Freshwater and saltwater are anachronistic distinctions that no longer apply. They were highly aggregated and misleading definitions even when they were relevant.
The Chicago School has always been quite diverse, from its early days with Frank Knight, Jacob Viner and Henry Simons to later periods of law and economics, new institutionalism and other tendencies.
Saltwater/freshwater came about because of a dispute in the dominant neo-Keynesian macro at the time (which both sides subscribed to) regarding the IS-LM model and the Phillips curve unemployment-inflation trade-off. Naive expositions of IS-LM had ignored the money demand function, which Friedman pointed out and ended up kickstarting the monetarist controversy. Phelps and Friedman also discovered a flaw in the absolutist Phillips curve and augmented it for rational expectations in 1968, destroying its former validity and anticipating the ensuing stagflation. This influenced Barro and Lucas to start the rational expectations revolution in macroeconomics, but it ended up being taken overboard to model always-clearing markets and other perfections.
Make no mistake, though. Both sides were operating in the same general framework. Most Chicagoites absolutely did not deny that there could be aggregate demand shortfalls. They were mostly Keynesians like the rest.
The Chicago School has always been quite diverse, from its early days with Frank Knight, Jacob Viner and Henry Simons to later periods of law and economics, new institutionalism and other tendencies.
Saltwater/freshwater came about because of a dispute in the dominant neo-Keynesian macro at the time (which both sides subscribed to) regarding the IS-LM model and the Phillips curve unemployment-inflation trade-off. Naive expositions of IS-LM had ignored the money demand function, which Friedman pointed out and ended up kickstarting the monetarist controversy. Phelps and Friedman also discovered a flaw in the absolutist Phillips curve and augmented it for rational expectations in 1968, destroying its former validity and anticipating the ensuing stagflation. This influenced Barro and Lucas to start the rational expectations revolution in macroeconomics, but it ended up being taken overboard to model always-clearing markets and other perfections.
Make no mistake, though. Both sides were operating in the same general framework. Most Chicagoites absolutely did not deny that there could be aggregate demand shortfalls. They were mostly Keynesians like the rest.