George J. Stigler
George Stigler was the quintessential empirical economist. Paging through his classic microeconomics text The Theory of Price, one is struck by how many principles of economics are illustrated with real data rather than hypothetical examples. Stigler deserves a great deal of the credit for getting economists to look at data and evidence.
Stigler’s two longest-held positions were at Columbia University (1947–1958) and at the University of Chicago (1958–1991). From the early 1950s to the late 1960s, most of his research was in the field of industrial organization. A typical Stigler article laid out a new proposition with clear reasoning and then presented simple but persuasive data to back up his argument.
Take, for example, Stigler’s “A Note on Block Booking.” Block booking of movies was the offer of a fixed package of movies to an exhibitor; the exhibitor could not pick and choose among the movies in the package. The Supreme Court banned the practice on the grounds that the movie companies were compounding a monopoly by using the popularity of the winning movies to compel exhibitors to purchase the losers.
Stigler disagreed and presented a simple alternative argument. If Gone with the Wind is worth $10,000 to the exhibitor and Getting Gertie’s Garter is worth nothing, wrote Stigler, the distributor could get the whole $10,000 by selling Gone with the Wind. Throwing in a worthless movie would not cause the exhibitor to pay any more than $10,000. Therefore, reasoned Stigler, the Supreme Court’s explanation seemed wrong.
But why did block booking exist? Stigler’s explanation was that if exhibitors valued films differently from one another, the distributor could collect more by “bundling” the movies. Stigler gave an example in which exhibitor A is willing to pay $8,000 for movie X and $2,500 for Y, and B is willing to pay $7,000 for X and $3,000 for Y. If the distributor charges a single price for each movie, his profit-maximizing price is $7,000 for X and $2,500 for Y. The distributor will then collect $9,500 each from A and B, for a total of $19,000. But with block booking the seller can charge $10,000 (A and B each value the two movies combined at $10,000 or more) for the bundle and make $20,000. Stigler then went on to suggest some empirical tests of his argument and actually did one, showing that customers’ relative tastes for movies, as measured by box office receipts, did differ from city to city.
Stigler’s thinking on government regulation was even more influential than his work on industrial organization. Because of Stigler’s research, economists view regulation much more skeptically than their counterparts of the 1950s did. His first article on the topic, coauthored with longtime research assistant Claire Friedland and published in 1962, was titled “What Can Regulators Regulate? The Case of Electricity.” They found that regulation of electricity prices had only a tiny effect on those prices. In the late 1970s, their finding was challenged by Gregg Jarrell, himself a Stigler student. But more important than this finding was their demonstration that one could examine the actual effects of regulation, and not just theorize about them.
Stigler devoted his entire 1964 presidential address to the American Economic Association to making this point. He argued that economists should study the effects of regulation and not just assume them. He twitted the great economists of the past who had given lengthy cases for and critiques of government regulation without ever trying to study its effects. In Stigler’s view things were not much better in the twentieth century. “The economic role of the state,” he said, “has managed to hold the attention of scholars for over two centuries without arousing their curiosity.” Stigler added, “Economists have refused either to leave the problem alone or to work on it.”
Many economists got the point. Since the mid-1960s, economists have used their sometimes awesome empirical tools to study the effects of regulation. Whole journals have been devoted to the topic. One is the Journal of Law and Economics, started at the University of Chicago in 1958. Another, the Bell Journal of Economics and Management Science, later the RAND Journal, started in 1970. As a general rule economists have found that government regulation of industries harms consumers and often gives monopoly power to producers. Some of these findings were behind economists’ widespread support for the deregulation of transportation, natural gas, and banking, which gained momentum in the Carter administration and continued until halfway through the Reagan administration. Stigler was the single most important academic contributor to this movement.
Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal 1971 article, “The Theory of Economic Regulation,” he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession. It has now become the mainstream view.
For his earlier work on industrial organization and his work on the effects and causes of regulation, Stigler was awarded the 1982 Nobel Prize for economics.
Stigler was an uncommonly clear and humorous writer. Economics from him never seemed like “the dismal science.” With his sometimes biting wit, he could put a profound insight into one sentence. In discussing the benefits of capitalism, for example, Stigler wrote: “Professors are much more beholden to Henry Ford than to the foundation that bears his name and spreads his assets.”
Not to be missed in a listing of Stigler’s contributions is his research on information. His 1962 article “Information in the Labor Market” was a watershed for further studies on unemployment. According to Stigler, job seekers needed short periods of unemployment in order to search for a higher wage. Even in industries with a “going wage,” variances in wage rates still exist. Therefore, the unemployed are as much information seekers as job seekers. His theory is now called the theory of search unemployment.
Information is also a problem for firms when they collude, implicitly or explicitly, to set prices. They do not know whether their competitors are secretly undercutting them. This uncertainty can be reduced, wrote Stigler, by spending resources to gather information. Stigler applied this insight to show that collusion is less likely to succeed if there are more firms in a market.
Also highly regarded as an economic historian, Stigler wrote numerous articles on the history of ideas in the early years of his career. His Ph.D. dissertation on the history of neoclassical production and distribution theories was highly acclaimed as a critical link in the chain of economic thought. Some of his articles in the area are collected in Five Lectures on Economic Problems (1950) and Essays in the History of Economics (1965). The entry on monopoly in this encyclopedia is one of Stigler’s last published works.
Straight Talk from Stigler
Sears, Roebuck and Company and Montgomery Ward made a good deal of money in the process of improving our rural marketing structure, but I am convinced that they did more for the poor farmers of America than the sum total of the federal agricultural support programs of the last five decades.
Am I to admire a man who injures me in an awkward and mistaken attempt to protect me, and to despise a man who to earn a good income performs for me some great and lasting service?
intellectual heirs did little to strengthen his case for laissez-faire, except by that most irresistible of all the weapons of scholarship, infinite repetition.
itself is a completely neutral instrument and lends itself to the dissemination of highly contradictory desires. While the automobile industry tells us not to drink while driving, the bourbon industry tells us not to drive while drinking…. Our colleges use every form of advertising, and indeed the typical university catalog would never stop Diogenes in his search for an honest man.
When a good comedian and a production of Hamlet are on rival channels, I wish I could be confident that less than half the professors were laughing.
About the Author
David R. Henderson is the editor of The Concise Encyclopedia of Economics. He is also an emeritus professor of economics with the Naval Postgraduate School and a research fellow with the Hoover Institution at Stanford University. He earned his Ph.D. in economics at UCLA.