Turning Points in Intellectual History

To illustrate the rise of the Chicago School of economics, people often contrast Richard Nixon's 1971 statement, "We're all Keynesians now," with Bill Clinton's 1996 statement, "The era of big government is over." The former is supposed to represent the pinnacle of Keynesianism's influence; the latter is supposed to represent the pinnacle of (or at least the recognized dominance of) the Chicago School's influence.

It's a neat little narrative, but is it accurate? On the macroeconomic side, the central clash was between traditional Keynesianism and monetarism. To simplify quite a bit, traditional Keynesian economists believed that policy should be expansionary during recessions, and emphasized the importance of fiscal policy in boosting short-run aggregate demand; monetarists emphasized the importance of monetary policy in the short-run, but believed that monetary policy should set a fixed rate of growth in the money supply. The Fed played around with some monetarist ideas in the early 1980s, but quickly abandoned them. Modern macroeconomics represents a mix of Keynesian and monetarist ideas. Strict monetarism has been discarded: discretionary monetary policy has been curtailed, but not eliminated. In short, we're all faint-hearted Keynesians and faint-hearted monetarists now. Clinton's 1996 statement that "the era of big government is over" didn't signal the end of Keynesian economics.

Clinton's 1996 statement did, I think, signal the pinnacle of the Chicago School in microeconomics. To me, the starting point for this Chicago School was Ronald Coase's 1960 article, The Problem of Social Cost, which established the Coase theorem. Before Coase's article, the mainstream school of thought on externalities was dominated by Arthur Pigou's welfare economics. Pigou advocated government interventions to internalize externalities—most notably, taxes on negative externalities, and subsidies for positive externalities. (Hence the term, "Pigovian tax.") Coase, however, showed that under certain assumptions—most importantly, well-defined property rights and zero transaction costs—parties would internalize externalities through private bargaining, without government intervention. The idea that market failures should be remedied without government intervention is central to Chicago School economics. Coase's landmark article, in my mind, was the liftoff point for the Chicago School.

This is always the way I've seen it in my head. Is my intellectual history wrong?