The Nobel Prize

George J. Stigler (1911–91)

George Stigler was born in Renton (a suburb of Seattle), Washington, USA in 1911. He obtained a BA from the University of Washington in 1931, an MBA from Northwestern University in 1932, and a PhD from the University of Chicago in 1938. A graduate student under Frank Knight at Chicago, his doctoral thesis on the history of production and distribution theories was subsequently published by Macmillan (Stigler, 1941). He was appointed assistant professor at Iowa State College in 1936, a post he held before moving to the University of Minnesota in 1938. Working in the faculty at Minnesota he was promoted from assistant and associate to full professor over the period from 1938 to 1946. In 1942 Stigler went on leave, first to work at the National Bureau of Economic Research (NBER) (where he was a research staff member until 1976), and then to the Statistical Research Group at Columbia University before returning to Minnesota in 1945. In 1946 he accepted the offer of a professorship at Brown University but after a year moved to Columbia University where he was professor from 1947 to 1958. In 1958 Stigler returned to the University of Chicago where he remained until he retired in 1981. From 1981 to 1991 he was the Charles R. Walgreen Distinguished Service Professor, Emeritus, at the University of Chicago. At Chicago he established the Industrial Organization Workshop, founded the Center for the Study of the Economy and the State in 1977, and was an editor of the Journal of Political Economy from 1974 until his death in 1991.

Among his many offices and honours, Stigler was president of each of the American Economic Association in 1964, the History of Economics Society in 1977 and the Mont Pelerin Society from 1976 to 1978, and was awarded the National Medal of Science in 1987. In 1982 he was awarded the Nobel Memorial Prize in Economics ‘for his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation’ (Nobel Foundation, 2004).

Stigler’s published work covers four main areas: the history of economic thought, microeconomic theory, industrial organisation and economic regulation. In the field of the history of economic thought the publication of his doctoral thesis, Production and Distribution Theories, in 1941, marked the first major attempt to survey the neoclassical theories of production and distribution over the period from 1870 to 1895. This landmark book covers the work of such influential economists as Eugen von Böhm-Bawerk (1851–1914), John Bates Clark (1847–1938), Francis Ysidro Edgeworth (1845–1926), William Stanley Jevons (1835–82), Alfred Marshall (1842–1924), Carl Menger (1840–1921), Léon Walras (1834–1910) and Knut Wicksell (1851–1926). In addition to this definitive study he also wrote numerous articles on the history of economic ideas and the contributions of a number of great economists of the past. Some of his most important articles – including ‘The Development of Utility Theory’, ‘Perfect Competition, Historically Contemplated’, ‘The Nature and Role of Originality in Scientific Progress’, ‘The Influence of Events and Politics on Economic Theory’ and ‘Ricardo and the 93 Per Cent Labour Theory of Value’ – have been gathered together in Essays in the History of Economics (Stigler, 1965).

Stigler made a number of important contributions both to microeconomic theory (including contributions to the theory of costs and production) and industrial organisation. Rather than attempt to survey the entire breadth of these contributions, in what follows we merely highlight, in approximate chronological order, some of his most important and influential published works. His paper on the diet problem entitled ‘The Cost of Subsistence’ (Stigler, 1945) played an important role in the subsequent development of the technique of linear programming. The year 1946 marked the publication of the first edition of his intermediate textbook, The Theory of Price – an earlier version of the book had been published by Macmillan in 1942 entitled The Theory of Competitive Price. One important feature of this influential textbook, which characterised his approach to economics, is the way theory is illustrated with real-world phenomena. Much of his subsequent published work involved the use of empirical evidence to test theories of industrial organisation. In a paper published in 1947 in the Journal of Political Economy (Stigler, 1947c), he uncovered the theoretical inadequacy and predictive failures of the kinked demand curve in oligopoly. On the basis of empirical tests he emphasised the frequency of price changes in oligopolistic industries against the traditional prediction that industries containing only a few firms rarely engage in price changes (see also Stigler and Kindahl, 1970).

His 1961 article, ‘The Economics of Information’, acknowledges that information is imperfect and can only be acquired at a cost. Furthermore, rational economic agents will only have an incentive to search for and acquire information up to the point where the benefit from additional information is equal to the costs incurred. In other words, Stigler recognised that the same considerations, involving a comparison between benefits and costs, apply to the acquisition of information as they do to the consumption and production of other goods and services. This seminal article, together with ‘Information in the Labour Market’ (Stigler, 1962a), inspired much subsequent work in such fields of study as macroeconomics and labour economics, most notably on search models of unemployment. In another very influential paper published in the Journal of Political Economy in 1964 on the theory of oligopoly (Stigler, 1964a) he argued that the stability of collusive behaviour in oligopolistic markets depends on the costs of detecting and enforcing significant movements away from price agreements. Those industries that are more successful than others at price collusion have lower costs of policing the price agreement. Many of his most important papers, which have had such a marked impact on the development of industrial economics since the 1970s, can be found in The Organization of Industry (Stigler, 1968).

In addition to these main published works mention should also be made to some of Stigler’s important empirical work, which he undertook over the period from 1947 to 1976 as a senior research staff member of the NBER. This work includes NBER monographs on domestic servants, trends in output and employment, employment trends in the service industries, scientific personnel, capital and rates of return in manufacturing industries and the behaviour of industrial prices (Stigler, 1947a; 1947b; 1956; 1963; Blank and Stigler, 1957; Stigler and Kindahl, 1970).

In the early 1960s, Stigler started detailed research into the practice and theory of economic regulation. A 1962 article, co-authored with Claire Friedland (Stigler and Friedland, 1962b), challenged the then-traditional view that public regulation achieves its stated objectives. In examining the case of electricity, Stigler and Friedland concluded that regulation had no significant effect on electricity prices in the United States. In a subsequent study, ‘Public Regulation of the Securities Market’, Stigler (1964b) concluded that regulation had not benefited investors buying new stock issues. These studies acted as a catalyst for economists in other countries to undertake research into the actual effects of economic regulation. In a seminal article, ‘The Theory of Economic Regulation’, published in 1971, he argued that ‘as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit’ rather than ‘for the protection and benefit of the public’ (Stigler, 1971, p. 3). Stigler’s studies of the ‘causes and effects of public regulation’ led to a new area of study known as the economics of regulation. One important aspect of his work is the way he integrated the economics of regulation with the economics of politics. For Stigler, participants in the political market, as in the economic market, display self-interested rational behaviour and should therefore be subject to the same tools of analysis. His studies also helped open up another new area of research between economics and law. Some of his most important essays on regulation, including the three papers noted above, have been gathered together in The Citizen and the State (Stigler, 1975).

George Stigler will be remembered first and foremost for his pioneering work in industrial organisation and economic regulation. His groundbreaking contributions (most notably Stigler, 1961; 1971) gave birth to two new areas of research on the ‘economics of information’ and the ‘economics of regulation’. He has also been credited by the 1991 Nobel Memorial Laureate, Ronald Coase, with naming and formulating the Coase theorem (see entry on Coase in this volume and Stigler, 1989). A much-admired economist known for his clear, creative and insightful style of writing, Stigler’s work is also often laced with humour (see, for example, Stigler, 1982).

Main Published Works
(1941), Production and Distribution Theories, New York: Macmillan.
(1945), ‘The Cost of Subsistence’, Journal of Farm Economics, 27, May, pp. 303–14.
(1946), The Theory of Price, New York: Macmillan; 2nd edn 1952, 3rd edn 1966; 4th edn 1987.
(1947a), Domestic Servants in the United States, New York: National Bureau of Economic Research.
(1947b), Trends in Output and Employment, New York: National Bureau of Economic Research.
(1947c), ‘The Kinky Oligopoly Demand Curve and Rigid Prices’, Journal of Political Economy, 55, October, pp. 432–9; reprinted in The Organization of Industry, Homewood, IL: Richard
D. Irwin, 1968.

(1956), Trends in Employment in the Service Industries, New York: National Bureau of Economic Research.

(1957), The Demand and Supply of Scientific Personnel (with D.M. Blank), New York: National Bureau of Economic Research.

(1961), ‘The Economics of Information’, Journal of Political Economy, 69, June, pp. 213–25; reprinted in The Organization of Industry, Homewood, IL: Richard D. Irwin, 1968.

(1962a), ‘Information in the Labour Market’, Journal of Political Economy, 70, October, pp. 94– 105; reprinted in The Organization of Industry, Homewood, IL: Richard D. Irwin, 1968.

(1962b), ‘What Can Regulators Regulate? The Case of Electricity’ (with C. Friedland), Journal of Law and Economics, 5, October, pp. 1–16; reprinted in The Citizen and the State: Essays on Regulation, Chicago: University of Chicago Press, 1975.
(1963), Capital and Rates of Return in Manufacturing Industries, Princeton, NJ: Princeton University Press.
(1964a), ‘A Theory of Oligopoly’, Journal of Political Economy, 72, February, pp. 44–61; reprinted in The Organization of Industry, Homewood, IL: Richard D. Irwin, 1968.
(1964b), ‘Public Regulation of the Securities Markets’, Journal of Business, 37, April, pp. 117– 42; reprinted in The Citizen and the State: Essays on Regulation, Chicago: University of Chicago Press, 1975.
(1965), Essays in the History of Economics, Chicago: University of Chicago Press.
(1968), The Organization of Industry, Homewood, IL: Richard D. Irwin.
(1970), The Behaviour of Industrial Prices (with J.K. Kindahl), New York: National Bureau of Economic Research.
(1971), ‘The Theory of Economic Regulation’, Bell Journal of Economics and Management Science, 2, Spring, pp. 3–21; reprinted in The Citizen and the State: Essays on Regulation, Chicago: University of Chicago Press, 1975.
(1975), The Citizen and the State: Essays on Regulation, Chicago: University of Chicago Press. (1982), The Economist as Preacher and Other Essays, Chicago: University of Chicago Press; Oxford: Basil Blackwell.
(1989), ‘Two Notes on the Coase Theorem’, Yale Law Journal, 99, December, pp. 631–3.

1 comment:

Sim Con said...

George Stigler was a remarkably incisive economist. Dantzig's 1991 paper "The Diet Problem" remarked that Stigler used to cut through other Economists like acid if he disagreed with them. Anyway, there's a spreadsheet to explore the Stigler Diet at here