Chicago Political Economy, and Its Virginia Cousin

Abstract

This essay explores the Chicago origin of two forms of contemporary political economy. One form was initiated at Chicago through George Stigler. The other form was initiated at Virginia through James Buchanan and is generally designated as public choice. Stigler and Buchanan were both students of Frank Knight, and their distinctive approaches to political economy are both evident in Knight’s oeuvre. Comparing Stigler and Buchanan is like comparing two parabolas, X2 and -X2: they share a common origin, but they point toward different analytical territory. Chicago-style political economy incorporates politics into the theory of competitive equilibrium, thereby neutralizing any independent impact of politics on markets. In contrast, Virginia-style political economy distinguishes the political from the economic within society, bringing into the analytical foreground tectonic interaction among market and political entities within society.