Price Theory as Prophylactic Against Popular Fallacies

The articles collected in the three-volume set of Chicago Price Theory illustrate elements of continuity and change in the development of the Chicago School. Its editors stress a continuity in price theory at Chicago that runs from Frank Knight to Gary Becker. Our main contribution in this review essay is to emphasize the discontinuity in the Chicago price theory tradition between the Knight/Viner/Simons generation and the post-war Friedman/Stigler/Becker generation. Moreover, we argue that a more logical continuation runs from the Knight/Viner/Simons generation to the Alchian/Buchanan/Coase generation of Chicago price theory. The element of continuity we stress is one of understanding price theory as a study of market adjustment and adaptation under alternative institutional arrangements, rather than using price theory to identify a unique solution to an allocative problem. Whereas the former understanding of price theory was underemphasized under Friedman/Stigler/Becker, the latter understanding of Chicago price theory tradition was continued by Alchian/Buchanan/Coase.