George Stigler

George Joseph Stigler (January 17, 1911 – December 1, 1991) was a U.S. economist. He won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1982.

George Stigler was one of the great economists of the twentieth century. He combined a gift for writing with the ability to conduct innovative research. His deep understanding of the ideas of the great economists of the past gave him a strong foundation on which to build an analysis of contemporary issues.

Stigler's impact was greatest and most lasting in the three fields that were singled out in the Nobel citation, those he labeled the economics of information, the theory of economic regulation, and the organization of industry. But it is important to note that Stigler’s emphasis on statistical documentation, in all three fields, has been no less than revolutionary. Previously, regulatory agencies were frequently judged by their original intentions or their self-proclaimed successes—indeed, by almost any standard but the verifiable results of their actions. Much of the credit for the growing interest in the empirical verification of economic theory must be given to Stigler.

Biography

George Stigler was born January 17, 1911, in Renton, Washington, a suburb of Seattle. His parents, Joseph and Elizabeth Hungler Stigler, had immigrated separately to the United States at the end of the nineteenth century, his father from Bavaria, his mother from what was then Austria-Hungary. George was their only child. During the prohibition years, his father, a brewer by profession, tried a variety of jobs, finally settling on real estate:

My parents bought rundown places, fixed them up, and sold them. By the time I was sixteen, I had lived in sixteen different places in Seattle. But my parents had a comfortable if nomadic existence (Stigler 1988, 9-10).

Stigler went to the University of Washington, Seattle, receiving a B.A. in 1931. It was the Great Depression and jobs in business were scarce. Although he had "no thought of an academic career" he was awarded a fellowship at Northwestern University business school, receiving an M.B.A in 1932 (Stigler 1988, 15).

At Northwestern he developed an interest in economics and continued his study at the University of Chicago. There he found an intense intellectual atmosphere that captivated him. At Chicago, Stigler was particularly influenced by Frank H. Knight, under whom he wrote his dissertation, receiving his Ph.D. in 1938. Milton Friedman, a friend of over 60 years, considered this to be a noteworthy feat since only three or four students ever managed to complete a dissertation under Knight in his twenty-eight years on the Chicago faculty. Chicago became Stigler's intellectual home for the rest of his life, as a student from 1933 to 1936, a faculty member from 1958 to his death in 1991, and a leading member of and contributor to the "Chicago School" throughout.

In 1936 Stigler accepted an appointment as an assistant professor at Iowa State College (now University), and shortly thereafter was married to Margaret "Chick" Mack. They had three sons, Stephen (a professor of statistics at Chicago University), David (a corporate lawyer), and Joseph (a social worker), and remained a close-knit family. They suffered a tragic loss in 1970, when Chick died unexpectedly. George never remarried.

Stigler accepted an appointment at the University of Minnesota in 1938 and then went on leave in 1942 to work first at the National Bureau of Economic Research and later at the Statistical Research Group of Columbia University, a group directed by Allen Wallis that was engaged in war research on behalf of the armed services.

When the war ended in 1945, George returned to the University of Minnesota, but he remained only one year, leaving in 1946 to accept a professorship at Brown University. After a year at Brown, he moved to Columbia, where he remained until 1958, despite several attempts by Theodore Schultz, chairman of the Chicago Department of Economics, to bring him to Chicago.

In 1958 Allen Wallis, then dean of the University of Chicago business school, persuaded him to accept the Charles R. Walgreen professorship of American institutions. Stigler remained at Chicago for the rest of his life. At Chicago he became an editor of the Journal of Political Economy; established the Industrial Organization Workshop, which achieved recognition as the key testing ground for contributions to the field of industrial organization.

From 1971 to his death, Stigler was a fellow at the Hoover Institution at Stanford, and spent part of almost every year at Hoover.

In 1977 founded the Center for the Study of the Economy and the State, serving as its director until his death in 1991.

Work

Stigler's doctoral dissertation, published as Production and Distribution Theories (1941), was a historical survey of Neoclassical theories that remains the definitive study of its subject. That book was followed by a steady flow of perceptive, thoughtful, and beautifully written articles and books interpreting the contributions of his predecessors, some of which were collected in Essays in the History of Economics (1965).

Stigler's first important publication was a textbook originally published in 1942 as "The Theory of Competitive Price" and subsequently revised and entitled The Theory of Price (Stigler 1946, 1952, 1966, and 1987). Its systematic linking of highly abstract theory to observable data and information is unique among textbooks in price theory.

This was, however, just a preamble to his main scientific thrusts. Stigler's achievements establish him as a leader in applied research on markets and industrial structure—a field often known as industrial organization. Through particular features of his research, Stigler is also recognized as the founder of Information economics and the economics of regulation, and one of the pioneers of research in the intersection of law and economics.

The linkage of data and theory is a consistent feature of both his writings and his scientific work. Stigler's many contributions to economic theory were the result of his efforts to understand the real world, and nearly all led to an attempt to provide some quantitative evidence to test some theory or to provide empirical counterparts to theoretical concepts (Friedman 1998).

Industrial organization and the role of real data and quantitative analyses

The role of information in industrial organization is at the core of Stigler’s novel view of the organization and the function of a firm. He was the first proponent of rigorous quantitative analysis of data and information from the whole industry. In other words, he suggested that all competing firms should be able to make decisions based on data from all their clients and competitors.

Despite strong simplifications, basic economic theory has proved effective in explaining and predicting the dominant features of market events. At the same time, the high level of abstraction has left many individual market phenomena unexplained. This is the premise for Stigler's research work. His underlying ambition was to seek explanations for the distinctive features and peculiarities of markets and structural developments within the framework of basic theoretical assumptions about firms' and households' optimizing behavior and the interplay between supply and demand.

Stigler showed that this can be explained if the costs of searching for, and diffusing information about, goods and prices are incorporated in the model along with production and transportation costs. A market participant's lack of knowledge about goods and prices can, of course, be alleviated by collecting and furnishing information. The amount of information a firm or household acquires is guided by the same comparisons between costs and benefits as the production of any commodity. That is, information is gathered until the expected utility of further search no longer outweighs additional search costs. The information a subject acquires is consciously chosen. Conversely—and more provocatively—even a lack of market information is rationally and deliberately chosen.

The basic properties of traditional theory do not have to be challenged. It has merely to be adjusted to account for the reality, as opposed to the assumption of "perfect information," in the same way that fundamental theories in physics simplistically assume the existence of a vacuum.

Next, Stigler hit upon the problem of optimization and actually called for the "linear programming" methodology to help in this respect. An early example of the latter is an article on "The Cost of Subsistence" (Stigler 1945), which starts:

Elaborate investigations have been made of the adequacy of diets at various income levels, and a considerable number of 'low-cost,' 'moderate,' and 'expensive' diets have been recommended to consumers. Yet, so far as I know, no one has determined the minimum cost of obtaining the amounts of calories, proteins, minerals, and vitamins which these studies accept as adequate or optimum (Stigler 1945, 303-304).

Stigler then set himself to determine the minimum cost diet, in the process producing one of the earliest formulations of a linear programming problem in economics, for which he found an approximate solution, explaining that "there does not appear to be any direct method of finding the minimum of a linear function subject to linear constraints" (Stigler 1945). While the name "Stigler Diet" was applied after the experiment by outsiders, according to Stigler, "No one recommends these diets for anyone, let alone everyone." The Stigler diet has been much ridiculed for its lack of variety and palatability, however his methodology received praise and is considered to be some of the earliest work in linear programming. It was two years later that George Dantzig provided a direct method of reaching the solution, the "Simplex algorithm," which has been widely used in many economic and industrial applications.

Theory of economic regulation

As early as the 1940s, Stigler studied the effects of some features of regulatory legislation in the USA, particularly rent controls and minimum-wage legislation. He discovered that far-reaching, unintended side-effects could arise alongside the primary desired effects. He also found that regulation of the rates of public utilities, such as electricity, completely lacked observable effects.

As a conceivable explanation, Stigler saw that regulation can be based on erroneous perception of real conditions and thus, in practice, be difficult to implement, and on the fact that the intended effects can be neutralized by external pressures. This work on the consequences of regulatory legislation set a pattern for numerous similar studies.

Eventually, he developed the “theory of economic regulation.” He asked: "If regulation does not generally achieve its stated objectives, why have so many agencies been established and kept in existence?" (Schmalensee 1987, 499). The Theory of Economic Regulation (Stigler 1971) presents Stigler's answer to that question:

The central thesis of the article ... is that, as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit. ... two alternative views of the regulation of industry are widely held. ... The first is that regulation is instituted primarily for the protection and benefit of the public at large or some large subdivision of the public. ... The second view is essentially that the political process defies rational explanation (Stigler 1971).

Stigler gave example after example to support his own thesis, which by now has become the orthodox view in the profession, concluding:

The idealistic view of public regulation is deeply embedded in professional economic thought ... The fundamental vice of such a [view] is that it misdirects attention to preaching to the regulators rather than changing their incentives. (Stigler 1971)

But Stigler's results do show that legislation can also be an outflow of market participants' optimizing behavior. To the extent that this is so, legislation is no longer an "exogenous" force which affects the economy from outside, but an "endogenous" part of the economic system itself. This approach constitutes a further step towards extending the sphere of application for the basic assumption of economic theory.

To conclude, Stigler's analysis was the beginning of what has since come to be called "public choice" economics: the shift from viewing the political market as not susceptible to economic analysis, as one in which disinterested politicians and bureaucrats pursue the "public interest," to viewing it as one in which the participants are seeking, as in the economic market, to pursue their own interest (Friedman 1999). In this understanding, it can be analyzed with the usual tools of economics.

Economics of information

The Economics of Information is the title of a seminal article (Stigler, 1961) that gave birth to an essentially new area of study for economists. In his intellectual autobiography, George Stigler termed it, "My most important contribution to economic theory (Stigler 1988, 79-80). The article begins:

One should hardly have to tell academicians that information is a valuable resource: knowledge is power. And yet it occupies a slum dwelling in the town of economics. Mostly it is ignored. (Stigler 1961, 213-25).

Sigler proceeded to illustrate the importance of subjecting information to economic analysis with two examples: the dispersion of prices and the role of advertising. According to traditional theory, the result of optimization and market processes should be that every commodity, except for transport costs, is sold for one and the same price everywhere. But, in practice, price variation is observed on most markets. Stigler showed that this can be explained if the costs of searching for, and diffusing information about, goods and prices are incorporated in the model along with production and transport costs.

These, and similar achievements prove an indispensable complement to basic theory. Subsequent research has shown how phenomena such as price rigidity, variations in delivery periods, queuing and unutilized resources, which are essential features of market processes, can be afforded a strict explanation within the framework of basic economic assumptions. They are no longer unnecessary market imperfections which can give rise to government intervention. The results have also contributed to explaining inflation and unemployment. An appreciable amount of the research on these phenomena during the last decade has also followed this line of reasoning. Thus, Stigler is not only the foremost originator of economics of information. He is also among those who have provided the basic postulates for today's research on the theoretical foundations of macroeconomics.

The proposal to study the economics of information was promptly and widely accepted. Within a decade and a half, the literature had become so extensive and the theorists working in the field so prominent, that the subject was given a separate classification in the Index of Economic Articles, and more than a hundred articles a year are now devoted to the subject.

The absence of controversy was certainly no tribute to the definitiveness of my exposition. ... The absence of controversy was due instead to the fact that no established scientific theory was being challenged by this work; in fact, all I was challenging was the neglect of a promising subject (Stigler 1983, 539).

Legacy

Few economists have so consistently and successfully combined economic theory with empirical analysis, or ranged so widely. Stigler regarded economic theory, in the words of Alfred Marshall, as "an engine for the discovery of concrete truth," not as a subject of interest in its own right, a branch of mathematics.

These are final word on Stigler from his colleague and fellow recipient of the Nobel Memorial Prize in Economic Science, Ronald Coase:

He is equally at home in the history of ideas, economic theory, and the study of politics. Even more remarkable is the variety of ways in which he handles a problem; he moves from the marshaling of high theory to aphorism to detailed statistical analysis, a mingling of treatments. . . . It is by a magic of his own that Stigler arrives at conclusions which are both unexpected and important. Even those who have reservations about his conclusions will find that a study of his argument has enlarged their understanding of the problem being discussed and that aspects are revealed which were previously hidden. Stigler never deals with a subject which he does not illuminate. And he expresses his views in a style uniquely Stiglerian, penetrating, lively, and spiced with wit… his writings are easy to admire, a joy to read, and impossible to imitate (Coase 1991, 472).

And yet, we still have his very important role he played in the American economics hardly mentioned anywhere. This is Stigler’s role as editor and reviewer:

For 19 years Stigler was a very successful editor of the Journal of Political Economy. Under his leadership this journal solidified its high reputation among economists (Becker 1993, 765).

Stigler's complete bibliography lists 73 reviews in 24 publications ranging from strictly professional, like the Journal of Political Economy (22) and the American Economic Review (10), to the popular, like the Wall Street Journal (5), and the New York Times (3), and dating from 1939 to 1989.

Although it was Stigler’s tangible work on the causes and consequences of economics and political institutions that was recognized by the Nobel committee, his intangible contributions to economics may be just as important. He has raised the standards of industrial economics far beyond those found in the work of earlier scholars. Moreover, Stigler has made sterling contributions to the history and sociology of economic thought. His recognition by the Nobel committee is a testament to his rigorous, clear-thinking style.

Major publications

• Stigler, George J. 1941. Production and Distribution Theories: 1870-1895, Macmillan, New York.
• Stigler, George J. 1945. The cost of subsistence. J. Farm Econ. 27: 303-314.
• Stigler, George J. 1946. The Theory of Price. Macmillan, New York.
• Stigler, George J. 1961. “The Economics of Information,” Journal of Political Economy June.
• Stigler, George J. 1962. "The Intellectual and the Marketplace"; in: Selected Papers, no. 3. University of Chicago Graduate School of Business, Chicago.
• Stigler, George J. 1963. Capital and Rates of Return in Manufacturing Industries. National Bureau of Economic Research, Princeton University Press, Princeton, NJ.
• Stigler, George J. 1965. Essays in the History of Economics, University of Chicago Press, Chicago.
• Stigler, George J. 1971. The theory of economic regulation Bell J. Econ. Man. Sci. 2: 3-21.
• Stigler, George J. 1983. Nobel lecture: The process and progress of economics J. Polit. Econ 91: 529-545.
• Stigler, George J. 1987. The Theory of Price, Fourth Edition. Macmillan, New York.
• Stigler, George J. [1988] 2003. Memoirs of an Unregulated Economist. Chicago, IL: University of Chicago Press. ISBN 978-0226774404
• Stigler, George J. (Editor). 1988. Chicago Studies in Political Economy. Chicago, IL: University of Chicago Press. ISBN 978-0226774381
• Stigler, George J. and J. K. Kindahl. 1970. "The Behavior of Industrial Prices," National Bureau of Economic Research, Columbia University Press, New York.
• Stigler, George J. and Paul Samuelson. 1963. "A Dialogue on the Proper Economic Role of the State." Selected Papers, no.7., University of Chicago Graduate School of Business, Chicago.

References

ISBN links support NWE through referral fees

• Becker, G. S. 1993. George Joseph Stigler. Journal of Political Economy 101: 761-767.
• Coase, Ronald. 1991. "George J. Stigler" in Remembering the University of Chicago: Teachers, Scientists, and Scholars, Shils, Edward (Editor), Chicago, IL: University of Chicago Press. ISBN 978-0226753355
• Diamond, Arthur M., Jr. 2005. Measurement, incentives, and constraints in Stigler's Economics of Science. The European Journal of the History of Economic Thought 12 (4): 637-663.
• Friedman, Milton. 1993. George Stigler: A personal reminiscence. Journal of Political Economy 101 (5): 768-773.
• Friedman, Milton. 1998. George Joseph Stigler January 17, 1911 — December 1, 1991 Biographical Memoirs. Retrieved April 30, 2008.
• Schmalensee, R. 1987. The New Palgrave: A Dictionary of Economics, vol. 4, Eatwell, J. M. Milgate, and P. Newman (Editors). New York, NY: Stockton Press.
• Sowell, T. 1993. A student's eye view of George Stigler. Journal of Political Economy 101: 784-792.

External links

• Biography of George J. Stigler (1911-91) The Concise Encyclopedia of Economics. Retrieved April 24, 2008.
• Press Release: The Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel for 1982 20 October 1982. Retrieved April 24, 2008.
• Autobiography Nobelprize.org Retrieved April 24, 2008.

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