. And the state should stay out of that relationship. Okay so here’s Henry Simons.

He’s in the 1930s at Chicago. He’s working on his dissertation, but not really getting too far because he’s always busy doing these reform pro proposals. He writes a positive program for laissez faire. And he eventually falls into correspondence with F. A. Hayek. It’s in their correspondence that Simons begins to identify himself and uses the word an old fashioned liberal, and at one point uses the word libertarian to describe himself.

Why does he gravitate towards Hayek? At this time, Hayek is the sort of tribune of the Austrian School of Economics. He’s located in London. They start corresponding before he becomes famous for his 1944 book, The Road to Serfdom. This is in the 1930s, Simons and Hayek are connecting, they’re sharing a sense that they are members of or partisans of an intellectual and political movement that’s being threatened.

They have some interest in the same economic ideas. But there’s a sense of fellowship growing between Chicago and London at this point. So Hayek will go on, as I said, to author The Road to Serfdom in 1944. In 1947, he will found the Mont Pelerin Society, which is an effort to bring academics and thinkers from many different national backgrounds together in this question of how should liberalism, the tradition of limited government, how should that be modified or adapted to a post Great Depression world, a post World War II world in which citizens are demanding ever more of their government?

How can those demands be met, yet competition protected? So Hayek will be thinking in similar terms to Simons. And it’s Hayek who will start talking about the competitive order, which is not the phrase that Simons used, but it’s nonetheless what Simons is starting to think about in a positive program for laissez faire.

Now, Simons is also very close with Frank Knight. Knight is an economist at the University of Chicago. He’s really the representative of the neoclassical economists of the 1920s. He’s best known for his book, Risk, Uncertainty, and Profit, which kind of analyzes the entrepreneurial function still taught in some business schools and still worth reading today.

But for the purposes of our story, Knight is almost best known as a pied piper. That is, he’s gathered a group of young students to him, young men, although occasionally there’s a woman in the mix, as I’ll mention. And these include Milton Friedman, these include Aaron Director, these include Henry Simons.

And they cluster together in what I call in my book the Room 7 Gang. Because these students, they find a store, like a room that’s storing old paintings. And, bric a brac in the basement of the social sciences building. They clear it out, and they basically make it into their little den. And they go down there, and they hang out.

And they mostly talk about Frank Knight, they talk about economics, and they develop these very tight social bonds. Now, the sort of leaders of the Room 7 gang are Henry Simons, and then Aaron Director, who is his best friend. And then below them are the graduate students who are very interested in what they’re doing.

And Henry Simons and Aaron Director have teaching positions at Chicago. The problem is, they’re terrible teachers. They’re absolutely terrible teachers. Aaron Director is reported to be, quote, personally unpleasant in his classes and not an effective teacher. Simons was apt to tell students their questions were, quote, elementary, stupid, or both.

And both of them radiated contempt from their very person, and quote, only those who thought precisely as they did could escape a sharp and scornful disapproval. So I go into this story a little bit in the book, but essentially what happens is eventually the University of Chicago faculty says, We got to get rid of these guys.

They’re doing a terrible job and Frank Knight says no over my dead body these are the most important people in the world to me and there’s a clash of Titans the dust clears And Aaron Director gets fired. But Henry Simons has the ear of President Robert Hutchins of Chicago, who thinks it’s really great that Simons has been able to send his proposals right up to the Roosevelt administration.

He also has the ear of the dean of the law school, Wilbur Katz, who’s been thinking, I really ought to bring some economic thinking into the law school. And Simons gets offered a position that’s half in the law school and half in the economics department. Simons is happy to get this position, but he’s a man who’s full of plots and plans.

And at this point, his worries about the fate of liberalism have coalesced into a plan, is to create an academic center at the University of Chicago. And we’ll draw thinkers together to consider these questions. And, He’s in touch with Hayek, right? And Hayek comes to the United States on a book tour for The Road to Serfdom and some wealthy businessmen approach Hayek and say, how can we help your cause?

We’d like to support you in some way. And Simons gets wind of this and says, I’ve got an idea, let’s do it at the University of Chicago. Let’s create this institute here. And there’s a flutter of letters between Simons and Hayek trying to come together. Now, the men that Hayek has met are the leaders of the Volcker Fund.

This is a small Midwestern philanthropy. It grows out of the profits of a furniture business in Kansas City. The new director of the Volcker Fund is very conservative in his outlook and very anti New Deal. And is looking for ways to make a case against the New Deal. And he believes that Hayek is the man to do this job.

And in the beginning, what the Volcker Fund wants is an American road to serfdom. They say the road to serfdom is great, but it’s Going over people’s heads. Let’s make one that’s really oriented to the American situation and American questions. So we have a bunch of people all working at cross purposes.

The funders want an American road to serfdom. Hayek wants a new liberalism to save the world. Incidentally, he also wants a divorce. He’s married. It’s a long story. He wants to get out of his marriage, and he’s really having trouble getting out of it. Divorce is very difficult and unusual. He wants to get remarried.

He realizes he’ll have to support two families. And he wants one, the liberal divorce laws in the United States, and two, an American salary, which in the post war era is gonna be a lot bigger than anything he can earn in Europe. So Hayek has a lot of interests intellectual and personal. Simons wants to save liberalism.

He wants to save economics. He wants to save himself. And he also wants to hire his friends. Chicago wants to do what universities always want to do, be on the cutting edge. And so this comes together in the Institute of Political Economy that will study the conditions of the competitive order. Simon thinks it will be very broad and open.

The funders think it will be more narrow. But what Simons wants most of all is to hire Aaron Director. And bring his best friend back to the University of Chicago. Recreate Room 7. And he is working on this. As he’s having all these ambitious plans and plots come together, he’s also deeply depressed.

And as it turns out the university says they will hire a director. Certain things change and they say, No, we’re not going to hire a director. And a few days after that, Simons is dead. He’s taken too many sleeping pills. It looks from what we can reconstruct, like it’s likely a suicide. It could have been an accident.

He was in a very deep and profound depression. And so the whole thing looks like it’s going to grind to a halt. And it’s at this point, though, that I want to bring Milton Friedman into the story. Friedman is a graduate student at Chicago in the early 1930s. He’s part of the room seven gang. He knows Henry Simons, very close to Henry Simons.

He knows Aaron Director. He knows Frank Knight. He doesn’t know Hayek very well at this point. Friedman himself is known as a statistician. He’s producing papers in mathematical economics. He’s not known as a monetary economist or anything like that, although he has strong liberal and free market beliefs that he’s developed through his relationship with these other teachers, particularly with Knight.

And he’s known to Hayek, he’s known to the funders, and he’s now married to Aaron Director’s sister, Rose. Keeps on meshing and meshing together. So Ro’s director was one of the very few women to study economics in an advanced program in her time. And she came at the encouragement of her brother. who was a junior professor who had a tuition grant and who said to her parents, I’ll watch over her.

You can send her to Chicago. You can send her to graduate study. I will take care of her and make sure nothing happens. So Chicago did have a tradition of female economists, professors, and female students, more so than other programs. Talk about that at length in the book. But the upshot is that Aaron Director and Milton Friedman are now family.

as well as close friends. And Friedman, like all his friends, this is a tragedy that they’ve lost Simons. This is a member of a very tight knit group. And, Friedman says to Aaron, director, you have to do this. You are the only person who can keep this dream that Henry Simons had alive. He says the same thing to Hayek and they say, okay, and now Friedman is hired at Chicago and he’s able to say to the administration, just hire Aaron Director and push this forward.

So that’s what happened. Aaron Director comes to Chicago and that is the start of the free market study and the transformation of American antitrust. Okay. Before I dive into the free market study, I want to note that this is only one of several foundation sponsored endeavors happening at Chicago at the time.

The Ford Foundation is funding the arbitration project, it’s funding the jury project, so Chicago is used to taking external funding and using it to bolster different intellectual agendas. What they get in the Free Market Study, which is the new name, it’s gone from the Political Economy Institute down to just a study, is a really small and eclectic group.

It has Milton Friedman, Aaron Director, the Chair of the Economics Department, the Deans of the Business School and the Law School, the Law Professor Edward Levy, and Frank Knight. Now if you think about this group, it’s got a lot of very busy people. It’s got a Chair and two Deans. It’s got a professor heading towards emeritus.

It’s got a director, Aaron director, who’s just lost his best friend and has seen his life turned upside down. Meaning that the person who has the strongest intellectual agenda and the most influence on this project as it dawns is Milton Friedman, the newly hired assistant professor with his whole career stretching in front of him.

So when you read the early memos, They don’t have an author on them, but I can tell you they’re written by Milton Friedman because I’ve read enough of his stuff. So it’s Milton Friedman who really says, sets the agenda for this group. And the first memo he authors is called, quote, a program of factual research into questions basic to the formulation of a liberal economic policy.
And the first place they decide to look is the question of monopoly. And they see monopoly as connecting fundamentally to liberalism because monopoly is one of the three great exceptions in classical economic thought to the idea of state intervention, right? It’s one of the three places state intervention is justified.

Natural monopolies. Is one place, the provision of lights or electricity or something like that, a public good neighborhood effects. So where somebody’s economic activity. naturally impacts somebody else, the state has a right to regulate. And then monopoly, the state has a right to regulate.

It’s the strong belief of Henry Simons and at the beginning it’s a belief of Milton Friedman’s as well. But he has some questions. I’ll read more from the memo. And he sees monopoly as a dividing line. In your kind of basic outlook, economic and social and political outlook. As he puts it, quote, Our faith in the vigor of competition would be shaken if it were shown that, as is frequently claimed, monopoly has been growing by leaps and bounds, and even in the absence of direct government support, tends to drive competition out of field after field.

While, quote, their faith. And the inevitability of monopoly would be shaken if it were found out that, government intervention aside, monopoly tends to disappear and competition to revive, even where once dormant. For Friedman, monopoly is an issue they have to settle. And note the language here. It’s them and us.

He’s already found a side, he already perceives a cleavage. He already knows what side of the cleavage he’s on. And it’s driven by specific values and goals. Yet, Friedman believes this question will be settled empirically. And you might be wondering, can you be both? Can you be driven by your values and goals and be truly empirical?

If, I think, yes, if your empirics can allow you to reassess your values and goals but you might think about that for yourself. This is a, at once, A very politically rooted and driven project and will become a very empirical project at least in, in one of its dimensions. And Friedman will take over as the advisor of Simon’s last graduate student, Warren Nutter.

And Nutter will launch an examination of the extent of concentration in U. S. industry. And Nutter will eventually conclude in a finding that is fairly widely accepted that concentration is not as pervasive. as was believed in the 1930s. So that’s the empirical pushback on monopoly. And that will do a lot to change Friedman’s thinking.

46, they’re launching the study. 1947 is the first meeting of the Mont Pelerin Society organized by Hayek in Switzerland. And the photo shows Friedman on the left, Stigler in the middle, and Aaron Director, you can see, is Hidden away under the hat and the mustache. And so they are, at this very moment, that they’re designing the free market study connected to this international conversation about liberalism.

In the post war era, welfare states have emerged across the industrialized West. In countries like Great Britain, industries are being nationalized or supported by the state. And in economic thinking, there is a broad idea I guess in political thinking, that the depression, created the crisis of World War II, right?

The depression, the upheaval, it led to the rise of fascism, it led to enormous bloodshed. And therefore, governments need to provide economic stability and economic goods to prevent a repeat II. And hand in hand with this is a revolution in economic ideas we call Keynesianism. The result is that the idea of government support of direct funding to populations through welfare programs, direct intervention in economies to assure stability, has broad buy in across the industrialized West.

At Chicago, the leading professors, the ones I’m talking about, are skeptical of this idea. And they’ll find themselves in a minority dissenting from this. Friedman’s intellectual project will be to develop an alternative to Keynesianism. He will eventually succeed in providing monetarism as an alternative to Keynesian economics.

Now, as Friedman launches upon this project in the economics department, Aaron Director takes up the position. that Simons had at the law school. And originally, there’s no mention of teaching, but he eventually does start to teach in the law school. So who is Aaron Director? He’s a child of Jewish immigrants from the area that is now Russia.

He arrives in Portland, Oregon, in the late teens, and he arrives right in the middle of Red Scare, in which he’s taunted and teased and baited for being Jewish. He kind of retreats into a small group of friends, including Mark Rothkowitz, who will later be famous as the artist Mark Rothko. And the two of them are visited one day by a recruiter from Yale, who comes out to Portland and asks to meet the smart kids around, and eventually recruits both director and Rothkowitz.

To Yale, where they publish a satirical newspaper called the Yale Daily Pest. That skewers their classmates for being too obsessed with girls and football and things like this. They are very intellectual, they are very intense, and they are at that point very left. Director will in fact leave Yale when he graduates, he’ll travel the world, connecting with members of the IWW and the Wobblies.

He’s very interested in labor and, he’s very very left in his politics. He comes to the University of Chicago to work with Paul Douglas. He was a great labor economist who will later be a U. S. senator. And lo and behold, though, once Aaron Director gets there, he meets Frank Knight, and he starts to find Frank Knight pretty interesting, and Frank Knight sort of woos him away from Paul Douglas, leaving quite wounded feelings in his wake.

This is the origin of the big fight they eventually have. But director will pull his sister Rose into Knight’s world and eventually become a fundamental part of that Room 7 gang. But when the galactic battle unfolds between Knight and Douglas Director has not been very productive. He hasn’t published anything like a positive program for laissez faire.

He’s a terrible teacher. He gets the boot. And then he wanders around. He goes to the Bank of England. He meets with Hayek. They strike up a friendship. And he’s not really going anywhere professionally when Simons commits suicide. And so he then accidentally basically gets this job at Chicago.

And then he falls into the teaching role. Because Ed Levy asked him to teach a class on antitrust. And, who is Levi? He’s was very close to Henry Simons. And he was previously a special assistant to Thurmond Arnold, who was a famed trust buster in the Roosevelt administration. He was firmly within the progressive tradition that saw monopoly as pervasive.

And aggressive antitrust enforcement is key to market competition. And Levi doesn’t know a lot about Director. He thinks that Director was close to Simons. He and Simons were very allied on their perspectives on monopoly. And so he thinks it’s going to be just a regular class. And as I said, by himself, Director is not a good teacher.

In a class full of undergrads, he’s absolutely terrible. But it turns out he does pretty well with a partner. He needs somebody to bounce ideas off of. He needs to be in dialogue. And so he starts to develop a very effective teaching technique. One student described how, so we always had the pipe. So you would go talk to him, and he would puff on the pipe, and he would ask a question, and then maybe another question.

And students recount that invariably he went right to quote, the root of the matter or the core of the issue. He had that just Socratic method down. And when it came to this class in antitrust, here’s what happened. As one student put it, quote for one day of each week, Aaron Director would tell us that everything that Levi had told us the preceding four days was nonsense.

He used economic analysis to show us that the legal analysis simply would not hold up. So you get four days of the tradition and one day of this is all wrong. So say the class is talking about predatory pricing. So before director it might be case law, findings, remedies, and then director shows up and says, Is the firm pricing below marginal cost?

Oh, it is. Okay how long can it keep doing that? Is that really sustainable? Could it really, in fact, be predatory pricing? Can it really last? And these legal concepts would suddenly seem to be on very shaky ground. So if the firm is losing money on each item it soles, it sells, won’t it eventually need to raise prices again?

If it raises prices again, therefore, won’t it tempt rivals back into the market? Don’t we have a natural mechanism here that will undo the problem of monopoly? Do we really need to intervene? As one student recalls, quote, I had never looked at it that way at all. So economics was a constraint on a whole bag of imagined activities which, when subject to that constraint, started evaporating.

The Judge Robert Bork described it as being, he said that he was part of a set of students that, quote, underwent what can only be called a religious conversion. It changed our view of the entire world. We became janissaries as a result of this experience. So you had something happening in that classroom.

That profoundly connected to students who felt like they had a new tool to understand reality. They had a new framework, and they had a very powerful way to challenge established economic thinking. And as Director’s career unfolded, there was an in gathering of all these personalities I’ve talked about.

Director helped Hayek find the spot he wanted at the University of Chicago on the Committee of Social Thought, not in the Economics Department. Now we have Milton Friedman and F. A. Hayek in the same place, the University of Chicago in the 1950s. That’s a pretty incredible thing. Now we have George Stigler comes back too.

Oh, I forgot to show you the picture here. Here we are with the group together. It goes Letwin, starting left to right, Letwin, Bork, Ed, Levi, McGee, standing behind John Jukes, another professor and Aaron director at the table. And so George Stigler will make his way back to Chicago. So you have a recreation of that student world of the 1930s.

You have the beginning of a new way of thinking about law and economics, and it’s always connected to these larger questions about liberalism. So let’s go back to the ideas, go back to antitrust. The basic idea of law and economics is let’s import economic concepts into the law. Let’s bring them into our legal analysis.

Let’s use it as a sort of objective test case. We’ll use economic reasoning to see how plausible the legal reasoning is. We’ll test them once against each other. So let’s look at one in particular, looking at antitrust. Now, I’ve talked about the investigation. of monopoly as economic phenomena in terms of an empirical question that an economist could study.

And Warren Nutter’s conclusions cast doubt on the idea that monopoly is ever growing at this period in time. Yet there’s also a legal shift that happens in the shift from a per se understanding of antitrust to a rule of reason. So a per se understanding would be that certain business practices are intrinsically anti competitive.

They’re defined as such. So tying, in which a customer has to purchase a second good in order to complete the sale. Or exclusive dealing, when a distributor can only buy from one manufacturer. And a judge has to determine that these business practices are being used in order to ascertain that it’s anti competitive.

They don’t have to ask what their effects are. Just that they’re being used. And so what director’s questions and the injection of economic analysis starts to do is to shift to a different standard. And this is the rule of reason. The rule of reason asks a more robust set of questions, has a higher set of standards, such as Is this behavior restricting market entry?

Is it restricting competition? And how would you know that? To figure that out, you would perform an economic analysis. You would need some training in basic economic concepts. And in particular, price would be key, right? Is the price low? Is the price competitive? Or is the price artificially propped up by these anti competitive practices?

And if the price is low and the price is competitive, then really, where is the harm? Where can you find the harm? You can’t in this analysis. So this will open the door to price as a basic standard of evaluating antitrust, consumer prices as a measure. And as I talk about in my book, this elevation of price, it’s really an outgrowth of Chicago price theory.

You start to see this basic logic. It’s the logic of microeconomics and it, but it starts to break out of the microeconomic analysis the being confined to how things work in a discrete market. And it’s breaks free into law, right? And you start examining the economic implications of law. It breaks free.

It will go into political science. The Virginia School develops into public choice. Let’s think about the incentives. And the economic structures that guide policy makers and government makers. It will break out in a kind of first wave of freakonomics. In Gary Becker’s work into things like, let’s think of marriage as a market.

And how, and criminal activity. And criminals as having a sort of supply demand curve. And a trade off mentality. And so this idea of price theory, the story of the Chicago school, is it starting an economic analysis. and bleeding out into all these other fields. Now, in my book, I really think the origin point of this is Frank Knight and Frank Knight’s teaching because Frank Knight teaches his students, Friedman, Stigler, director, Simons, he says, economic analysis is the analysis of choice under scarcity.

And then he goes on and says, but you shouldn’t do that because it would be simplistic and banal. Instead, you should study history and all these other things. And his students hear the first part and do not hear the second part. I’m here to continue the message. And so then it, that becomes this incredibly powerful tool.

And I think that it probably sounds familiar to you, what I’m saying. So you have to try to bring yourself back to the 1950s, the 1960s when this sounds new, it sounds exciting, it sounds fresh, and if you can bust this out and the other person hasn’t heard of it and doesn’t know what you’re talking about, you win because they don’t know how to say anything back.

They just, they have no answer. So it becomes an incredibly powerful mode of thinking. Now I agree. I want to talk a little bit then about how it gets institutionalized. Aaron Director’s teaching really is the foundation because it spreads the vibe. There’s people will recount their visiting year at Chicago and they’ll come and it’ll be like, coffee and cookie hour and everyone is just clustered around Aaron Director and hanging on his every word.

And people who are skeptical eventually find him really interesting as well. And so the Volcker Fund has given him a five year grant, and they want him to write The American Road to Serfdom. Aaron Director can’t write a thing. He never publishes anything. He’s just perpetual writer’s block. And what eventually happens is Rose Drekter, Gets her husband to write the American Road to Serfdom.

It’s called Capitalism and Freedom, and so that’s what happens. But the Volcker Fund, they’re very suspicious, and so Hayek is oh no. I’ve seen the manuscript. It looks great. So Hayek’s basically lying through his teeth. But then eventually the Volcker Fund comes back, and they’re like, okay, we don’t have a book.

But we have all these law students using economic analysis, that’s actually pretty good. So they give him another grant that’s now called the Antitrust Project. And they will create the Journal of Law and Economics in 1958, just to bring it a little full circle. Here’s Milton Friedman giving the 1967 Simons Lecture.

And so the Free Market Study becomes the Antitrust Project. And now it has a journal, it has fellowships, it has research money. And remember, I said, this movement is also happening at Harvard and at UCLA. And there’s a couple professors at Harvard who worked in the government and start to think, worked in Commerce Department.

We actually need to have a little more of a robust analysis. So it’s not just Chicago, and that’s important because when Chicago goes to place its graduates, there’s other people who are receptive, who are already thinking this way, and it’s not just a one school project. So that turns out to be important.

But at Chicago, this connection to economics is really key, and it leads to sort of new understandings in both fields. For instance, when George Stigler comes back to Chicago, he had been an expert witness in monopoly trials. He would be the economist who helps you analyze the, and discover the case of monopoly.

And then after spending some time with Aaron Director, he decides, as he writes in his memoir, quote, monopoly power is of no value in explaining many phenomena which have efficiency explanations. Again, instead of looking for monopoly. Questions of power, questions of fraud, questions of unfairness, you’re going to just use this efficiency analysis.

Another important dimension of law and economics comes with the Coase theorem, named for Ronald Coase, and his famous article, The Problem of Social Cost. Now, what Coase basically argues is that in the case of externalities or neighborhood effects, remember those great exceptions to liberal economics, The places where things like pollution, or noise, or other side effects of economic aren’t captured in the market price, or impact third parties.

Coase argues that these can in fact be captured and priced. And he uses a kind of economic framework of perfect competition. He says, yes, this doesn’t exist, or perfect information rather. If we had perfect information, we could capture, price, and cost all of these. We don’t have perfect information, but still we can do it in some circumstances.

Now, The folks at the Law and Economics, they get this article, they don’t really buy it. They invite him to come to Chicago defend yourself. And there’s this moment, it’s gone down in the lore, it’s the Coase conversion evening. And Coase is invited over, maybe it’s Aaron Director’s house, there’s 20 economists.

And they all say, you’re wrong, I don’t get it, this doesn’t make any sense. By the way, this literature still continues today. And it midway through the evening, Milton Friedman’s I agree. I get it. And then he convinces every single person in the room. And in the end. This whole group of 20 economists has decided Coase is right, as Stigler put it, what an exhilarating event.

And he bemoaned that he hadn’t recorded it. But Coase’s ideas go on to be influential in tort law, in environmental economics. We think about cap and trade could be considered in that legacy. And in the mid 1960s, Coase will replace director as the editor of the Journal of Law and Economics. Does anybody know where Aaron Director will go then?

Correct. Aaron Director, there used to be mandatory retirement at age 65, you got kicked out of your job, and Aaron Director is hired at the Hoover Institution, and my theory, I have no evidence for this, but I believe that the director of the Hoover Institution was thinking, if I want to hire Milton Friedman in five years, I’m going to hire Aaron Director now and lay the groundwork for that.

So I’ve mentioned in terms of the famous names that come out of this, I’ve mentioned Robert Bork talk about Richard Posner briefly. Posner is actually at Stanford, and he walks, I don’t know if he’s at Hoover or just in the same building or whatnot. Anyhow, he happens to go by a door at the nameplate that says Aaron Director, and he’s Oh, I’ve heard of that guy.

I will introduce myself. Okay, that’s the beginning of Richard Posner. Law and economics. He basically, director just tells him what the program is and then Posner can actually publish while director can’t. There we go. I’m being a bit glib, but that is the origin point of the reorientation of Richard Posner’s.

Now, over time the role of Friedman becomes less important as law and economics develops to a point where people take it further make their own career. The idea spread to Washington, D. C., and this is especially meaningful as law graduates increasingly think like economists, and as economists get interested in law.

And this is important because law has long been the language of Washington, D. C., the language of policy. In the 1960s, economics starts to become the language of policy as well. So this is a new sort of modality to talk about and have influence in government. And there’s a scholar, Elizabeth Popp Berman, who’s talked about this happening more broadly in the 1960s.

And she talks about the impact of moving from thinking about industries to markets and pinpoints law and economics as having shifted the policy mindset from industries towards markets. She argues that if you’re thinking about industries, you’re thinking about things like firms, workers, the interests of different groups, the rights of different groups.

And if you shift to thinking about markets, that all drops away, and you just start thinking about efficiency. And you just start thinking about price. So you have a sort of thinning of the topics you’re interested in. And cost benefit analysis becomes key. And cost benefit analysis is often centered around the costs and the benefits to the consumer.

Rather than to the producer. Okay, so what happens next? A lot of different threads come together And what happens next is that law and economics creates the world we live in today. Thank you so much.

Hi okay, so my question is I feel like in the past 20 years particularly in antitrust you were seeing a massive divergence between how lawyers think about it and like judges in particular and economists. What I mean by this is that we’ve had 20 years of empirical research that indicates like monopolies have effects outside of the prices.

So for example, hospitals merge. The nurses now only have one employer, lower bargaining ability for wages. So there is a case, a very strong case we made that the suppression of wages has occurred in part because of rising. Concentration, even if it’s not reflected in the price of the good itself.

So my question is, what is the future of law in econ, as econ, in many ways, gets empirical results that diverges more from this current paradigm? Yeah. Yeah, that’s a great question. Is economic changes, is economics changes? How much do you Does law and economics change? I must confess, as a historian, I’m not perhaps in the best place to, to answer that.

And I would say that it is a particular version of economics that gets encapsulated here. And it’s one that has empirical roots, but also is really about like logics and examining different, how different logics play out. And these scholars did go back to historical case studies and said, standard oils prices weren’t this, that, or the other.

It’s all very hotly contested, but I do think that law and economics probably has to shift. That being said, my understanding is that economics, and I don’t mean to sound glib, just like you can have, it takes a long time for economics 101. to reflect the sort of cutting edge of research.

And so my understand, my, my guess would be with all the things you have to learn in law school, you’re probably gonna get a version of Economics 101 in law school, and it’s gonna take a while for that to shift. So that would be my speculation. Thank you. Thank you so much. So I was curious you talked a little bit about the Harvard School, and I know from Professor Popperman’s book, she creates this clear divide between sort of the Chicago School and the Harvard School.

I’m curious, one, what you think about that, and two, what you saw in your research with the interplay between those two, and was there like a lot of communication between sort of the Harvard law, or the Harvard sort of economic, yeah, economic influence on government versus the Chicago one?

And I’m just curious about that. Yeah I think it’s really important there’s two places, but I feel like I remember that a lot of the Harvard people do a stint at Chicago. and then go back to Harvard. There’s not a lot that’s completely Chicago free. And UCLA also has some folks that go to UCLA.

So I think the fact that it’s institutionalized in different places is important, but there are still some really common roots, especially when you go back, especially when you look at someone like Aaron Director. In general the closeness of the Chicago school. to partisan politics can lead people to sometimes create, try to create space that’s maybe not there intellectually, but they’re creating it for other reasons.

I’ll ask a question before we wrap up. Thank you for this. This is so interesting. I’m wondering what your research shows about why it is that law as a practice, as a discipline was. But I was like, okay, but the question is the law, as it’s known, is ripe for taking on this sort of economic thinking?

I could imagine a different world where lawyers are like I don’t care about this. We’re not interested in taking this on. So what was it that made law such a fertile ground to take on this sort of approach?

Yeah, that’s a really good question. I think one is that economists were achieving sort of new heights of influence in terms of social scientists in government.

And part of that is the architecture of the post war world, says The president needs a council of economic advisors. The president needs to report to Congress once per year on what they are doing about the economy. So it creates a market for economists and a whole set of prestige patterns.

So I think there’s a natural draw to that. And then I’m just thinking in terms of the history of intellectual movements in law. And I wonder, someone else might correct me. If there’s maybe a bit of a doldrums in the 40s and 50s in terms of intellectual movements that are, obviously you have legal realism in the 20s and 30s, maybe that’s a little bit slack.

Maybe legal liberalism isn’t going to pick up until the Warren Court era, so maybe you have just a little bit of a lull in which what’s being taught is not particularly fresh or robust, and that creates an opening. That would be a really, a good question to research, but that’s an intuition I have.

Yeah. I think that, is this on? Okay. Pardon me. I think that another way to look at it is that the price theorists looking at consumer surplus at UCLA, at Rochester, at the University of Washington, at Chicago in particular, we’re looking at what’s this sort of idea of maximization of consumer surplus.

And if you believe that in any, at any level, then as a legal theorist looking at is what we’re doing, making society as a whole better off or worse off. Half aligns some of the ideas that the progressives had with some of the ideas that the law and economics scholars had. And as a consequence, it was particularly persuasive.

I took antitrust here at Stanford from Bill Baxter right after he got back from remaking the world of antitrust. And he was teaching as much economics as he was teaching antitrust to that class. I wasn’t a Economics PhD student, not a lawyer at the time, but I took the class and was fascinated.

Yeah, that’s a great point. I think there’s also a rise of consumer politics. That starts in the Great Depression, it starts with the elevation of purchasing power, it starts with the kind of pocketbook politics of people can’t afford to buy what they need, and how do we make an economy where people can buy what they need?

And then the 1950s, we’re measuring economic success by, like, all the stuff you can buy. So I think you’re right, the consumer really gets put in the center. I think in our own moment, there’s a rethink. Do we want the consumer at the center, or do we want the producer? Or the worker or some other social identity at the center.

But I think you’re right that progressives put the consumer at the center because it was like people still needed to get enough stuff to live. Right now we can consume way above our basic needs. And so I think that’s a really good point that the progressives had. And then you see someone like Levi, right?

Or someone like Simons, they still have these progressive strains and they can fit into this very easily. Thank you, great question. So Is this on? Thank you very much for that fascinating talk. And I bet I liked it better than anyone else because it, it had a certain element of Walking down memory lane for me in 1975, when I was, what, 20 years old, I met both Friedrich Hayek and Milton Friedman and was a colleague of Ronald Coase.

So these people, many of these people were folks that I knew as a youngster. But I just wanted to say one other thing about your talk and why I consider it so timely and important right now. One of the questions I think is fair to say comes from what is sometimes called the new economics or the new antitrust theory associated among other people with Lena Kahn, the the person who has been the the chair of the Federal Trade Commission.

But, and so that’s on the left, but we also now are seeing on the right. Many of the very same things being said. Vice President Vance has said that he likes Lena Kahn and has espoused some antitrust theory that is more like like that than anything that Aaron Director would have would have supported.

And, I think I, we seem to be at a crossroads right now, and I think in order to for us to appreciate, predict, and engage with this moment, which is a which is a real crossroads, to know where it all came from is so valuable and I also like the emphasis on actual human beings.

And not just, theories, but actual human beings and how and how intellectual change takes place, in, in a, what, storeroom, room seven down in the basement that’s cause, cause that actually matters. Things are not all abstract, and so I just really want to thank you for not only a fascinating, but also, I think, an extremely timely.

Presentation. So please join me in thanking Professor Burns.