The Encyclopedia of Libertarianism

Stigler, George J. (1911-1991)

George J. Stigler was one of the central figures of the Chicago School of Economics. He was awarded the Nobel Prize in 1982 for “his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation.”

Stigler was born and raised near Seattle. He earned his undergraduate degree from the University of Washington and then moved to Northwestern University, where he received his MBA. In 1933, he enrolled in a PhD program in economics at the University of Chicago and studied under the three scholars most closely identified with what some have called the “first” Chicago School of Economics: Henry Simons, Jacob Viner, and Frank Knight. Stigler wrote his dissertation on the history of economic thought under Knight and was awarded his doctoral degree in 1938. He also was influenced by Viner’s neoclassical approach to microeconomic questions, an approach that Stigler would use profitably throughout his career. At Chicago, Stigler became lifelong friends with two fellow graduate students, Milton Friedman and W. Allen Wallis.

Stigler’s first teaching position was at Iowa State. He moved from there to Minnesota and then Brown, before settling at Columbia from 1947 to 1958. In 1958, Stigler returned to Chicago, where he rejoined his old friends Friedman and Wallis and where he would spend the rest of his life.

Stigler’s belief in the power of markets to solve social problems—and the often negative consequences of government intervention—can be seen in two of his earliest publications. In 1945, he examined the effects of the minimum wage in a paper published in the American Economic Review, arguing that it does little to alleviate poverty and distorts the allocation of resources. The following year, in Roofs or Ceilings? The Current Housing Problem, Stigler and Friedman critiqued the policy of rent control, arguing that it led to shortages in the housing supply and higher prices for most consumers. The pamphlet was published by the newly founded Foundation for Economic Education, which would become one of the libertarian movement’s most venerable institutions. In 1947, Stigler traveled to Europe with Friedman and Aaron Director, Friedman’s brother-in-law and one of the early leaders in the economic study of the law, to attend the inaugural meeting of the Mont Pelerin Society. Stigler would serve as president of the society from 1976 to 1978.

After Stigler returned to Chicago for good in 1958, he and Friedman became the almost universally acknowledged leaders of what has been called the “second” Chicago School of Economics, which also would count Gary Becker, Robert Lucas, Ronald Coase, Harold Demsetz, Arnold Harberger, Sherwin Rosen, and Sam Peltzman, among others, as its members. Many of these economists would hold positions in multiple departments in the university, including the Law School, the Graduate School of Business, and the Department of Sociology. In addition, within the Graduate School of Business, a distinguished group of financial economists, including Merton Miller, James Lorie, and Eugene Fama, made their mark on the profession. It also is true that the Chicago School of Economics extended beyond the physical domain of the university. Economists trained at Chicago or sympathetic to the Chicago tradition would help to shape the direction of the economics departments at the University of Rochester (where Wallis would eventually become president), the University of California at Los Angeles, and the University of Minnesota.

Stigler’s contributions to economic theory were numerous and wide ranging. His textbook on price theory, built on the insights he had learned from Viner, would help define the way Chicago School economists tackled microeconomic questions. In the early 1960s, Stigler’s attention turned in large measure to examining economic regulation. He was skeptical of the view held by many political scientists that most regulations were, quite simply, necessary and rational responses to problems with a relatively unfettered market system. Through a number of careful empirical studies, on the electricity and securities industries, for example, he found that regulations often reduced consumer welfare rather than enhanced it. If true, then, why had the number and power of regulatory agencies expanded so greatly in the 20th century? In answer, Stigler came up with his “capture theory.” Business leaders urged the regulation of their industries to restrict competition and thus benefit incumbent firms. Regulatory capture led Stigler to conclude:

And so we face an embarrassing problem if we wish to return to a freer, more traditionally liberal society: the business community does not wish to be released from the public interventions to which it is subject. The merchant marine does not want unregulated, unsubsidized cargo ships; the steel industry does not want free imports; the construction industry does not want competitive interest rates. Each industry will agree on the desirability of making other industries freer and more competitive, but will assert that its own industry would become disorganized and perhaps even non-viable if the state withdrew. There are mavericks in many industries—entrepreneurs and firms that are eager to take their chances in the freer winds of competition—but they are seldom in a majority.

Hence, Stigler often took a pessimistic view when considering the viability of market-oriented reforms. “[T]he persistence of the vast array of regulations is evident—and it is inevitable.” Some economists have gone further to assert that Stigler also maintained that whatever we observe is not only inevitable, it also is efficient. However, it is difficult to find direct evidence for such a claim in Stigler’s written work.

Stigler considered his most important contribution in economics to be his work on information theory. Economists had a hard time reconciling how similar, or even identical, products could fetch different prices from one seller to another. This diversity of price, some argued, was an example of market failure. But Stigler made the case that it was the result of rational decisions by consumers. Attaining information about products is costly, so in many cases it simply does not make sense to acquire “perfect information.” Consumers will search until the marginal expected gain is equal to the marginal cost of additional searching. For some consumers—those whose time is worth a lot—this differential could mean that little searching will be done. For others, whose time is less valuable, we should expect more effort to be expended in seeking information. Stigler’s work in this area, although seemingly intuitive, was groundbreaking and has sparked a vast literature in information theory.

Stigler wished to see a return to a more liberal society with far less government intervention. But he was first and foremost an economist. His understanding of the nature of freedom differed from the conventional libertarian view. Freedom, to Stigler, did not mean merely the absence of coercion. It also had a positive dimension. A “widening range of choices due to the growth of income and education” amounted to an effective increase in freedom in Stigler’s eyes. Capitalism, even in the case of the modern mixed economy, enhanced people’s abilities to direct their lives as they wished, and this enhancement, in Stigler’s view, should be seen as enhancing their liberty.

George Stigler was one of the most eminent economists of his generation. Although his work was often highly technical and quantitative, he also was a gifted writer who paid great attention to his prose. Many of his most important professional papers can be found in a volume titled The Essence of Stigler. His highly readable autobiography, Memoirs of an Unregulated Economist, published just a few years before his death, discusses not only his own life and work but also the development of the Chicago School and economic theory more generally.

 

Further Readings

Friedman, Milton, and George J. Stigler. Roofs or Ceilings? The Current Housing Problem. Irvington-on-Hudson, NY: Foundation for Economic Education, 1946.

Leube, Kurt R., and Thomas Gale Moore, eds. The Essence of Stigler. Stanford, CA: Hoover Institution, 1986.

Stigler, George J. The Citizen and the State: Essays on Regulation. Chicago: University of Chicago Press, 1975.

———. Essays in the History of Economics. Chicago: University of Chicago Press, 1965.

———. Memoirs of an Unregulated Economist. New York: Basic Books, 1988.

———. The Pleasures and Pains of Modern Capitalism. Occasional Paper 64. London: Institute of Economic Affairs, 1982.

———. The Theory of Price. New York: Macmillan, 1946.

Originally published .