The Citizen and the State

Essays on regulation

The Citizen and the State: Essays on Regulation, by George J. Stigler, Chicago: University of Chicago Press, 1975, 209 pp., $10.95.

For those already familiar with the writings and thoughts of George Stigler on the subject of economic regulation, this book will be a refreshing reexamination of some familiar essays, with many unfamiliar pieces adding spice. For those who have never enjoyed Stigler's works—in particular his observations on the subject of the government, the economist, and the State—this short book should provide a stimulating introduction to the inspirations of one of the most imaginative, creative, and innovative thinkers of our time.

Even within the economics profession, George Stigler has probably not had the recognition he has long deserved. His problem is that he writes too well. He writes cleverly and with wit. He does not encumber his essays with great mathematical proofs deriving the number of angels that can dance on the head of a pin. It is not that Professor Stigler cannot use math when math is needed, but he uses it only when it is needed. This book should provide an opportunity for both economists and noneconomists to see an imaginative mind at work.

The book contains 12 essays, most of which have been published elsewhere, although sometimes not in readily accessible sources. There are a few essays that appear to be written solely for this book. The book itself is divided into five sections, "The Debate Over Freedom," "The Traditional Regulatory Approach: Some Evidence," "Old and New Economic Theories of Regulation," and "Extensions and Applications."

Stigler's first essay covers the debate between liberals and conservatives over government policy. He argues that both start from dogmatic positions and fail to study carefully the actual effects of government operation. Both liberals and conservatives debate the issue of the preservation of liberty, the humanitarian treatment of the needy, the competence of the state, and the competence of the individual, but in no case do they ever actually come to grips with the issues and debate each other on the same ground. They have failed to look at the evidence or even to develop the evidence to support their positions.

The next essay, "Reflections on Liberty," deals with the gradual encroachment on our freedom by the government. He points out that the reductions in freedom that have taken place are those that in fact the public wants. Although the conservative keeps bewailing the loss of freedom, his position is unconvincing to the public, says Stigler. Few believe that we are going down the slippery hill to totalitarianism through gradual elimination of our freedoms. Stigler responds that we can show that there are areas where our liberty has been infringed upon by the State. A study of the barriers to entry and occupation shows how our freedom is restricted. We have government censorship of taste that prevents us from consuming those things that an all-wise government sees are not in our interest. The third area that Stigler says is worthy of study is that the State is now the giver of many valuable rights, TV channels, oil import quotas, state liquor licenses, taxicab licenses, etc.

Stigler's next set of essays deals with the failure of economics and economists to study the impact of government programs and regulations. In this he includes two of his essays directed toward remedying that fact. His "What Can Regulators Regulate: The Case of Electricity" is probably the best-known and most-cited piece in this book. Almost all studies of electric utility regulation refer to this path-breaking work in which Stigler questions whether the regulators can effectively regulate and what the evidence is. He gathers data on the price of electricity in regulated and unregulated markets and looks at the value of stocks of regulated electric and unregulated firms. His conclusion is that regulation has little if any effect on electricity rates, which he attributes to two circumstances. First, the electric utilities possess only a small degree of long-run monopoly power; second, the regulatory body is incapable of forcing the utility to operate with a specific combination of output and price.

The third essay in this section, "Public Regulation of Security Markets," appeared first in the University of Chicago's Journal of Business in April 1964. In this study Professor Stigler is highly critical of the Securities and Exchange Commission (SEC) and of a report of the special studies of the security market directed by Milton Cohen. Stigler dissects the "proof" of the need for more regulation offered by the Cohen study. The proof, he contends, is four case studies of new firms that failed. As Stigler points out, however, no matter what the government does, there will always be failing firms whose securities have been marketed. Stigler goes on to investigate the effect of the SEC. This agency is meant to protect the buyer of new securities by providing additional information and by making sure that only sound securities are in fact marketed. After adjusting for the relative differences in the performance of the markets in the period before SEC regulation and the period after, Stigler finds that the average return is equal for the two periods and that there is no difference in values of new stock prices relative to market averages after one or two years, but a significant difference in the third and fourth years. He says, "These comparisons suggest that the investor in common stocks in the 1950's did little better than in the 1920's, indeed clearly not better if they held the securities only one or two years" (p. 84).

He did find, however, that the variance in the ratio of the prices of new securities to the market average was much larger in the 1920's than in the 1950's. A "simple-minded interpretation is that the SEC has succeeded in eliminating both unusually good and unusually bad new issues!" Stigler argues that "a more plausible explanation lies in the fact that many more new companies used the market in the 20's than in the 50's—from one viewpoint a major effect of the SEC was to exclude new companies." (p. 85.) This essay should be read with some caution. Cohen and others have been highly critical of it and published a stinging rebuttal in the Journal of Business arguing that Stigler was quite careless with his methodology and his data.

The fourth section contains essays by Stigler on the economic theories of the function of the State. He discusses externalities, public goods, erroneous decisions, and market failures as a basis for policy. In one essay, he presents an economic theory of regulation with the general thesis that regulation is acquired by the industry to increase the industry's profit. Where regulation is onerous, Stigler claims that this is the exception rather than the rule and can be explained by the same maximizing theory. Stigler proposes as a general hypothesis that every industry or occupation with enough political power to utilize the State will seek to control entry. In addition, regulatory policy will often be fashioned so as to retard the rate of growth of new firms. A third set of powers the industry will attempt to secure is that affecting substitutes and complements. Finally, the industry will be interested in establishing control over prices. In this path-breaking essay Stigler develops some of the concepts used in the literature on public choice and attempts to apply basic wealth-maximizing concepts to political institutions to show when political parties and politicians will provide benefits on specific industries. In support of his conclusions he offers some evidence on occupations and weight limitations imposed on trucks by state authorities.

Stigler's last two essays on regulation deal with the process of economic regulation, the ways regulation actually works, and the ways that it might be improved. The first, reprinted from the Antitrust Bulletin, covers the amount of regulation—how to measure it and its relationship to agency expenditures—the growth of regulatory expenditures, the use of fees in regulation, and the career patterns of regulatory officials.

His tenth essay starts off with the observation that regulation is here to stay. What is important, therefore, is finding ways to improve its performance rather than simply trying to abolish it. He discusses what regulators are qualified to do, what the incentives of regulators are, and how the biases of regulatory incentives do not produce better regulation. This leads Stigler into considering how the regulator should be regulated. His modest suggestion is that any person be allowed to enforce regulatory statutes. He contends that this would result in the best-informed being enlisted to stop violations of regulations, in enforcement being a profitable undertaking for superior officers, and in competition between public and private enforcers. A problem with this essay is that it is doubtful whether it is generally in the public's interest to enforce regulatory statutes. To the extent that they are designed to transfer wealth, weak enforcement may protect the public. If one does want them enforced, however, Stigler's suggestion has merit.

Chapter 11, the penultimate essay, is the last dealing with regulation. "Can Regulatory Agencies Protect the Consumer?" is a reprint of Stigler's statement in a debate with Manuel Cohen sponsored by the American Enterprise Institute. In this essay Stigler argues forcefully that the marketplace is a better protector of the consumer's interest than any regulatory body and that public regulation poses large costs, particularly by suppressing competition.

The last chapter in the book is a puzzle—a delightful one. Entitled "A Sketch of the History of Truth in Teaching," it has almost nothing to do with traditional regulation, although it is a spoof on truth-in-advertising legislation. It is only regrettable that since Stigler included his piece on "truth in teaching," he failed to include his one on "model changes" in the publishing industry.

All in all this book presents a damning indictment of public regulation. For those who still believe that regulatory agencies operate in the public's interest, this book should be an eye opener. It should also be required reading in all college civics courses.

Thomas Gale Moore is a senior fellow at the Hoover Institution and teaches at the Stanford Business School. He served as a senior staff economist on the Council of Economic Advisors from 1968 to 1970. He has written many books and articles on government regulation and has testified frequently before Congressional committees.