A Critique of the Contributions of George Joseph Stigler to the Development of Economic Thought.
| Columnist: Daniel, Uzoigwe Chimezie |
George Joseph Stigler: Nobel Prize Winner in
Economic Science(1982).
SECTION ONE
INTRODUCTION: GEORGE JOSEPH STIGLER
BIRTH
George Joseph Stigler was
born in Seattle, Washington D.C on January 17, 1911. A US Economist, Joseph
Stigler is one of history’s most outstanding modern economists.
EDUCATION
Stigler graduated from the
University of Washington in 1931 with a B.A and then spent a year at
Northwestern University from which he obtained his M.B.A in 1932. It was during
his studies at the Northwestern University that Stigler developed an interest
in economics and decided on an academic career. Due to a tuition scholarship
that he received from the University of Chicago, Stigler enrolled at the
university in 1933 to study Economics and went on to earn his Ph.D. in Economics
from the University of Chicago in 1938. Stigler was one of four Students that
ever managed to complete their Ph.D dissertation under Frank Knight in his 28
years at Chicago.
SPECIALIZATION
Stigler confined a large part
of his study to microeconomics once stating, “I know very little
macroeconomics, and I thank God for it everyday, because it changes once a
year.” Within Microeconomics, his contributions were far-reaching. He also
wrote extensively on the history of economic thought and also contributed to
several aspects of the field of Industrial Organization.
INFLUENCE
George Joseph Stigler was
greatly influenced by his Ph.D Supervisor, Frank Knight at the University of
Chicago. Other Economists who influenced him include Jacob Viner, Henry Simons
and Milton Friedman, his friend and colleague at the Chicago School.
In the same vein, He
influenced Jacques Dreze, Thomas Sowell, Kenneth Lyon and many of his Students
throughout his career. As part of his special interest in the study of history
of economic thought, He did a lot of analysis on the works of Adam Smith but
opposed Lord John Maynard Keynes. He is better associated with the Chicago
school of thought and thisaccounts for the intellectual rapport between him and
Milton Friedman, who was his friend and colleague at the Chicago school.
CAREER AND SERVICE
Stigler’s teaching experience
began in 1936 at Iowa state College where He taught until 1938. He spent much
of the World War II period at Columbia University, performing mathematical and
statistical research for the Manhattan project. He then spent one year at Brown
University from where he proceeded to serve on the Columbia faculty from 1947
to 1958. He later lectured at the London School of Economics (LSE).
Stigler went on to become the
Charles R. Walgreen Distinguished Service Professor of American Institutions,
and Director of the Walgreen Foundation, Graduate School of Business, at the
University of Chicago. In 1941, Stigler became a member of the Research Staff
of the National Bureau of Economic Research (NBER). He was also a member of the
American Philosophical Society, the American Economic Association, the Royal
Economic Society as a Fellow, and the American Statistical Association. He
later became the President of the American Economic Association.
In 1971, Stigler became the
Vice-Chairman of the Securities Investors protective Commission, and in
1969-70, He was a member of the Blue Ribbon Defense Panel. In 1960-61, He was
Chairman of the Price Statistics Review Committee of the National Bureau of
Economic Research. In 1954-55, Stigler served as a member of the Attorney
General’s Committee for the Study of Anti-Trust Laws.
He was a founding member of
the Mont Pelerin Society, and was President of the Society from 1976 to 1978.
PUBLICATIONS
Stigler has a number of
publications to his credit. He left behind a well-known intellectual legacy as
embodied in his books, his over 100 major articles, and his many book reviews
and short works. StigIer’s work, collectively, has been cited over 4,800 times
from 1955 through 1983, according to Science Citation Index (SCI) and Social
Sciences Citation Index (SSCI).However, Stigler’s most notable works and
most-highly cited as reported in the “Web of Science” as at 19/7/2002include
but not limited to:
The Theory of Economic regulation (1971)
The
Economics of Information (1961)
De
Gustibus Non EstDisputandum(1977)
A Theory
of oligopoly (1964)
Information
In the Labour Market (1962)
The
Economics of scale (1958)
Perfect Competition, Historically Contemplated (1957)
However, what could be said
to be Stigler’s magnum opus is his seminal studies of industrial structures,
functioning of markets, and causes and effects of public regulation and the
economics of information for which he was awarded the Nobel prize in 1982.
However, as Coase (1982) would argue, Stigler’s studies of the history of
economic thought is where he is seen at his best.
AWARDS/HONOURS
Stigler earned many honours
and awards for his contributions in the field of Economics most notably the
National Medal of Science (1987). When in 1982, Stigler was awarded the Nobel
Memorial Prize in Economic Sciences; many saw it as long overdue. Ronald Coase,
another Nobel Laureate particularly described the award as something that was
clearly right, in a world in which so much offends. When Stigler died in 1992,
it was clear the field of Economic science had lost a Colossus and an
intellectual powerhouse.
In the next section, we
review Stigler’s most important contributions to economic thought.
SECTION TWO
A REVIEW OF STIGLER’S CONTRIBUTIONS TO THE DEVELOPMENT OF ECONOMIC
THOUGHT
The contributions of George
Joseph Stigler to the growth and development of economic thought are immense.
In this section, we attempt to examine the key aspects of Stigler’s most
important contributions to economic thought and the contributions cited by the
Nobel Committee merit particular attention.
1.
THE
ECONOMICS OF INFORMATION AND SEARCH
ORIGIN
OF THE THEORY
The theory of perfect
competition in product and resource markets implies a singleprice for goods or
resources of homogeneous quality. Yet price and wage surveys and product and
labour market studies reveal a variance in prices and wage rates even within
narrowly defined product and occupational groupings. In the early 1960s Stigler
wrote two important articles that helped explain this evidence.
THE CRUX OF THE THEORY
He observed that the
one-price (one-wage) market will occur only where the cost of information about
the prices (wages) offered by buyers and sellers is zero. In most situations,
information is scarce and costly to obtain, and therefore it can be thought of
as an economic good. Acquiring information entails costs and yields benefits,
just as does obtaining all other economic goods. Because of this reality, market
equilibrium will be characterized not by a single price but rather by a
distribution of prices (wages) whose variance is related to the cost of
searching for information. People and firms will judge it too costly to search
for all of the information required to eliminate price (wage) variability. The
greater the search costs, other things equal, the greater the dispersion of
prices.
STIGLER’s FINDINGS (THE MODEL OF OPTIMAL ECONOMIC SEARCH)
Stigler was the first to
develop a formal model of optimal economic search, which he applied to the
product and resource markets. An explanation of search in the labour market
will establish the general principle. Evidence indicates that those seeking
employment recognize that wages paid for similar work vary among employers.
Suppose that workers know the variance of the wage distribution andcan at least
roughly estimate its mean, but they do not know which employer isoffering which
wage. Therefore, they find it in their interest to search for the bestjob
offer. Stigler asked, “Do they search until they have received every offer
possible, therefore eliminating all but the highest one?” If not, what determines the optimal length of
their search? Figure 24B-1 below explains Stigler’s thinking on this subject.
The vertical axis measures
the marginal benefit (MB) and marginal cost (MC) to a hypothetical person of
successive days of job search. The horizontal axis shows the number of days
devoted to searching (N).
Stigler stipulates that Search
costs are of two types. The first are the direct costs, which include “for hire”
notices, resume costs, postage, and transportation costs. These expenses tend to
rise with additional search. Normally, the person begins the search closest to home,
where the costs of obtaining job information are lower. As the search broadens,
these costs tend to rise. The second cost is the opportunity cost of using
one’s time to search for a better offer. Once an offer is in hand, the person could
accept it and presumably immediately begin earning income. By continuing to
search, these earnings are sacrificed. This opportunity cost is particularly
large in those situations where the offer cannot be “stored”; that is, where
the recipient of the offer must either accept it or reject it within a short
period. In either case, a significant cost of continued job search is the
earnings foregone by not taking the previous best opportunity. As the searcher
receives and fails to accept higher wage offers, the marginal cost (MC) of
additional days of search rises.
The marginal benefit curve (MB)
in Figure A above slopes downward and to the right. A job search increases the
likelihood of discovering better wage opportunities, but there are diminishing
marginal benefits to the number of days devoted to job search. The present
value of the increased income expected from an additional day of search falls
as more information is gathered and more days go by.
As seen in the graph, the
optimal length of job search for this individual is N1, at this point; the
marginal benefit and cost of search are equal. Stigler said job search is but
another human economic activity that lends itself to analysis by way of the marginal
calculus. “Frictional” or “job search” unemployment results from imperfect information
and the desire by those unemployed to spend an optimal amount of time searching
for a job.
Because Stigler’s theory of
information and search admits that wages and prices for similar commodities or
services do not equalize under competitive pressures, it may appear to fall
within the tradition of the imperfect competition theories of Robinson and
Chamberlin. These theories challenged the competitive model and implied that greater
government involvement was needed in the economy. But this interpretation is
misleading, if not incorrect. Stigler’s theory indicates that the existence of
price and wage variability for similar goods and resources is not only
compatible with economic efficiency, where there are positive costs of
acquiring information, but is necessary to achieve economic efficiency under
these conditions.
His theory therefore attempts
to show that unregulated markets normally produce society’s maximum well-being.
2. STIGLER’S
THEORY OF REGULATION (THE ‘CAPTURE THEORY’)
ORIGIN OF THE THEORY
According to Stigler,
regulation can also be analysed as an economic good supplied and demanded
because of potential gains to the parties involved. Those regulated gain
through the direct subsidies, entry controls, price fixing, and so forth that
regulation confers. This gain may exceed the costs of adhering to the rules and
meeting the standards set by the regulators.
THE CRUX OF THE THEORY
Political leaders and
regulators are usually willing to supply regulation because they benefit from
the endorsements, campaign contributions, and votes that politically effective
coalitions can provide. Winning elections provides continued employment, both
for those elected and those appointed to government positions. Rather than
promoting an efficient allocation of resources, regulation tends to serve the
interests of those regulated at the expense of the broader public.
STIGLER’S FINDINGS
Groups who have intense and
focused interest tend to “capture” the regulatory system and use it for their
own self-interest. This is why Stigler’s theory on regulation is also termed
the “capture” theory. The big gains to
the coalitions are paid for through losses to others. These losses individually
are small but collectively exceed the gains to those regulated. Because the
individual losses are small and the transaction costsof organizing large
numbers of people are large, the losers may not have sufficientincentive to
express their opposition.
Those firms, occupational
groups, or other interest groups who have much to gain through control of the
regulatory process will tend to prevail. The politician and the regulator thus
are endogenous elements in Stigler’s system. Rather than being the outside
referees maintaining rules that promote efficiency, elected officials and their
appointees tend to be captured by those they regulate.
The policy implication of
this theory is that, in many cases, less regulation, as opposed to more, is
likely to improve economic well-being.
3.
STIGLER’S
CONTRIBUTIONS TO THE FIELD OF INDUSTRIAL ORGANIZATION
ORIGIN
In economics, the subject of industrial
organization means, as the Swedish Academy indicates, ‘the study of market
processes and the structure of industries.’ However, according to Coase (1982)
for reasons which are not altogether clear, it is a field which has come to
concentrate on The Monopoly Problem and, more specifically in the United
States, on the problems thrown up by the administration of the antitrust laws.
The result has not been a happy one for economics.
THE CRUX OF STIGLER’S CONTRIBUTIONS
TO THE FIELD OF INDUSTRIAL ORGANIZATION
By concentrating on the
problem of monopoly in dealing with an economic system which is, broadly speaking,
competitive, economists had left unexplained many of the salient features of
the economic systemor have been content with very defective explanations. The
link with the administrationof the antitrust laws has tended to make matters worse
by importing into economics an imprecise analysis which abounds in the judges’
opinions in antitrust cases.
STIGLER’S FINDINGS
Stigler’s articles on
industrial organization are reprinted in The Organization of Industry (1968),
and most are concerned with monopoly and antitrust policy. However, as Coase
(1982), he transcends the weakness of most discussions of these questions by an
impressive use of empirical data (as in “The Economic Effects of the Antitrust Laws”),
by an analysis more precise and more searching (as in “Price and Non-price
Competition”or “A Theory of Oligopoly”), and by discussing interesting and
significant problems (as in “The Division of Labour Is Limited by the Extent of
the Market”). Nonetheless, although the analysis proceeds at a much higher
level than is usual, it remains true that most of the subjects discussed are
those commonly dealt with under the heading of industrial organization.
But Stigler is not like the others.
Like a mountain raised by a volcanic eruption, standing high and strange in the
surrounding landscape, there is to be found in ‘The Organization of Industry’ a
paper of a quite different kind.
4.
A THEORY
OF OLIGOPOLY
ORIGIN OF THE THEORY
Economists had always agreed
that Oligopolists wish to collude to maximize joint profits. In his theory,
Stigler basically agree with the hypothesis but sought to reconcile this with
facts, such as that collusion is impossible for many firms and collusion is
much more effective in some circumstances than others. Stigler espoused these
views in his ‘A Theory of Oligopoly’ (1964).
THE CRUX OF STIGLER’S
CONTRIBUTIONS
Stigler argues that a
satisfactory theory of oligopoly cannot begin with assumptions concerning the
way in which each firm views its interdependence with its rivals. The
traditional theory of profit-maximizing enterprises has the notion that
behaviour is not something to be assumed but something to be deduced. With this
in mind, it can be said that firms in an industry will behave in such a way,
given the demand and supply functions (including those of rivals), that their
profits will be maximized.
Stigler stipulates that the
combined profits of the entire set of firms in an industry are maximized when
they act together as a monopolist. In the traditional formulation of the
oligopoly problem, in which there are no major uncertainties as to the
profit-maximizing output and price at any time with this result holding for any
number of firms.
SUMMARY OF STIGLER’S FINDINGS
Stigler modified the
traditional formulation of the oligopoly problem. He presented a systematic account
of the factors governing the feasibility of collusion, which like most things
in this world is not free. Stigler looked critically at the concept of
homogeneity of products, and what it implies for profit-maximizing. He showed
that collusion normally involves much more than “the” price.
Homogeneity is commonly
defined in terms of identity of products or of (what is presumed to be
equivalent) pairs of products between which the elasticity of substitution is
infinite. Stigler opines that it is the behaviour of buyers that is decisive.
Yet, it should be that products may be identical to any or every buyer while
buyers may be quite different from the view point of sellers.
Stigler was of the view that
once collusion has been effected, and a price structure established, any member
of the agreement can secretly violate it and gain larger profits than by
conforming to it. He identified fixing market shares as the most efficient of
all methods of combating secret price reductions because no one can profit from
price-cutting if he is moving along the industry demand curve once a maximum
profit price has been chosen.
5.
STIGLER’S
CONTRIBUTIONS TO THE FIELD OF PUBLIC POLICY
ORIGIN OF THE THEORY
The field of public policy
involves the study of specific policy problems and governmental responses to
them. It is a field that is on the borderline between politics and Economics.
Thus, it was treated under the field of political economy before economics and
politics became separate disciplines (Dryzek, 2008). The study of public policy
attempts to devise solutions for problems of public concern. Such issues
studied under public policy include healthcare, pollution and the economy.
Generally, public policy represents government’s plans and strategies for the development
of particular sectors of the economy or the whole economy itself. Thus, we can
have public policy on transport, communication, education and health. On the
other hand, a national policy for growth and development would be seen as a
public policy for the whole economy.
THE CRUX OF THE THEORY
In a paper, ‘Economists and
Public Policy’ published in 1982, Stigler argued in a thesis that Economists
have a deplorable habit of giving emphatic advice on public policy without bothering- even if
they live long after- to see whether their productions of the effects of the
policy were correct.
He substantiated this by
saying that in the mid-nineteenth century, Nassau Senior and Robert Torrens
predicted dire consequences for the textile industry if the British Parliament
passed the ten-hour day bill. He however stated that each of the famous
Economists lived for seventeen years after the bill was passed, but neither of
them found the time to examine its actual effects.
He also partially recanted an
earlier thesis in which He asserted that once the practice of testing
predictions by examining the evidence became general practice, economist’s
advice – that is, the advice that survived the empirical tests- would be heeded
by the Society. For truth, even temporary truth, is a God that that the
rational society must worship.
SUMMARY OF STIGLER’S FINDINGS
Stigler argued in his theses
that a society will not challenge for long established truths about the real
World, because that is unwise behaviour no matter what one is seeking to do. To
disregard the real World is to act inefficiently. For example, Stigler argues
that Economists confirm Walter J. Wessel’s proposition that a legislated
minimum wage is largely vitiated by the ability of employers to reduce fringe
benefits and costly working conditions (Economic Inquiry, April 1980). Then,
the labour unions which support such laws would surely address this means of
frustrating their desired increase in the cost of employing workers who receive
low wage rates. Stigler continued by incorporating hard science in his
analysis.
The Place of Hard Science
Stigler noted that there are
things that economists know withgreat confidence about the working of an
economic system. The price of a commodity will rise when its supply falls, even
if the state passes a law against a price rise: the rise willthen simply take
the form of legal or illegalcosts in getting the rationed commodity-waitingin
line or buying in a black market. A largeand rapid rise in the supply of money
will lead to a rise in prices (again, possibly concealed but not avoided by public
controls). A competitive industry will refuse in the long run to supply its
product at less than a cost-remunerative price, and will be unable to get much
more.
Stigler opined that such
elementary and even platitudinous findings are deducible from first principles
and illustrated by many thousands of documentable instances. Stigler argues
that these were the sorts of findings which that were inescapable and therefore
irresistible to an intelligent society.
Stigler believes that if we
look at any important economic policy of the state, we shall find that it takes
account of whatever established knowledge economists possess, and perhaps of
some that we do not yet possess. The theory of price discrimination, for
example, emphasizes the possibility of profiting from differences among buyers
in the “intensity” of their demand for a product when they can be prevented
from reselling to one another. He said that this theory is fully recognized in
the regulation of the structure of public utility prices.
Public Policy-making: The Presence of Other Values
Here, Stigler argues that
there were other important (both economic and non-economic values) that
influence public policies. He started by recognizing the errors Economists
(including himself) normally make in their analysis. For example, Economists
expect the society eventually to believe their case for free trade and the case
against minimum wages and the case for free energy prices (subsidy removal or
deregulation of the downstream sub-sector) and our case against rent controls.
Every one of these recommendations is based on a tolerably accurate analysis of
the effects of the policies on aggregate social income. Yet the Society often
pursues very different economic policies. Stigler explains this divergence by
saying that the Society usually factors in other values which Economists do not
usually consider critical in their analysis. Such values the society consider
in the actual implementation of public policies include the need for
redistribution of income, reducing wide income inequality gap and improving the
standard of living for the general citizenry.
Reflections on the Chicago
Credo
The Chicago represents the
general idea of what guides the working of the markets as enunciated by the
Chicago School of Thought which Stigler is part of. The credo states that
people act efficiently in their own interests. Using this credo, Stigler argues
that people who make automobiles on average know better what to make and how to
make it than the best industrial economists. The worker who chooses an
education and a craft on average knows better how to choose than the best
labour economist. The householder who buys a consumer good on average knows
better what and where to buy than the best home economist.
This is not to say that the
economic world is perfect-although it really is pretty impressive- or that its
imperfections can never be discovered by an economist-although it is hard to find
an example. The credo also asserts that economic agents learn all the presently
knowable things it pays them to know-always on average-and act with due regard
for this knowledge. The credo asserts that nothing is easier than for an
economist to be wiser in 1982 than the American automobile industry was in
1972, but no economist in 1982 is so wise as the automobile industry in 1982 or
even in 1981 (Stigler, 1982).
Stigler linked the invention of the credo tothe
cornerstone of Adam Smith’s Wealth of Nations (1776). Smith’s observation was that “the statesman,
who should attempt to direct private people in what manner they ought to employ
their capitals, would not only load himself with a most unnecessary attention,
but assume an authority which could safely be trusted, not only to no single person,
but to no council or senate whatever, and which would nowhere be so dangerous
as in the hands of a man who had folly and presumption enough to fancy himself
fit to exercise it.
Stigler extended the Chicago
credo to the larger society where the society is expected to act efficiently in
public decision-making depending on the values that are critical to such
society despite divergent advice offered by Economists.
6.
STIGLER’S
CONTRIBUTIONS TO PRICE THEORY
ORIGIN OF THE THEORY
Standard Economics is usually
divided into two major fields. The first part is the price theory (otherwise
known as Microeconomics) and the second is macroeconomics. The price theory
explains how the interplay of supply and demand in competitive markets creates
a multitude of individual prices, wage rates, profit margins, and rental
charges. The price theory assumes that people behave rationally. Consumers try
to spend their income in ways that give them as much pleasure as possible
(maximize their utility). On the other hand, entrepreneurs seek as much profit
as they can extract from their operations (maximize profitability).
Price theory has been part of
economic discourse even before Adam Smith published his Inquiry into the Nature
and Causes of the Wealth of nations (1776). However, these discussions were
indirect and were not distinguishable from moral philosophy and politics. It is
to be noted that before Adam Smith’s magnum opus, past economic philosophers including Plato, Aristotle have
treated price theories under different names like value and exchange and
monetary theory.
However, it was Adam Smith’s
Wealth of Nations that unravelled the principles of economics and enunciated on
the price theory. Smith captured this under the several classical economic laws
including the self-interest law, the law of value, the law of wages, the law of
rent, profit and interest and the law of markets (Okoh, 2006). It was later
that the acclaimed father of Neo-classical economics, Alfred Marshall developed
further on the price theory particularly in his masterly neo-classicist work “Principles
of Economics” (1890). In this work, Marshall explained demand by the principle
of marginal utility, and supply by the rule of marginal productivity (the cost
of producing the last item of a given quantity). In competitive markets,
consumer preferences for low prices of goods and seller preferences for high
prices were adjusted to some mutually agreeable level. At any actual price,
then, buyers were willing to purchase precisely the quantity of goods that
sellers were prepared to offer (Lekachman, 2008).
As in markets for consumer
goods, this same reconciliation between supply and demand occurred in markets
for money and human labour. In money markets, the interest rate matched
borrowers with lenders. The borrowers expected to use their loans to earn
profits larger than the interest they had to pay. Savers, for their part,
demanded a price for postponing the enjoyment of their own money. A similar
accommodation had to be made in wages paid for human labour. In competitive
labour markets, wages actually paid represented at least the value to the
employer of the output attributed to hours worked and at least acceptable
compensation to the employee for the tedium and fatigue of the work.
Later, many modern economists
made their own contributions to price theory which was now distinct. Stigler
was just one of these economists. In what follows, we attempt to summarize
Stigler’s contributions to price theory, a subject which interested Stigler
throughout his career.
SUMMARY OF STIGLER’S CONTRIBUTIONS TO PRICE
THEORY
Stigler defined price theory
as the study of the factors affecting the value set by sellers on their goods.
Stigler began his empirical work in price theory in the mid- 1940s, soon after
moving to Columbia University, New York. Indeed, he published what was perhaps the
first example of linear programming in a paper entitled “The cost of
subsistence.”(1945). His work also included the statistical investigation of a
specialized theory of rigid price structures (in “the Kinky Oligopoly Demand
Curve and Rigid Prices” published in 1947), and a paper on the factors
governing the delivered prices of commodities (“A theory of delivered price
systems” published in 1949). In 1946, he published a landmark book, “The Theory
of Price.” After two revisions, in 1952 and again in 1966, it is still used in graduate
schools throughout the US (Essays of an Information Scientist). It has been
cited over 260 times through 1983.Stigler also co-authored another
importantempirical study of prices in 1970,
“The Behaviour of Industrial
Price” published in 1966 (75 citations through 1983). The book examines the question
of price stability and presents meticulous data collected by Stigler and his
colleague James K. Kindahl, University of Massachusetts, Amherst.
The book’s statistical
evidence helped undermine the long-standing economic maxim that a major segment
of the economy sets prices by management decision rather than in reaction to market
factors.
7
STIGLER’S CONTRIBUTIONS TO IMPERFECTIONS IN THE CAPITAL MARKET.
ORIGIN OF THE THEORY
Although, the classical
orthodoxy had long established that the invisible hand works to establish a
perfect working system, what we obtain in real life is usually different.
Markets are usually imperfect in practical life and this is what Stigler
explored in his contributions to capital market imperfections.
SUMMARY OF STIGLER’S FINDINGS
Stigler’s contributions to
the theory of imperfect capital markets are contained in his work, Imperfections
in the Capital Market(1967). In this work, Stigler described the
imperfections in the capital market as not only a popular but a “terminal” one.
By “terminal”, Stigler, was inferring that it was a very important issue but
had received little or no attention as at that time. In making his
contributions, Stigler identified two key imperfections in the capital market:
Inability to borrow cheaply:Stigler
identified this as the basic imperfection in the capital market due to the
inefficiencies in the capital market. Inefficiency in the capital market leads
to a mis-allocation of capital especially when the costs of transactions are
high. When borrowers of funds cannot get cheap funds, it signals inefficiency
in the capital market.
Monopoly as an Imperfection: According
to Stigler (1957), there is ample historical precedent for identifying a
perfect market with a competitive market. Stigler argues that monopoly power
could lead to serious inefficiency in the allocation of capital.He however did
not see this inefficiency caused by monopoly power to be too large since
capital is the most fungible, the most divisible, and the most mobile of all
productive resources.
Stigler concludes by saying
that the efficiency of markets should be of great interest to the economist.
Although, Stigler admits that it was not possible to have perfect markets, he
enjoined economists to continue to work towards developing theories on how to
reduce the inefficiency of real markets and make them work better.
SECTION THREE
EVALUATION
A GENERAL EVALUATION OF STIGLER’S WORKS
George Joseph Stigler’s contributions
to the development of economic thought are varied. This is because Stigler
contributed a lot to different fields of economics including but not limited to
the Price theory, industrial
organization, public policy, the history of economic thought, the functioning
of markets, the Economics of Information and Search and Public regulation.
An examination of his works
shows that Stigler is an Economist who is very analytical and always detailed
in his approach. More to this is the fact that Stigler always likes to subject
his theories to empiricism. He always endeavours to reconcile the theoretical
World and the real World by subjecting his theoretical postulations to real
World data tests to ensure that they are valid. This is reflected in most of
his works which are always accompanied with quantitative analysis.
This was acknowledged by
Ronald Coase (in an appreciation) where he wrote that ‘what remarkable is the
variety of ways in which Stigler handles a problem; he moves from the
marshalling of high theory to aphorism to detailed statistical analysis, a
mingling of treatments which resemble, in this respect, the “subtle and
colourful”Edgeworth (Francis Edgeworth who developed the box diagram still
being applied to international trade theory today is noted for his graceful and
analytical approach to economic analysis). It is by a magic of his own that
Stigler arrives at conclusions which are both unexpected and important.’
But this is not to say that
there are no reservations with Stigler’s works. An examination of Stigler’s
works show a high level of abstraction in his analysis and Stigler’s analytical
language usually sound very esoteric. According to 1970 Nobel prize-winning
economist, Paul Samuelson, (Massachusetts Institute of Technology, Cambridge),
not all of Stigler’s conclusions are universally accepted. In the utility rate
study, for example, the evidence could also be interpreted to support the view
that the unregulated industries kept their rates competitive out of fear of
regulation.
However, according to Coase,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. Coase continues by
saying that 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. He is a man sui generis. Age shall not wither nor custom
stale George Stigler’s infinite variety.’
It could also be said that
some of Stigler’s contributions remain valid today although latter-day
economists may have improved upon them. Stigler’s iconic contributions still
form part of the embodiment of microeconomics and these contributions continue
to be relevant to today’s society.
In the part that follows, we
attempt an evaluation of Stigler’s theoretical contributions already discussed
above with the aim of identifying the strengths and weaknesses (where
applicable) of the theories and assessing their practical relevance to society
and today’s economic world.
1.
THE
ECONOMICS OF INFORMATION AND SEARCH
STRENGTHS OF THE THEORY
a.
Stigler
was the first to develop a formal theory of optimal economic search.
b.
Stigler
did not only develop a model of optimal economic search, he applied it to the
product and resource markets.
c.
Stigler’s
contributions to the Economics of Information and Search were ground-breaking
and were backed with lots of statistical and mathematical proofs using the
geometric tools of economics.
d.
Stigler
provided the platform for further theorizing on the Economics of Information
and Search.
WEAKNESSES
OF THE THEORY
The theory could be said to
be highly abstracted the way Stigler developed it and the practical utility of
the model of optimal economic search continues to be questioned.
RELEVANCE OF THE THEORY TO TODAY’S SOCIETY
Stigler’s Economics of
Information was built upon by George Akerlof, Michael Spence and Joseph
Stiglitz all of who co-won the 2001 Nobel prize in Economic Sciences in 2001.
Today, Information Economics focuses on the study of how inadequate or
imperfect information can influence a market. The Economics of Information
stipulates that markets operate inefficiently if buyers and sellers act with
imperfect or inadequate information. If there is asymmetric information (if a seller
has better information about product quality than a buyer), then a market is
likely to collapse entirely or result in an offering of low-quality products
that may cause the market to contract rather than grow.
On the other hand, despite
criticisms, Stigler’s optimal model of Economic search has stood the test of
time especially in product and resource markets. In product markets, it remains
valid that in searching for a product, a consumer would not want to search
further when the marginal cost exceeds the expected marginal benefit of the
product itself. This also applies to resource markets when firms want to
acquire both labour and capital resources for production purposes.
Therefore, Stigler’s
contributions to the field of Economics of Information and Search remain valid
till date.
2.
STIGLER’S
THEORY OF REGULATION ( THE ‘CAPTURE’ THEORY)
STRENGTHS
a.
The
theory was a ground-breaking theory as far as the economics of regulation is
concerned.
b.
The
theory accurately explains what happens behind the scene in the regulatory
system when Politicians and their cohorts backed by political power ‘capture’
the regulatory system and take advantage of it.
c.
The
‘capture’ theory is a good explanation of the experience (of regulation) of
developing countries (with weak institutions) which the elite in such societies
usually subvert to favour themselves.
d.
Stigler
established that less regulation was more favourable to the growth of markets
and this has continued to be the view of modern economists.
e.
Stigler
provided the basis for further intellectual cogitation in the theory of
regulation by economic scholars.
WEAKNESS OF THE THEORY
a.
In
modern times, Stigler’s theory of ‘capture’ is only applicable to developing
Countries with weak institutions. The ‘capture’ theory cannot apply to
developed countries with strong institutions that can checkmate the activities
of Politicians and their cohorts in attempting to subvert the regulatory
system.
b.
Although,
Stigler’s argument that less regulation was more plausible than regulation, He
did not explain what should apply (how markets can grow or whether growth was
not feasible) when as a matter of necessity, the government regulates certain
sectors for strategic reasons.
RELEVANCE OF STIGLER’S THEORY
OF REGULATION TO TODAY’S SOCIETY.
In the modern society,
Stigler’s ‘capture’ theory still remains a valid explanation of what happens
behind-the-scene in the regulatory system (especially in developing countries)
where the elite in such societies usually sabotage the regulatory system. This
phenomenon still prevails till date.
Stigler argued that less
regulation is friendlier to the growth of markets than regulation. Stigler’s idea
has been the core working principle of global development institutions
including the World Bank and the IMF who advocate deregulation in line with the
tenets of the Washington Consensus (see Williamson, 1989). The World’s emerging
economies have also embraced the tenet of deregulation as a more suitable
approach to growing their economies. In line with this, Nigeria adopted the
Structural Adjustment Programme (SAP) in 1986, a policy that sought to
liberalize the Nigerian economy and diversify her economic base.
3
& 4 STIGLER’S
CONTRIBUTIONS TO THE FIELD OF INDUSTRIAL ORGANIZATION AND OLIGOPOLY.
We evaluate Stigler’s
contributions to the field of industrial organization and oligopoly together
since according to Ekanem (2012), current research in industrial economics,
theoretical and empirical is focused on formal models of oligopoly.
STRENGTHS OF THE THEORY
a.
Stigler’s
contributions to industrial organization was a timely intervention in the
growing monopoly problem and the issue of anti-trust policy in the US in his
time.
b.
Stigler
in his The Organization of Industry (1968) was able to reconcile
industrial economics with conventional price theory.
c.
Stigler
was able to modify the traditional oligopoly theory making more explicit the
motivation behind colluding firms and how collusion can lead to the
maximization of profits by the firms involved.
d.
He added
to existing knowledge on Industrial Organization and the Oligopoly problem and
charted a course for further theorizing in the two fields.
WEAKNESSES
OF THE THEORIES
a.
Many
Economists disagree with Stigler that the subject of Industrial Economics is
not a distinct sub-field of Economics, but coincides with conventional price
theory (see Phillips and Steventon 1974). The current approach is to recognize
industrial economics as a distinct branch of price theory.
b.
Stigler’s
oligopoly theory did not explain how the excesses in collusion could be
managed.
RELEVANCE
TO TODAY’S SOCIETY
Today, industrial production constitutes one of the major drivers
of global economic growth. Therefore, a study in industrial organization is an
effort that is worthwhile. Stigler’s voice in the field of industrial
organization added to the growing number of voices in the field which has made
it to be studied as a distinct field of Economics as industrial economics.
The study of the oligopolistic market structures has remained the
major concern of industrial economics. Stigler’s contributions in this regard
have provided illumination into the workings of markets that are characterized
by imperfect competition. These markets which cannot be analysed using the
standard textbook competitive model according to (Schmalensee, 1987) are the
forms of market that exist in real societies.
5
& 6.
STIGLER’S CONTRIBUTIONS TO THE FIELD OF PUBLIC POLICY AND THE PRICE THEORY
STRENGTHS
OF THE THEORY
a.
Stigler
advocated that economists should be meticulous enough to follow up on their
advice to government on public policy issues in order to assess the performance
of their advice as far as public policy-making and implementation is concerned.
b.
Stigler
was able to recognize the presence of other values other than economic values
in public policy-making. This is a more realistic approach to public policy
issues.
c.
Stigler’s
empirical approach to the study of price theory was novel and made more
economic sense.
d.
Stigler’s
studies into the price theory helped undermine the long-standing maxim that a
major segment of the economy sets prices by management decision rather than in
reaction to market forces.
e.
He
cultivated the ground for further theorizing in these two fields.
WEAKNESSES
OF THE THEORIES
a.
Stigler
did not provide an ‘exhaustible’ list of other values (other than economic)
that could influence public policy-making.
b.
The fact
that Stigler identified strongly with the Chicago credo presents his views on
public policy as one-sided since he did not recognize other divergent but
veracious views as far as the issue of public policy is concerned.
c.
In
developing countries (and some developed countries alike) where subsidies,
minimum wages, price floors and ceilings are rampart, a major segment of the
economy still sets prices by management decision rather than by the reaction of
market forces as Stigler stipulated.
RELEVANCE OF THE THEORIES TO
TODAY’S SOCIETY
In
public policy-making, Stigler’s emphasis on the presence of other values other
than economic values is worthy of note. This can be related to the public
policy efforts of African countries Nigeria inclusive where public policies are
made based only on economic considerations ignoring other values
(socio-cultural and socio-political) of the African Society. The failure of the
Structural Adjustment Programme in Nigeria and many other African countries
could be attributed to this. The SAP pill (which was prepared based mainly on
economic considerations) was just forced down the throat of most African
Countries without consideration for the dynamic and peculiar socio-cultural and
socio-political forces prevalent in African countries. This is contrasted with
the experience of the East Asian Countries who rejected the SAP package, looked
inwards (by reconciling developments efforts with the socio-cultural milieu)
and experienced rapid growth in such a dimension that economists have aptly
tagged their experience the ‘East Asian Miracle.’
In the same vein, Stigler’s
empirical approach to the price theory has improved our understanding of
microeconomics and increased its applicability in solving the problems of
economic units – households, firms and governments.
7.
STIGLER’S
CONTRIBUTIONS TO INEFFICIENCIES IN CAPITAL MARKETS
STRENGTH OF THE THEORY
-
Stigler
was able to identify the inability to borrow cheaply as a basic imperfection in
the capital market. This has continued to be the case to date.
WEAKNESS OF THE THEORY
-
Stigler
did not recognize monopoly as a huge imperfection. However, in real life, no
matter how fungible, divisible and mobile capital maybe, a firm with monopoly
power can appropriate huge capital outlays toitself, kill competitors and
entrench a huge imperfection in the capital market.
RELEVANCE TO TODAY’S SOCIETY
The issue of cost of borrowing has remained a topical issue in
modern capital markets. Like Stigler stipulated, high operational costs has
remained the bane of underdeveloped capital markets especially in developing
countries.
CONCLUSION
In this work, we have
attempted to review the contributions of George Joseph Stigler to the
development of economic thought. In doing this, we find that though Stigler was
interested in Microeconomics, He is a man of many parts given his varied
contributions to the field in the area ofPrice
theory, industrial organization, public policy, the history of economic
thought, the functioning of markets, the Economics of Information and Search
and Public regulation.
In his contributions, we find
an Economist who is very exhaustive and analytical in his approach and promotes
empiricism in his theorizing. An evaluation of these contributions reveals that
despite societal dynamics, they still remain valid in modern economics and
relevant to today’s society.
Stigler left an envious
intellectual legacy in Economics in his time; it is now left for today’s
Economists (including Students of Economics) to work towards making their own
contributions to the development of economic thought in their own time.
REFERENCES
Coase, Ronald (1982): “George J. Stigler: An
Appreciation.”
Dryzek, John. “Political Science.” Microsoft Encarta
2009 (DVD). Redmond, WA: Microsoft Corporation, 2008.
Friedland, Claire (1994). “Catalogue of the George
Joseph Stigler Manuscripts in Special Collections, Regenstein Library,
University of Chicago. Centre for the study of the Economy and the State.
University of Chicago.
Okoh, S.E.N (2006). Selected Readings in the History
of Economic thought.’ Mindex publishing, Benin-city.
Stigler, G. J. "Monopoly and Oligopoly by
Merger," A.E.R., Vol. XL (May, 1950). .
- "Economics of Information," J.P.E.
(June, 1961). .
- "Perfect Competition, Historically
Contemplated," ibid. (February, 1957).Reprinted in Essays in the History
of Eco-nomics. Chicago: Univ. of Chicago Press, 1965. .
-The Theory of Price. 3d ed. New York: Macmillan
Co., 1966
- The Theory
of Economic regulation (1971). University of Chicago Press.
- A
Theory of oligopoly (1964). University of Chicago Press
- Information
In the Labour Market (1962). University of Chicago Press
- Economists
and Public Policy (1982). University of Chicago Press
