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Memoirs of an Unregulated Economist

Book Review

May 1, 1989


Arthur J. Rolnick Senior Vice President and Director of Research, 1985-2010
Memoirs of an Unregulated Economist

By George J. Stigler
Basic Books
Photographs, 228 pages

As director of economic research at the bank, I am often asked: What do economists do? And just as often I have a difficult time answering. Usually my response is complicated and full of economic jargon that intimidates or bores my questioner. The conversation frequently stops after I explain that economics is the study of how to allocate limited resources efficiently and that economists develop theoretical models of this process and test them empirically. Recently I have tried a Yogi Berra-like response: Economists are people who study economics. But this hasn't worked much better. I am still frequently left with blank faces and silence.

Now I have found a better way to answer this question. To anyone wondering what economists do, I now recommend George J. Stigler's autobiography, Memoirs of an Unregulated Economist. Stigler, winner of the Nobel Prize for Economic Science in 1982, has written a book about economics and its practitioners that is clear, witty and engaging. Writing in an unpretentious style, without equations to intimidate the less mathematically inclined readers and without much of the standard jargon that frustrates readers outside the profession, he deftly explains what economics is and what economists do.

Stigler's enthusiasm for his subject is contagious as he writes as much about the development of economic thought in the 20th century as about the development of George Stigler as an economist. Although this is an autobiography, Stigler is obviously interested in much more than himself. (Readers, for example, do not learn that he won the Nobel Prize until about halfway through the book, and even then the references are brief and only used to illustrate his ideas.) Stigler challenges and entices his non-economist reader to think as economists do about a variety of problems involving decisions based on limited resources. He provides his economist readers with an insider's view of the development of economic thought from the beginning of his career through his association with the well-known and highly regarded Chicago School. Both types of readers will find the book filled with insight on the profession of economics.

Stigler begins his memoirs by asking what some might think is a rather strange question: Are economists good people? The question is clearly not about whether economists are moral (economists are generally not known for their exciting lifestyles), but rather about whether their endeavors are useful. Not surprisingly, Stigler argues that the output of economics is most useful, and he provides ample support for this conclusion throughout the book. He does this by walking his readers through some of the major issues economists have explored during his career.

The issues are quite varied and may surprise some readers. Economists have attempted to explain much more than what most people might think of as conventional economic problems. Besides studying the importance of monopoly, the effectiveness of regulation or the significance of information in economic decision making, economists have applied their analytical and empirical tools to a variety of social problems. Stigler is quick to point out that the role of the economist is more than just theorizing about how an economy works; it is also using theory to understand and solve real problems caused by the scarcity of resources.

Stigler's chapter on monopoly is a brief but informative history of thought on what has become a popular topic. Monopoly was not considered a problem until late in the 19th century; consequently, little was written on the subject before then. As large conglomerates developed, though, that void was quickly filled. Much was written on the evils of monopoly, with some major contributions coming in the 1930s, the period when Stigler was earning his economic credentials. Considerable work was devoted to measuring monopoly power and designing regulations to restrict monopoly behavior. Influenced by this research, Stigler made one of his rare appearances as an economic witness, testifying in 1950 before a congressional committee on the need to break up U.S. Steel Corp.

Years later, looking back over his testimony, Stigler is surprised at how confident he was in his recommendation. Even though he knew little about how to run a steel company, he did not hesitate to publicly declare that this one should be broken up. Now he realizes that the conventional beliefs about monopoly were based "more on consensus than on evidence." Since 1950, researchers studying the impact of monopoly have found only a small effect: contrary to conventional views, highly concentrated industries (those with only a few firms) do not behave much differently than less-concentrated ones; prices are not much higher and output is not much lower in those industries than in less-concentrated and presumably more-competitive industries. Stigler now concludes that "competition is a tough weed, not a delicate flower."

This is not the only time that Stigler has challenged his own views as well as conventional wisdom. While acknowledging the rationale for asking government to regulate problems that cannot be readily solved by private markets, he raised a question few ever bothered to ask: How successful has regulation been? Until Stigler's work, most economists simply assumed regulations were effective because they existed. Stigler's research raised serious doubts about that assumption. He analyzed the effects of regulating electric rates, the benefits of the Securities and Exchange Commission's elaborate review of prospectuses of new security issues and the impact of antitrust laws on the competitiveness of the U.S. economy. He concluded that these regulations did not live up to their reputations. The regulation of electrical rates had little effect on the rates charged by utilities. The regulation of new security issues also appeared ineffective. Only the antitrust laws showed some positive effects, but these were tentative and somewhat ambiguous.

Stigler's most influential contribution to economic thought, though, came in his work on information theory, for which he received the Nobel Prize. Here again, he was questioning conventional wisdom. Economic theory implied that competitive markets would lead to one price for identical goods. Stigler observed that, in fact, very similar goods often sold at varying prices. Trying to reconcile the theory with the facts, Stigler began to investigate the importance of information. Treating information as a valuable commodity, he could explain why prices might vary for identical goods. From this basic notion has come many other ideas that have helped economists build theories that better explain all kinds of economic behavior. The considerable work done on decision making under uncertainty, for example, could not have progressed far without an understanding of the role of information. This is true, as well, for the theory of expectations, the analysis of macroeconomic policies, the theory of contracts, and the theory of monetary systems.

Stigler's journey through the development of economic thought in the 20th century goes beyond the now-conventional issues of monopoly, regulation and information. It also includes side trips to some of the recent developments outside traditional economics. Referring to economics as the "imperial science," Stigler shows how it has invaded other academic fields that face problems involving decisions restricted by limited resources. He discusses research known as "public choice," that assumes government policy-makers are driven by self-interest rather than a pure concern for the public's welfare.

Even further afield is the work he discusses on crime, discrimination, marriage and the family. Such social phenomena, he argues, are subject to economic analysis because they are problems that require choosing efficiently among alternative ways to use resources. A person, for example, weighs the expected costs and benefits of committing a crime; a couple ponders whether or not to have another child; an employer considers the pros and cons of selecting workers based on criteria other than merit. Economists have found that their tools help us better understand how and why decisions like these are made and what might be expected from policy interventions.

No book, of course, is flawless. In this one, Stigler's clear, simple style falters occasionally. For example, his discussion of what he labels the "Coase Theorem" is difficult to follow. Stigler explains how in 1960 Ronald Coase criticized A.C. Pigou's well-regarded theory on externalities, which are the positive or negative side effects of economic activities. Pigou argued that positive externalities should be subsidized and negative ones taxed. Coase questioned Pigou's analysis, but Stigler's explanations of Coase's views are not well-motivated or clear.

Still, don't let this quibble keep you away from this mostly lucid, insightful and entertaining book. If you want to learn more than a Yogi Berra will tell you about the life of an economist, read George Stigler's memoirs.