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!
REASON: What's your view of the antitrust revisionism going on now—that the antitrust laws should be a lot more modestly applied?
STIGLER: Well, I've learned. The government had gotten, more and more into watching all kinds of details like, "You have exclusive dealerships in selling bikes. Why, what right do you have to have that?" They were worrying about lots of details that I don't think were important, and in fact they're not even monopolistic. But now there's more and more an awareness that the real antitrust afflictions are horizontal combinations, or are mergers with monopolistic content.
REASON: Are Americans protected by public utility regulation?
STIGLER: When I did studies of this, the indications seemed to be not. In fact, there was a question whether the utility commissions were raising rates or holding them down.
REASON: A private monopoly unregulated by government would charge the same or lower prices for electric power?
STIGLER: That's right. We made studies for the 1910s and '20s. That's when the regulation really came in—there were still a lot of states that didn't have it. And what we did was to compare states and see whether, when you allow for costs of generation and things like that, the rate differences were appreciable. Well the differences weren't so large. We found that regulation, if it did anything, lowered the rate not for residences but for industrial users.
Now there's been a change in the last 10 or 15 years, partly due to fuel prices changing and partly due to the fact that in inflation, a new trend had taken place in electrical utilities. And a lot of the public utility commissions are dragging their feet and have been holding down rates. But studies indicate that these regulations which temporarily hold rates down have made investment unattractive. So the total cost of electricity is going to be substantially higher 10 years from now than it would be in the absence of regulation.
It's exactly the same as rent control. In the short run, clearly, if you had an apartment that was nice and well-built in Manhattan, you're better off with rent control—for 10 years you're going to have lower rents. But then you've got to ask the question: Who in their right mind is going to invest in that town? Housing in the long run in New York is going to be more expensive, since there's no such thing as a free brick and mortar construction.
REASON: Are you saying that without regulation, the electricity market was a competitive market like rental housing?
STIGLER: No. The utility field was partly monopolized by the states, you know, by exclusive franchises. But that's not the point. If I were a monopolist, I would maybe make more by charging enough to get a two percent higher rate of return than I would in the absence of regulation, or maybe I'd charge five percent more on prices. So that's a cost that you have, a social cost, of unregulated monopoly. But it's not at all clear that that cost will be anywhere near as large as the cost of an inefficient or very short-sighted regulatory system. It is quite possible that the "extortionate, self-seeking" monopolist would find it much more remunerative to have a big business and rapid innovation and cut prices, like the computer industry did for a long time. The computer industry is pretty competitive now, but even in the first 10 years of IBM's dynasty, the record of progress was incredible. That was self-interest—that wasn't benevolence.
REASON: So monopoly can be efficient?
STIGLER: Monopoly should be efficient. It isn't quite as efficient in taking account of the concerns of the consumer, but it's got to be efficient in production and innovation or it isn't making as much money as it should. The idea that the monopolist sits back and just clips coupons is nonsense. He's got all kinds of competitive pressures.
REASON: Then why this American preoccupation with antitrust legislation?
STIGLER: So far as I can tell, it's a public-interest law. If you propose an antitrust law, the only people who should be opposed to it are those who hope to become monopolists, and that's a very small set of any society. So it's a sort of public-interest law in the same sense in which I think having private property, enforcement of contracts, and suppression of crime are public-interest phenomena.
REASON: But the law has been used, for instance in the Alcoa decision, simply to hit against firms that were efficient and lowered prices to consumers but in doing so had out-competed a lot of rivals in the market that were consequently upset.
STIGLER: Well, you're simplifying the Alcoa case. The Alcoa case was partly that there had been suppression of international competition by joining in international cartels.
REASON: So you like the Sherman Antitrust Act? This is an anomaly.
STIGLER: I like the Sherman Act. I don't like the Clayton Act.
REASON: Why not?
STIGLER: Oh, it starts to get gimmicky there. It has dumb things in it like interlocking directorates that don't matter. It has a merger statute that I think is too severe, although I like it better than none at all. And it says, let's have a thing called the Federal Trade Commission, which took a separate act and which I would like in so many ways to see abolished. It's a nuisance. It's been petty. The current one is moving the other way, but it's got lots of terrible laws at its disposal.
REASON: What about advertising in the American economy? Is advertising some sign of monopoly?
REASON: Of inefficiency?
STIGLER: You're almost getting close to what I did my work on, which should have, maybe did, win the prize for me—the economics of information. That is the area where I've done probably my most important work as a professional scholar. Economics for a long time had a standard model in which it was assumed that people have perfect knowledge. And on this model, it's clear that advertising is manipulative and tends to deceive you and so forth and so on. So there was a very widespread, entrenched hostility to advertising among professional economists. And if you go through the literature up to 1960 or '61 when I wrote my article, and for some time after that…
REASON: "The Economics of Information"?
STIGLER: Yes. You would find lots of this hostility strewn across the landscape. But now economists have found that it's a fascinating area—does it make an important difference whether you and I have different amounts of information? And what competitive forces are there to stop exploitation of ignorance? And things like that. And now I'd say that the hostility to advertising is greatly diminished and the understanding of it improved.
In some ways it's a marvelous method of creating information. In areas like the local newspaper, the daily sales of the grocery stores, there isn't anything remotely like it in terms of efficiency and power in bringing about what we consider a well-organized market, which is a market where people are paying about the same prices for the same things.
REASON: What about some of the television advertising? How does the slogan "Have a Coke and a smile" help consumers?
STIGLER: Some very interesting stuff has been written on that by a former student of mine named Phillip Nelson. He says that if I advertise that I am the leading brand, whether it's automobiles or computers or cocaine or what, that conveys information to you—the information that a lot of people are using the product and are continuing to use it and that therefore it hasn't got palpable and serious deficiencies. And maybe that's the main clue you'll want at this moment. If I were to say to you, "Here are the engineering specifications of my car," you'd say, "My god, do I really want to know that much about a carburetor when I'm buying a new car?" Consumers have the problem, you see, of how to intelligently control their lives. If I can think up a method that will convey to them information that they can rely on as a guide and yet does not insist that they take postgraduate courses in three sciences, they'll be delighted. So one of the real searches in advertising is to try to communicate information of a kind that's relevant. The assurance of the continuity of the enterprise is one kind that's relevant. Now that's not the only kind. And statistical studies so far suggest that in fields where there's a great turnover, like cosmetics, advertising helps new products to get in pretty fast. So advertising opens up the market to new products and new brands, which is a source of potential strength to the system.
REASON: Let's turn to the larger picture. Is it the twilight of capitalism?
STIGLER: I don't think so. If it weren't for foreign military threats, we could go along one way or another with a very slow rate of increase of income with all the regulations on God's earth and no early demise of capitalism. It wouldn't be a very exciting or dynamic capitalism, but I'm not sure that it would come to a halt. Indeed, much of the problems of capitalism come from businessmen, from their own visits to Washington, not from having Ralph Nader run it over the rocks.
REASON: Visits for special favors?
STIGLER: Sure: "Bail me out. I want competition everywhere else, but for heaven's sake be good to the domestic textile industry," or "Be good to this other group," and so forth.
REASON: What is capitalism's constituency, then? Who's in favor of capitalism?
STIGLER: Oddly enough, aside from Chicago professors of economics, not as many as should be. In the long run, of course, workers and consumers are the main beneficiaries—easier jobs, higher incomes, and so forth. That's the main performance of the system. The businessman can make a killing, but it's a small killing compared to society's killing. Henry Ford made a lot of money making cars at one time, but that was a small advantage to him compared to the benefit to millions of people who for the first time in their lives were emancipated from common public carriers and could live where they wanted, move at the hours they wanted, to the places they wanted. Ford collected a billion bucks, but that was peanuts compared to the benefits.
REASON: Why is there such a preoccupation amongst some economists and almost all policymakers with the idea of equality of income?
STIGLER: It's been the predominant ethical creed of Western society for 100 years now, starting with the Fabians, at least. It's been the article of faith, to not have conspicuous, ostentatious, and even immoral inequalities in income.
REASON: Now it's interesting to hear you explain this penchant for egalitarianism in terms of what appears to be an intellectual acceptance, even citing the Fabians, an obviously intellectual group.
STIGLER: Well, I was going to say it's a creed. I normally don't place great faith in intellectuals as leaders, and I have to be consistent—or it's nice to be consistent, at least here. I think that the main thing is that the state turned out to be a splendid instrument for redistribution of income. It turned out, that is, to be highly available, in the sense that even in America where we had a constitutional code, amendments plus political moods led to great changes in what you could do.
REASON: It's pretty obvious that the state can rob Peter to pay Paul. But why has it been such a pervasive philosophy that in fact that's important?
STIGLER: Well maybe it's always been important. In one way you're asking a question that I don't think we have an answer to, and that is, Why has the state suddenly grown so much in the last 100 years? All the arguments I've given, and that a lot of other people have given, have floundered in part on the problem that the state did not grow rapidly from 1750 to 1850. If anything it may have declined. And yet all the main kinds of historical trends, industrialization and so forth, were going on in both periods.
REASON: Could it be that the intellectual climate changed? The intellectuals turned on capitalism?
STIGLER: Well, that's Milton Friedman's answer. That's not mine. I have a feeling that intellectuals are like singers. If I say I want to hear Wagner, they'll give it to me. If I want to hear country and western or something else, they'll give it to me. And if I indicate that I want intellectuals to preach to me one line by buying their books and patronizing their lectures and appointing them to high office, they'll do it. And if I want them to do something else, they'll do it.
REASON: So you take the intellectual entrepreneur as more or less a passive reactor to the tastes and preferences of various economic interest groups?
STIGLER: Let me put it this way. Suppose there are two of us, and you're a pronounced social interventionist and I'm an anti-one. My name is William Graham Sumner, and yours is Thorstein Veblen or something. And neither one of us will change our views. We're men of the utmost integrity. The thing that will happen is the society changes. You're getting $800,000 a year in lecture fees and turning down a lot more, and I'm sitting in my barn occasionally muttering to a passerby that the world's going to hell. So you see, I'm not talking about dishonesty or anything like that.
REASON: But within the economic world, entrepreneurs don't simply passively react to consumer tastes. Henry Ford didn't, certainly. Mr. Edison didn't.
STIGLER: What do you mean? Now wait. Be careful. He wasn't passive. That's the wrong word to use. But I don't really think that Vasco de Gama went around the Cape of Good Hope and then after that England liked tea. We have latent desires. And now suppose the entrepreneur comes along. I've had a desire for household gimmicks which I can't quite specify now but which will be handy, like a method of kicking off flies in the room. And I don't articulate it, because I'm not an inventor. But the entrepreneur is searching around, and he tries 12 things, and 11 of them I don't want but that one I buy. He has to innovate to find out what my latent desires are, but he's not really creating them.
REASON: But isn't the intellectual simply doing that by advocating Fabian socialism or free-market capitalism or whatever the creed is?
STIGLER: But why did my desires now take that form in 1880 but not in 1810? I want to give a utility-maximizing explanation for that if I can. And it's a terrible thing, because you see most of the things in this world are not easy to explain, and yet I hope I have a principle if I were clever enough that would explain all of them. But most of the time if you ask why people got socialistic, for example, in the latter part of the 19th century, the intellectuals in particular, what kind of an answer would you get? I can't imagine what the answer is. It's completely ad hoc.
REASON: Joseph Schumpeter's theory was an economic theory of sorts, saying that a subsidized class develops out of capitalism. There is some sort of a preference on the part of the capitalist middle class to subsidize intellectuals, and these intellectuals inherently bite the hand that feeds them, because it is their interest to sort of propagandize for their own power to take over.
STIGLER: That's irrational on the part of these entrepreneurs. They're supporting potential intellectual traitors.
REASON: But it's only irrational in the long run if they in fact think that socialism is going to make their heirs poor. But they might have thought that socialism was going to make them wealthier. And in fact, a lot of people at the beginning of this century thought, and I'm sure quite sincerely, that socialism was a superior system in terms of material wealth. So why can't we just say that those people, given their limited information, were simply wrong, that they accepted what was in fact not in their best interest?
STIGLER: That's what I call the error theory. My complaint against that is, unless I manage to explain when errors are made and why and what kind, I have stopped all explanation; since one of the graceless things about errors is that they can come from anywhere and go in any direction. Of course I can say that the middle classes in particular were mistaken as to both the democratic nature of socialism and its humane nature, and as to its economic efficiency. And that explains that event. And then if socialism goes into decline, I can say that they saw through the error. And if it doesn't go into decline, the error persisted. And so…
REASON: That is a very frustrating way to analyze history. On the other hand, errors exist.
STIGLER: I think they do. I don't deny, for example, that the 1918 Prohibition amendment was an error. The American people were not prepared to abide by such a restriction. That means it was socially an error; it was an untenable policy. And I have no doubt some errors last longer than that. But in general the errors have to give way, it seems to me, to increased knowledge.
You see, if you play your error game, why did England overturn private enterprise on a wide scale, so that now this greatest of industrial nations and a very pretty civilization has a lower standard of living than even, let us say, Italy? What does it take to see through an error? So the error theory doesn't seem to me to help.
REASON: But you would have to argue that they are worse off overall for having adopted self-interested policies. So we both have trouble explaining it.
STIGLER: The only thing is that I'm prepared to continue to try to explain it on a principle. Whereas if you play the error game, you ought to start working on the question, What kinds of errors really are made and last? Nobody I know has tried that game. Milton Friedman, whom I greatly admire, says that the reason that India is crazy is that it got emancipated when Harold Laski was in the rider's seat in the West as an intellectual, whereas Japan got emancipated when Dewey walked around accompanied by good friends like laissez-faire economists and so forth and so on, and that's why Japan's been an economic miracle but India has been a shambles economically. I think that's an awfully simplistic reading of the role of the intellectual in life.
REASON: What is that role?
STIGLER: I'm still working on how to study the role of the intellectual. And my skepticism is not very popular with intellectuals. I understand that, since it's denigrating. In a way, I even have a slight streak of inconsistency in a related matter. I'm always complaining that we shouldn't be reformers, we should be scholars. We're more influential as scholars, because if we prove something, everybody believes it; whereas if we beg for something, they're skeptical.
REASON: The economist as preacher is ineffective, but the economist as scientist actually gets things done.
STIGLER: Very, very effective. And yet as a scientist he's obviously a reformer, too. He's trying to get the rest of his profession to change their tunes.
REASON: So that's the inconsistency?
STIGLER: It's a sort of one. Although there's this difference—that you try to get them to change, not by changing their case, but by demonstrating the superiority of alternatives.