Economist! Drama! Prose!

Memoirs of an Unregulated Economist, by George Stigler, New York: Basic Books, 248 pages, $17.95

When George Stigler, the University of Chicago's godfather of industrial organization economics and eloquent champion of market forces, won the Nobel Prize in October 1982, alert policy experts in the Reagan administration took their cue. They invited the economics laureate to meet the press at the White House to, essentially, throw some scholarly cold water on the whiners and moaners in the media who were griping daily about the 10 percent-plus unemployment rates in the "trickle down" Republican economy.

When the tall, grandfatherly professor mounted the podium, a thrill must have tickled the White House partisans—"Here's a holy man from the university, soon to be sainted by the Swedish Royal Academy, blessing our free-market policies." Suddenly, out of nowhere, the stately gentleman referred to the then-current economic situation as a "depression." In record time, Reagan staffers adjourned the meeting and stuffed the erstwhile savant into an adjoining (private) room—to the roar of a delighted press corps.

Such devilish utility, gained at the expense of fools he attempts not to suffer at all, provides insight into the soul of a legendary American economist who has now retired and relaxed to write his delightful Memoirs of an Unregulated Economist. Only slightly less than the more famous Milton Friedman has George Stigler set the tone for American economic scholarship and world public policy in the latter days of the 20th century. Though Friedman stood up to Keynesianism on technical issues and macroeconomic policy debates, he made the case for the market in brilliant but popularly written (and read) treatises such as Capitalism and Freedom (1962) and Free to Choose (1980). It was Stigler, however, who burrowed deep inside the intellectuals' lair and largely turned professional economists from sleepy apologists for state intervention into skeptical investigators of the motives, and results, of government regulation.

George Stigler blazed a trail by roaming the regulatory landscape in search of evidence of the actual effects of government. Upon finding the evidence, he discovered that it correlated only roughly with the publicly announced aims of regulation. Hatching what we now call "public choice" and "law and economics," Stigler's Chicago nest provided a warm, fuzzy incubation for the study of legislators, judges, and regulators as Real People.

As simple a step as that may sound today, it was radical indeed when conceived about the time Stigler returned home in 1957 from Columbia University to Chicago (where he had been a graduate student in the mid-'30s). The prevailing orthodoxies had placed government completely outside the realm of self-interested social organizations, a deux ex machina that could magically pop onstage to mop up the seemingly insoluble foibles of lesser, privately interested men. A high percentage of economic scholarship was then devoted to the task of rigorously defining the precise nature of "market failure." And it was the purpose of public policy to seal each private hole with a divine public-sector emolument. When MIT's Francis Bator published his famous "Anatomy of Market Failure" in 1957, it mathematically identified four theoretical blotches in private calculations but devoted not a word to the costs of government intervention.

Maybe they live like that in Cambridge, but not in Chicago. Chicagoans know that government has a personality, and There Ain't No Such Thing as a Free Alderman. (Take self-interest out of the public sector in Chicago?) Stigler and his eminently able colleagues began to ask of market failure studies: Compared to what? Establishing that some theoretical divergence of private and social costs exists, or that competition is—as defined by the calculus—less than perfect, or that information is not freely available to all consumers in a marketplace, does not decide the policy question in favor of public intervention. At best it sets the table for a hearty dinnertime discussion of the relative efficiencies of alternative rules for organizing a marketplace.

In "The Economics of Regulation" (1971), Stigler postulated his best-known maxim: "As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit." Such was his conclusion after a series of path-breaking empirical studies. Investors were not protected by the Securities and Exchange Commission. The antitrust laws had had little, if any, positive effect and had often been imposed against efficient forms of organization. Electricity prices had not been lowered by state commission regulation.

And where Stigler sowed, others soon reaped. Ronald Coase described federal regulation of broadcasters as untenable on economic or public-interest grounds. Sam Peltzman found that neither recent food safety regulations (the Delaney Clause) nor the mandatory seatbelt rules were saving as many lives as they were costing. Philip Nelson discovered that advertising was a generally procompetitive phenomenon that lowered the cost of goods and made manufacturers more responsive to social taste and preferences. Soon governmental prohibitions on advertising for professional services were found to be anticompetitive and were largely eliminated.

The rise of the positive economic policy analyst has pleased Stigler enormously. He revels in the present-day state of affairs wherein economists are commonly reviled by their social science fellows and political activists generally. "The main reason is easily named," Stigler boasts, as "economists have been the premier 'pourers of cold water' on proposals of the reformers and philanthropists" who seek to uplift mankind.

A good amount of this book is filled with posturing about the vestigial scientific purity of a good economist. But despite these pretensions, Stigler levels his truest aim at those wrong-headed naivetes that dominate policy discussion in the classrooms, newspapers, saloons, and churches of America. As an economist he is armed, in reality, not with laboratory science (the ability to replicate atmospherically controlled experiments is very limited in the study of markets), but with informed analysis, combining a simple theoretical base with intelligent review of actual data and real institutions. For somewhat different reasons than he sets forth, Stigler is thus largely justified in crowing that "of all the social scientists, only economists possess a theoretical system to explain social behavior."

Every student of a subject is drawn by a certain fascination with explaining phenomena and is amazed by the process of obtaining truths. For the student of economics, Stigler's Memoirs is a rare delight because it combines real drama—the march and intellectual conquest of a once-distinct and seemingly outmanned school of thought—with the wonderfully nonscientific prose of a master of conversational discourse. To be able to deploy the words economist, drama, and prose in the very same sentence is itself a rare (nay, scarce!) treat. Here is the unique opportunity to chat with a giant of the trade about, for instance, the most fundamental economic principle (the no-free-lunch rule) and to toss around first-hand tales of the greats and near-greats of this half century of economic thought: Jacob Viner, Henry Simons, Frank Knight, Milton Friedman, Ronald Coase, Reuben Kessel, Richard Posner, Harold Demsetz, G. Warren Nutter, Gary Becker—even the defector (that is, economist-turned-politician), Sen. Paul Douglas. (I was particularly tickled by the recounting of Stigler's one and only personal observation of a great discovery: the "Coase Theorem." The triumph of a superior idea, first presented to a teeming seminar full of surly Chicago doubters, is the intellectual equivalent of hitting oil.)

The "new learning" that Stigler spearheaded amongst the Chicago microeconomists taught the world about the powerful force of efficiency, about the ubiquity of competition (even where government monopolies dominate, competition for the monopoly lives on), and about the desirability of first figuring out why governments behave as they do. George Stigler has been the foremost tradesman in this development of higher standards for understanding the world and deserves every tax-free dollar his Nobel Prize sinecure awards him. In this charitable spirit, I am even willing to forgive the horrendous price theory mistake embodied in the empirical test suggested on page 99. (It involves U.S. Steel stock prices, and the eager student of economics is invited to discover it for herself.) This good-faith allowance, one might note, is a sharp departure from the Stiglerian School of Scholarly Criticism. (If one did not know of his ferocity independently, one could surely be fooled by this gentle tome; in his autobiography Stigler purrs like a pussy.)

Stigler's insistence that all that is required for good scholarship is detached, objective truthseeking is an absurd proposition that, fortunately, he deviates from at every possible opportunity. It is Stigler's passion and broad vision of man as a rational beast, and a battery of subtle insights thereby derived and compellingly explained, that make him a beacon of contemporary thought. It is this grand thinker—whose "unscientific" approach would be instantly rejected by Stigler the journal editor—whom the world knows and loves. On this, George, the market is right again.

Contributing Editor Thomas W. Hazlett teaches economics and public policy at the University of California, Davis, and is a senior fellow of the Manhattan Institute for Policy Research.