From its birth in 1946 onward, corporations made possible and crucially supported the rise of the Chicago law and economics movement. Aaron Director, who at one point had advocated for curbing corporate power and vigorously enforcing antitrust law, spearheaded the effort to create a “new liberalism.”

Editor’s note: Aaron Director, one of the founders of the so-called Chicago School of Law and Economics, died 15 years ago. To mark the anniversary of his death, ProMarket is publishing a series of articles on his work and controversial intellectual legacy. You can find previous installments here.

“The price system is the most efficient system of social organization that has ever been conceived,” declared Allen Wallis, a professor at the University of Chicago Business School, in 1950 at the Citizens Board of the University of Chicago. Wallis, Aaron Director, and Milton Friedman all gave lectures on the topic of “Conservative Economics” to businessmen.

In the months that followed their lectures, businesses sent numerous laudatory letters. The Volker Fund, the Foundation for Economic Education, the Rockefeller Building, the Chamber of Commerce, Wealth Incorporated (NYC), and others requested copies of their lectures. Unsolicited copies were mailed to corporations, such as Standard Oil of Indiana, and periodicals such as The Wall Street Journal, which published an abridged version of Wallis’s lecture. Presently appreciative letters arrived in response to the mass mailing. General Motors, Sunkist, and Kellogg were among those that expressed gratitude, and some corporations requested to know more about “conservative economics.”

From the time of its birth in 1946, there has been a dynamic, mutually beneficial relationship between the Chicago law and economics movement and corporations. The close relationship between Chicago law and economics and the corporate world began when Aaron Director returned to the University of Chicago to lead the Free Market Study (1946-1953)—or the “Hayek Project,” as Henry Simons and Wilber Katz (then Dean of Chicago Law School) called it—and work in the Chicago Law School.

From 1946 throughout the 1950s, corporations made possible and crucially supported the rise of Chicago law and economics through funding and advice, and corporations praised scholarly publications of Chicago law and economics that championed a free market economy. They especially extolled those that challenged the status quo antitrust positions of many government officials and economists that undermined corporate power.



The Free Market Study examined the legal foundations of capitalism and sought to create a reconstituted liberalism to countervail collectivism (e.g., socialist central planning), giving birth to Chicago “neoliberal” ideas in the early 1950s. Milton Friedman self-referentially used the term “neoliberalism” in 1951. Reflecting later on why the Chicago Law School agreed to the “Hayek Project,” Director asserted: “It was…decided that Chicago was the only place that was likely to accept such a project, and it was also decided that the law school was the only part of the University of Chicago that would accept such a project.”

Once the Free Market Study got underway in the fall of 1946, its members convened regularly to debate how to reconstitute liberalism and create a competitive order and thereby counter collectivism. In a New York Times interview, Director indicated that one criterion for assessing the success of the Free Market Study was its ability to exert political pressure to engender policy change.

Notably, Edward Levi was a visionary for Chicago law and economics. Levi is a colossus in the history of the University of Chicago: There he joined the University of Chicago Law School faculty in 1936, became Law School Dean in 1949, Provost in 1962, and President in 1968. Levi saw the potential for the Hayek Project to enrich legal education and further research. Over the course of the Free Market Study, Levi came to greatly respect Director—the two men, for example, taught a well-received antitrust law course.

The collaboration between Director and Levi was auspicious. From the start of the Free Market Study, both saw antitrust law as a centerpiece of the investigation of the legal foundations of capitalism.

Levi enthusiastically supported the proposed investigation because he saw its objective to be analyzing the conduct of business enterprise. Writing to Wilber Katz in May 1945, Levi said that very little was actually known about the way business behaved in response to economic and legal policy. Because of this, certain fields of law—antitrust, patents, taxation, etc.—lacked critical information, and hence law schools could not train good lawyers. Levi believed that empirical work had to be done.

The creation of the Free Market Study and the beginning of the relationship between Chicago law and economics and the Volker Fund occurred because of Friedrich Hayek. In his 1944 book The Road to Serfdom, Hayek suggested that, although the Allies might win World War II, another crucial war in the realm of ideas had to be fought and won: “Though for the time being the different ideals are represented by hostile nations fighting for their existence, we must not forget that this conflict has grown out of a struggle of ideas within what, not so long ago, was a common European civilization. …Though the first task must now be to win the war, to win it will only gain us another opportunity to face the basic problems and to find a way of averting the fate which has overtaken kindred civilizations.”

Harold Luhnow, the President of the Volker Fund, asked Hayek to write an American version of Road to Serfdom and offered to finance this undertaking. After negotiating, they agreed that an American-based study of the conditions necessary for an effective competitive system needed to be organized and that a product of this study, the American Road to Serfdom, could influence American political opinion. The academic work of this study and its popular political tract would be used to countervail collectivism and would complement the newly formed Mont Pelerin Society, an international organization of embattled liberals. Notably, Hayek played a principal role in forming the Mont Pelerin Society in 1947. Director was a leader and charter member; as Secretary of Mont Pelerin Society, which he referred to as “our society” in his letters to Hayek, he played an important part in incorporating the Mont Pelerin Society in America.

Harold Luhnow considered his role in ousting the “Pendergast political machine” in Kansas City one of his triumphs in life; when led by Tom Pendergast, the machine had control of many of the politicians in the city. After WWII, Luhnow had his eyes set on reshaping politics and economics in the United States. He headed the Kansas City-based corporation the Volker Company, which by 1960 would have branches in over twenty states in the United States. The Volker Fund had extensive resources; in 1952, the Volker Fund had a net income of $1.2 million and a net disposable income of $720,000, a substantial percentage of which it used to fund education initiatives. For example, Leonard Read’s libertarian Foundation for Economic Education, which provided education in free market thinking, was Volker-funded.

In 1946, Director greatly admired University of Chicago economist Henry Simons. Director considered Simons a dear friend and greatly admired Simons’s scholarly work. Importantly, at this time, Director agreed with Simons’s policy prescriptions.

According to historian Ellis Hawley, Simons’s “widely read” 1934 pamphlet, A Positive Program for Laissez Faire, was at the vanguard of a barrage of attacks on increased concentration in industry. Simons located his own work within the classical liberal tradition. Simons observed: “The great enemy of democracy is monopoly, in all its forms”; this included “gigantic corporations.” At the time, it was feared that very large corporations would become behemoths or, even worse, “Frankensteins.” Simons wrote that “The gains from monopoly organization in general are likely, of course, to accrue predominantly to the strong and to be derived at the expense of the weak,” that “There is…no reasonable excuse…for hundred-million-dollar corporations, no matter what form their property may take. Even if the much-advertised economies of gigantic financial combinations were real, sound policy would wisely sacrifice these economies to preservation of more economic freedom and equality.” Simons believed that the proliferation of monopoly had led to the Great Depression and threatened freedom and equality.

Simons called for an “outright dismantling of…gigantic corporations” and championed “unqualified repudiation of the so-called ‘rule of reason’” in antitrust law. He demanded vigorous antitrust enforcement, maintaining that an antitrust violation ought to be considered “a major crime” and “prosecuted unremittingly by a vigilant administrative body.” Later, in 1941, Simons trumpeted that antitrust law “an anchor in a collectivist storm.” In closing his pamphlet, Simons called for “the custodians of the great liberal traditions” to join him to battle collectivism ([1934] 1948, p. 77).

Director resided in Washington in 1945, when he was asked to lead the proposed Hayek Project. Director began working in Washington, DC after the University of Chicago Economics Department refused to renew his teaching contract in 1934. After he left the university, Director attempted to complete the dissertation he would never finish. While traveling in England in 1937 to research the Bank of England, Director met Hayek. After attending one of Hayek’s seminars, Director considered Hayek his teacher. Until Director agreed to take the helm of the Free Market Study, he addressed his letters, “Dear Professor Hayek.”

Once WWII commenced, Director returned to Washington and supported Hayek’s work. For example, he extolled the Road to Serfdom in a 1945 book review in the American Economic Review. In support of Hayek and Simons’s plan, Director wrote an outline for the Hayek Project, which he called the “Free Market Study.” The outline’s main objective echoed Hayek’s major concern, a thorough examination of the legal foundations of a free market economy. Under the heading “Policies for Movement Towards the Free Market,” Director included ten policy areas and listed antitrust policy first.

Most of Simons’s scholarly output, with the exception of his work on taxation, can be found in Economic Policy for a Free Society (1946). During the first year of the Free Market Study, Director focused a good deal of time assembling Simons’s oeuvre for publication, and Economic Policy for a Free Society was one output of this undertaking. Director put much care and attention in organizing Simons’s published and unpublished work to further his main motivation for returning to the University of Chicago. Simons had tragically committed suicide on June 19, 1946. Hayek himself had exhorted Director to return to Chicago to carry on Simons’s legacy: “I do want to say that in a sense it would seem to me even more important than before that you should [return to Chicago]. It seems to me the only chance that the tradition which Henry Simons created will be kept alive and continued in Chicago.”

Notably, it would be a mistake to say that Simons’s work was in accord with the vision of the Volker Fund. In early November of 1947, Leonard Read wrote to Director about Simons’s Economic Policy for a Free Society; he disparaged the book, claiming it advocated collectivism and undermined the cause of individual freedom. For Director, accusing Simons of being a collectivist was tantamount to the worst form of invective.

Hayek, not Simons, successfully arranged for the Chicago Law School to house the Hayek Project. The contract stipulated that the Free Market Study would investigate the legal foundations of capitalism and produce an American Road to Serfdom. Director would head the project, and its members would include Wilber Katz (Dean of the Law School), Garfield Cox (Dean of the Business School), Theodore Schultz (Chair of the Economics Department), Milton Friedman, and Edward Levi. The Free Market Study would have an Advisory Committee oversee its progress. Luhnow said that he aimed to “keep control” of organizations he funded. Luhnow requested that the Advisory Committee include Leonard Read and Loren Miller. Both men were supporters of the Volker Fund, and benefited from its financial support.

In early November of 1947, Luhnow asked Hayek to “press Director” to hold the first Advisory Committee meeting. Luhnow wrote Hayek that his connections (he did not say who) said Director was not fulfilling his role in the Hayek Project. Luhnow did not say why. Presumably, he was disgruntled by Director’s support of Simons’s work: Director echoed Simons’s views on large corporations, monopoly, and antitrust law in his opening address for the 1947 Mont Pelerin Society meeting, which Volker Fund supporters attended. Luhnow, like Read, expected the Free Market Study to be closely aligned with Hayek’s Road to Serfdom, which contained no strong repudiations of corporations and no championing of vigorous antitrust enforcement.

“Because of its determination to reconstitute liberalism in order to attack collectivism and because of its departure from Simons’s work, the Hayek Project served as an incubator for a new form of liberalism, ‘Chicago neoliberalism’ or ‘Chicago New Liberalism.'”

From 1950 to 1952, in their effort to combat collectivism, Director and other members of the Hayek Project departed from the work of Simons. For example, in 1951, Director claimed that very large corporations should no longer be considered a threat to competition, but should be considered another feature of a competitive market. The Free Market Study undertook some empirical studies geared toward countervailing collectivism and reinvigorating liberalism. For example, Warren Nutter’s work, The Extent of Enterprise Monopoly in the United States, 1899-1939 (1951), evaluated the extent of industrial monopoly in the United States. Nutter argued that there had been no significant increase in business monopoly since 1900.

Director noted that Nutter’s findings challenged the collectivist claim that the efficiency of large-scale industry would inevitably give rise to more and more business monopoly, thereby resulting in less and less competition and necessitating socialist economic planning. Since collectivists hinged their argument on the premise that industrial monopoly had been significantly increasing and since, as Director pointed out, widespread belief in the inevitability thesis gave rise to collectivist policies, Nutter’s investigation dealt a blow to collectivism.

In sum, because of its determination to reconstitute liberalism in order to attack collectivism and because of its departure from Simons’s work, the Hayek Project served as an incubator for a new form of liberalism, “Chicago neoliberalism” or “Chicago New Liberalism.” Importantly, it is premature to claim that the Free Market Study adopted a far less critical attitude toward very large corporations and industrial monopoly solely because of its empirical investigations. Jacob Viner, as Gary Becker pointed out in 1993, highly valued testing claims with empirical and historical evidence.

Nonetheless, even though Nutter’s empirical analysis indicated that the extent of industrial monopoly had changed little since 1900 and other related empirical studies by Chicago economists—such as Arnold Harberger’s 1954 Monopoly and Resource Allocation in The American Economic Review—suggested that industrial monopoly was relatively benign, Viner concurred with Simons. Viner’s continued opposition to concentrations of power in the market stemmed at least in part from his steadfast adherence to classical liberalism and in part from the fact that he valued studies—e.g., George Stocking and Myron Watkins’s Monopoly and Free Enterprise (1951)—conducted in the spirit of classical liberalism.



From their interactions with the Volker Fund, Director, Hayek, and Levi would have realized that to champion Simons would hinder their chances of obtaining resources from private corporations. In the late 1940s and early 1950s, many corporate leaders spoke disparagingly of economists who challenged big business. In 1951, Director stated, “The road to monopoly…is not a one-way road.” According to Director, the corporate form was ideal because it neither hindered nor promoted monopoly. Director claimed that competitive forces would control corporations and ensure the markets in which they engaged would be competitive. Notably, the central ideas in his talk marked a watershed moment in the development of economic thinking at Chicago.

Just a few years earlier, Director had advocated for curbing corporate power, restraining the growth of business monopoly, and vigorously enforcing antitrust law.

This is the first of two pieces on Aaron Director and the legacy of Chicago law and economics, based on the forthcoming 2021 book Aaron Director, and the American Road to Serfdom (Cambridge University Press; under contract) by Robert Van Horn. For a further look at the subject matter of this piece, see: 2018. “Corporations and the Rise of Chicago Law and Economics.” Economy and Society. 47(3): 477-499.

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