When George Stigler, as a young visiting professor, delivered his first lecture at Columbia College in the late '40s, the intellectual debate in New York City, reports Murray Rothbard, focused on whether official membership in the Communist Party was necessary for meaningful political activism. In that first address, Stigler detailed the counterproductive consequences of rent controls. He then exposed how minimum-wage laws create unemployment and discriminate against low-wage workers. The crowd was stunned.
Today, George Stigler can still shock his listeners, but now he can make many of them smile, as well. Stigler's critique of government regulation of business has spread so wide that, now, the defenders of state intervention must explain themselves to incredulous crowds. In 1982, he even won the Nobel Prize in economics.
When Stigler started out-first as a University of Chicago student in the '30s, then as a roving teacher before returning to Chicago in 1958-economists took large corporations' monopolistic power and consumers' manipulable desires as the foundation of market analysis. Stigler's relentless empirical work confounded the prejudices of his day. Among his many iconoclastic findings, for example, was that regulated stock-market returns in the '50s were no better than unregulated returns in the '20s.
"The study of the regulation of economic activity became a passion of Stigler's," UCLA economist Harold Demsetz recently wrote in Science magazine. Stigler's "passion" soon led to perhaps his most famous paper-"The Theory of Economic Regulation, "published in 1971-and his most important general hypothesis: "As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit."
Contributing Editor Thomas Hazlett recently interviewed Professor Stigler at the Hoover Institution.
REASON: What does a good economist contribute to society?
STIGLER: Well, what we mostly do is contribute maybe slightly better-trained minds to the society each June, and I don't think that's negligible. But just sticking to the research side, I think that we've done a very good job on the analysis of things like tariffs and energy programs. We're very good on whether a highway safety program makes sense or doesn't make sense, or at least what its costs and benefits are. And so forth down the line. We've been ingenious in our measurements and I think clear-headed in our analysis. It's not an accident that the president has a Council of Economic Advisers, although it seems to me to have too big a mandate for controlling the economy and not enough for these allocational things. I think the council's been a center of good sense through both parties on questions, for example, like minimum-wage legislation. The council has always fought next year's increase in the minimum wage. It's lost, because the AFL-CIO is stronger than the Council of Economic Advisers, but it's probably slowed down the growth, and I consider that a great service to this society. My friend Ronald Coase once said that if an economist delays the adoption of a bad law by one week, he has earned his lifetime salary several times over.
REASON: What government program would you most want to see abolished?
STIGLER: There's a long list of them. You understand that you have to draw a line between two different kinds of policies that an economist has a right to object to. One kind, he disagrees with the objective of the program. He says, "I'll be damned if I see why we have a great big protective system for domestic sugar producers." And here he's quarreling with Congress on whether that group is worthy of preferential treatment. And then there are lots of times when you name the policy, like clean air, where the techniques are very inefficient and undesirable. For example, in clean air we have a "nondegradation" policy. It says, don't let the air get worse in the terrible Ohio Valley, but don't let it get worse in the lovely, clean southwestern part of the United States, either. Well that's an excellent device to keep industry from migrating from Ohio to the Southwest, but it's not a device at all to keep air clean. It's a device to maximize the cost of that. Industries have to have expensive air scrubbers where there's no pollution as well as where there is, and so forth.
REASON: When you won your Nobel prize last year, you met with President Reagan. Did you give him any advice?
STIGLER: Feldstein [Martin Feldstein, chairman of the President's Council of Economic Advisers] kept urging me to say what the president should do. I didn't want to go into details, partly because in 20 minutes what difference would it make? The president was struggling to go off and meet the winner of the New York marathon race and stuff like that. But I said I thought we economists have two good functions that we can perform, including Feldstein, who is a very good economist. One is to say, "Well, Mr. President, here is a gang, the dairy interest, that's got a lot of clout and you've got to give them something. Let's figure out the cheapest way to give it to them." That's one important function of a professional economist, no matter what side you're on.
REASON: You should just accept the fact that this group has the political clout?
STIGLER: Yes, but then let's buy them off without what the economists call deadweight loss being imposed upon others. And the other thing we can do as political advisors is to say, "Look, the industry structure is changing." Like the banking industry has been undergoing important changes. And those changes are the main reason for the deregulation, not Chicago School economists getting unusually eloquent. There are big divisions of interest in the industry, and big groups have been wanting to change sides. Whenever that's on the horizon-as it was in airlines in the late '70s, and as it has been in banking for five or seven years-if you can advise the president that that's coming, that's a great area to start deregulation. Because then half of the industry is going to support you. You're not fighting the battle of your life just for consumers, who tend not to be organized and not to support such efforts.
REASON: Why don't you grade the average American on his level of economic understanding?
STIGLER: By what standard? Should you grade them by comparing them to the best economist in the United States? Then I suppose the correct grade should be an F or F minus. But you know, so what? They lead useful lives, and they buy the amount of economic information that's appropriate for them to have. And they don't go home every night and say, "I wonder what Friedman wrote today that I can read." So I don't like to grade them that way. You see, if I had a way that they would enjoy learning more, then I really ought to become an entrepreneur and do it. If I had a nifty new cassette or a new magazine or something else that really gave them information that they'd like to have in a form they'd love to have it, I've got a fortune on my hands. I don't have to beg them in that case. But people don't want to go home every night and say, "Dear, do you really think that marginal-cost peak-load pricing would be better for our local electric utilities?" That could happen. But I don't even know whether the marriage would survive such strains!