In Search of the Two-Handed Economist

Economics is what economists do. A definition so closely resembling a tautology can be easily dismissed. Yet there is a gem of insight lurking in this claim that needs further investigation. In essence, the statement reflects the fact that few economists are self-reflective. They have more urgent objectives at hand. Such professionals are far more concerned with conducting research than with distancing themselves sufficiently to ponder deeply on the way they proceed with their work and whether their operational algorithm might contaminate their eventual results. Despite this common practice of affording such introspective examination a deservedly benign neglect, methodology remains important, though not in the irritatingly prescriptive sense adopted by Descartes or, in the case of economics, fashioned by Milton Friedman and his close ally George Stigler.

In 1964, George Stigler chose the occasion of his AEA presidential address to challenge the assembled battalions of economists, entranced by his words, to engage in the moral equivalent of a crusade within the profession. He called for the eradication of economics by assertion. From this time onward, no economist would be worth that name unless each and every hypothesis put forward was supported and tested by available evidence. No longer would economics be simply stated or buttressed by “just so” stories. The putting forward of testable hypotheses and evaluating each one with given available data is what would become known, in the best sense of the term, as the Chicago method.

These days, economists talk about the Chicago School as though the meaning behind that phrase was both common knowledge and unquestionably understood. But if those words represent anything more than an empty formulation, the assured attribution buttressing that meaning lies in the ghosts of theories now well past their shelf-life. The type of rock-ribbed price theory that formed the wedge Milton Friedman and George Stigler adroitly used to shatter the immediate post-war consensus no longer sufficiently differentiates the clear-water approach of Chicago from the salt-water recipe characterizing Harvard or Berkeley. Like any other discipline or profession, economics moves on. After years of cross-breeding and mutually dependent influences, such a clear-cut distinction belongs to the past rather than the present state of the profession. Bloody battles and past triumphs are left to historians of thought to dissect. However, what stubbornly persist are labels and oral traditions that are often built upon misunderstandings and fractured fairy tales handed down from one generation to the next.

“No,” replied Elinor; “her opinions are all romantic.” … “A few years, however, will settle her opinions on the reasonable basis of common sense and observation; and then they may be more easy to define and to justify than they now are, by anybody but herself.” (Austen 1933a [1811]:33)

George Stigler did not think much of case studies, the 1950s Harvard approach to industrial organization. “Each new PhD gravely decided in some mysterious fashion whether the industry chosen for his doctoral dissertation was or was not acting in a socially desirable way” (Stigler 1988a: 162). So perhaps he would have been amused or annoyed that his campaign to destroy the idea of monopolistic competition serves as an illustration of how marketing and ideological demands intertwine to shape methodological exposition. While Milton Friedman and his work might seem to provide a more obvious candidate for such a case study, because he was the much more public face of the Chicago counter-revolution, it is easy to overlook the subtlety of his marketing which, at least for a number of professional readers, served to underplay the ideological component helping to shape and drive his work. If Chicago is to serve as an ideal encapsulation of the interplay of ideology and marketing in economics, then the logical imperative is to focus on someone who distinctly shaped that post-war Chicago School.

I waited in an anteroom on an unseasonably hot October morning while Gary Becker’s secretary typed away. Like all the offices housing the Chicago economics department, the room is shabbily comfortable. Professor Becker walks in and is reminded of a staff seminar later that day. As the secretary recites the title of the scheduled paper, Gary Becker’s eyes involuntarily roll. I can easily relate to that. It is the “Life’s too short to listen to a yet another incredibly narrow paper on arcane techniques without any clear economic applications.” Many of us reach that age, only the timing varies from one individual to the next.

It is one of those hot, sultry October days in Chicago when I make my way to the University’s Graduate School of Business to talk to Sam Peltzman about the life and times of George Stigler. To be more precise, my aim is to discuss how Stigler approached economics and dealt with economic research. Sam Peltzman, of course, had been one of Stigler’s PhD students and was certainly acknowledged (by Stigler) to be one of the best of that select group. To some degree, he was considered by many other academics to be Stigler’s one true protégé. Their mutual respect becomes obvious not simply by examining past comments, but by tracing out their subsequent dealings with each other. Once established at UCLA, Peltzman’s old teacher made strenuous efforts to lure him back, going as far as to guarantee research funds from his own Center. Stigler clearly appreciated him not only for his obvious ability, but also for his willingness to go head to head with anyone when a question concerning economics arose. George Stigler tended to be most comfortable with people who could give as good as they got, in other words, people not dissimilar to him, at least in terms of this character trait. And it is quite true that Sam Peltzman doesn’t suffer from any signs of acute shyness when expressing his clearly held views. While doing archival research, I found a letter to George Stigler from a consultancy discussing the suitability of various members of the Chicago Department of Economics or the Business School as consultants for the private sector. The judgment on Sam Peltzman was distinctly negative. The letter noted that Peltzman was only in the same office with a client for five minutes before managing to insult him. This response apparently didn’t signal either a propensity for tact or a future usefulness as a consultant. One suspects this didn’t faze Sam Peltzman in the least.