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2016 | OriginalPaper | Buchkapitel

Marching to a Different Drummer: Sam Peltzman Reflects on George Stigler

verfasst von : Craig Freedman

Erschienen in: In Search of the Two-Handed Economist

Verlag: Palgrave Macmillan UK

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Abstract

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.

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Vorheriges Kapitel De Gustibus Non Est Disputandum: George Stigler through Gary Becker’s Eyes

The Center for the Study of the Economy and the State was renamed the George J. Stigler Center for the Study of the Economy and the State soon after his death in 1991.

This same idea is much later made explicit by another former student, Mark Blaug. Moreover, a conversation a few weeks later with Robert Solow also conveys the strong impression that this ability not to be intimidated, but to verbally spar in a playful fashion, is one of the bonds that cemented a long friendship between Stigler and Solow.

I exaggerate, but not by that much. The exact quote in a letter discussing the usefulness of members of Stigler’s Center acting as contractors for Lexecon is: “… we once tried to hire Peltzman on a project, but he insulted the client and it fell through” (Letter to George J. Stigler from Richard A. Posner, February 13, 1979). Compass Lexecon, as it is known today, is one of the world’s largest economic and financial consulting firms, founded in Chicago in 1977.

As Lucky Ned Pepper says to Mattie Ross in True Grit (2010), “You do not varnish your opinions.”

The paper referred to can be found in Peltzman, Sam (1993), “George Stigler’s Contribution to the Analysis of Regulation”, The Journal of Political Economy 101(August): 1253–1289.

Making his mark refers to the impact Stigler had on the profession in influencing subsequent work in this area. His Nobel Prize singles out his work in regulation as one of his distinct contributions to the field of economics.

The dissertation became: Peltzman, Sam (1965) Entry into Commercial Banking. March: University of Chicago Library. A shorter version appeared as: Peltzman, Sam (1965) “Entry into Commercial Banking”, Journal of Law & Economics 8(1):11–50.

The work referred to here, and later in the interview is: Stigler, George J. and Claire Friedland (1962). “What Can Regulators Regulate? The Case of Electricity”, The Journal of Law and Economics 5(October): 1–16.

Claire Friedland was George Stigler’s research assistant for more than thirty years and credited as his co-author in a number of seminal published papers. Claire Friedland has insisted that Stigler was giving her more credit than was her due. But Claire Friedland is unusual among economists in being decidedly modest about her accomplishments.

The regulation paper refers to Stigler’s much-cited article that helped to change the way economists saw the relation between government and the economy. Stigler, George J. (1971),“The Theory of Economic Regulation”, Bell Journal of Economics and Management Science 2 (Spring): 3–21. It is quite possible to see a direct relationship between this paper and the earlier 1962 paper on regulation. If in fact regulation doesn’t improve outcomes, the issue then becomes one of discovering why regulations exist in the first place. What in fact is the driving force behind such legislation? In this 1971 paper, Stigler offers an explanation using a simple supply and demand for regulation apparatus that is based on the assumption that government is not some unified representative individual with an undifferentiated set of aims, but rather a collection of agents who have their own agendas and objectives.

The reference is to the 1962 paper previously mentioned.

The interested reader might want to refer to Stigler, George J. (1965) “The Economist and the State”, American Economic Review 55(March): 1–18. This is the printed version of the presidential address that Stigler gave at the December 1964 American Economic Association meetings. It is at some points almost a visionary piece and certainly a call to arms for the profession to do more empirical work rather than depending entirely on theory and assertion.

Peltzman refers here to Noll, Roger G. (1989). “Economic Perspectives on the Politics of Regulation”, in Schmalensee, Richard and Robert Willig (eds), The Handbook of Industrial Organization, Volume II. Amsterdam: Elsevier Science B.V., pp. 1253–1289.

The paper referred to can be found in Peltzman, Sam (1993), “George Stigler’s Contribution to the Analysis of Regulation”, The Journal of Political Economy 101(August): 1253–1289. The article is one of a number of tributes in this memorial edition of the JPE, where about half of that number is devoted to an appreciation of George Stigler and his work. Under the guidance of his friend and close colleague, Gary Becker, these articles more than adequately repay any close reading. The Peltzman article and a few others are of particular interest.

The article referred to is: Peltzman, Sam (1989), “The Economic Theory of Regulation after a Decade of Deregulation”, Brookings Papers on Economic Activity, Microeconomics.

This again refers to the article: Peltzman, Sam (1993), “George Stigler’s Contribution to the Analysis of Regulation”, The Journal of Political Economy 101(August): 1253–1289. The paper under discussion is: Stigler, George J. and Claire Friedland (1962). “What Can Regulators Regulate? The Case of Electricity”, The Journal of Law and Economics 5(October): 1–16.

The article referred to is: Posner, Richard A. (1971). “Taxation by Regulation”, Bell Journal of Economics and Management Science 2 (Spring):22–50. As the title hints, the paper attempts to explain the reason why some regulations lead to internal cross-subsidizations.

Those familiar with the presidency of Theodore Roosevelt will recognize this particular reference to a “bully pulpit.”

This article was published posthumously, representing the equivalent of a voice from the grave. In his later years, Stigler struggled with what he came to name “the paradox of legitimacy.” If in fact there is a political marketplace allowing voters to express their preferences, then how can you label something like the sugar subsidy which has stood the test of time illegitimate? If choice was necessarily grounded in consumer sovereignty, then that must hold sway in any market whether of an economic or political persuasion. This is one of the issues that Stigler takes up in the article. Stigler, George J. (1992). “Law or Economics?”, Journal of Law and Economics 35 (October):455–68. This position was earlier presented in a 1987 speech Stigler gave to the National Association for Business Economists upon being awarded its Adam Smith Award. The speech later appeared as: Stigler, George J. (1988) “The Effect of Government on Economic Efficiency”, Business Economics 23(January): 7–13. This position quickly attracted a scathing reply from William Niskanen who seemed shocked by the heresy of such a previously faithful follower of Adam Smith. He calls Stigler dangerously mistaken. See Niskanen, William A. (1989) “A reply to George Stigler: evaluating government policy”, Business Economics 24 (January):1–7.

Ralph Waldo Emerson is the “somebody” that Sam Peltzman mentions. The exact quote, one of those for which Emerson is best known is: “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines” (Emerson, Ralph Waldo (1841[1908]) “Self-Reliance”, Essays: First Series. East Aurora, NY: The Roycrofters). It could be argued that George Stigler greatly admired consistency. However, the real question was whether he was given to indulging in a foolish consistency. For Stigler, this would imply refusing to change his mind no matter what the evidence might be. From the examples Sam Peltzman offers, it is doubtful that he would designate George Stigler as ever suffering from such a foolish consistency.

Henry Calvert Simons (1899–1946) was a staff member of the Economics Department at Chicago during the time that George Stigler was a graduate student there in the 30s. Simons became best known for his book, A Positive Program for Laissez Faire (1934), which proposed more competitive markets as a solution for overcoming the Great Depression. The staff of the economics department at the time regarded Simons as something of a protégé of Frank Knight. One consequence of that relationship was that Simons, in the 30s, would become the catalyst, a principle cause of bitterness, initiating an intense feud that subsequently flared between Frank Knight and Paul Douglas. George Stigler describes the unfolding of this feud in his autobiography,Stigler, George J. (1988). Memoirs of an Unregulated Economist. New York: Basic Books. Simons after the war inaugurated something of a tradition by becoming the first economics professor to serve as a faculty member of the University of Chicago Law School. Unfortunately, he held the position for only a very short period before committing suicide. However his successor, Aaron Director, would have a greater impact in this position, becoming instrumental in the creation of a law and economics tradition at Chicago.

Here Sam Peltzman is jumbling up events a bit which is easy enough to do when they occurred some three decades before. Phil C. Neal in 1967 was a faculty member [and is still an emeritus professor] of the University of Chicago Law School when Lyndon Johnson asked him to head the White House Task Force on Antitrust Policy. [Neal, Phil C. etal. (1968–1969). “Report of the White House Task force on Antitrust Policy”, Antitrust Law and Economics Review 2 (Winter).] The Neal Report embraced the then dominant structure-conduct-performance approach to anti-trust issues. Not surprisingly, it delivered the type of report that the Johnson administration was likely to expect. The report emphasized the dangers of the then dominant conglomerate mergers and advised more interventionist policy. The Nixon administration came to power with different inclinations and in its first year (1969) asked Professor George Stigler to head a new commission examining the same anti-trust issues. [Stigler, George J. et.al. (1969) “Report of the Task Force on Productivity and Competition”, Antitrust Law and Economics Review. 2 (Spring).] Stigler reflected the changing attitudes that were becoming clear within the economics profession. The structure-conduct-performance paradigm was under attack, spearheaded by the faculty at the University of Chicago that had pioneered the study of law and economics. Unsurprisingly, the Stigler report saw little, if any threat, coming from conglomerate mergers and thus left the Justice Department with little to do in this regard. The debate became somewhat generational with the younger generation of the profession tending to support the Stigler report.

Exactly where this is published is not clear. In his autobiography and in his Ely Lecture [Stigler, George J. (1982), “The Economists and the Problem of Monopoly”, American Economic Review Papers and Proceedings, 72 (May): 1–11], Stigler certainly makes it abundantly clear that economists came to love the Sherman Law because of the income it bestowed on the profession. But where he may have claimed to himself love the law remained something of a mystery. However, after engaging in some casual detective work, Peltzman’s memory appears to hold true. The quote is in a speech George Stigler delivered at DePauw University [Stigler, George J. (1965),“The Formation of Economic Policy”, An Address by George J. Stigler. April 21: 1–20].

This study is concerned with the effects of the anti-trust policies of the United States. To be quite candid, one reason I chose it was because I am very fond of our anti-trust policy in its broad outlines, although not in all of its details. I wondered whether being fond of a policy would help me to find good effects of it! (Stigler 1965:12).

Perhaps Peltzman remembered the speech since in it Stigler lauds Peltzman’s work.

One of our very finest dissertations, recently completed, was a study of entry into commercial banking given the restrictive practices of the Federal Deposit Insurance Corporation. Professor Sam Peltzman, its author, concludes that since the introduction of the Federal Deposit Insurance Corporation in 1934, with its very high standards for admission of new banks, the entry into commercial banking in the United States has dropped by perhaps 60 % (Stigler 1965:16).

Here Peltzman seems to be referring to Stigler, George J. (1966) “The Economic Effects of the Antitrust Laws”, Journal of Law and Economics 9(October): 225–258.

The elusive name is: Peltzman, Sam; Michael E. Levine and Roger G. Noll (1989). “The Economic Theory of Regulation After a Decade of Deregulation”, Brookings Papers on Economic Activity, Microeconomics 1989:1–58.

Peltzman is most likely referring to work in behavioral economics which was gaining some steam in 1997. Among others, Daniel Kahneman, Amos Tversky and Richard Thaler had produced some initial work on the subject. At Chicago, a joint workshop with members from the economics and psychology departments was involved in discussing the possible merits and shortcomings of this approach.

The reference here is to the 1987, 4th edition of George Stigler’s textbook, the aptly named Theory of Price (New York: Macmillan). There is at least some foundation for assuming that this new edition was spurred by his 1982 Nobel Prize for Economics. The previous edition had appeared some two decades previously.

This claim appears in the set of Tanner lectures he presented in 1981 [Stigler, George J. (1982) “The Ethics of Competition: The Friendly Economists” The Economist as Preacher. Chicago: University of Chicago Press, pp. 14–26.] The relevant description appears on pages 25–26. In this part of his lecture, he describes a test that would serve to verify his claim that “Much of the time, most of the time in fact, the self-interest theory (as I interpreted it on Smithian lines) will win.” (p. 26)

Sam Peltzman refers to one of only two papers Stigler and Becker co-authored: Stigler, George J. and Gary S. Becker (1977). “De Gustibus Non Est Disputandum”, The American Economic Review 67(March): 76–90.

We are both referring to his seminal paper on oligopoly: Stigler, George J. (1964) “A Theory of Oligopoly”, Journal of Political Economy 72(February):44–61. I might argue that the article attempted to do away with any need for a theory of oligopoly. However it is interesting to look at an article Sam Peltzman wrote more than a decade after this conversation.

Stigler’s article was a landmark in the theory of industrial organization and in the practice of antitrust. For industrial organization economists it focused attention on the sorry state of oligopoly theory and, using information theory, proposed a theory that could explain the deviations of oligopoly pricing from competitive pricing. For antitrust practitioners the article came to have an important impact on the application of antitrust law, especially in the merger area. Indeed, it is not an overstatement to say that Stigler’s theory of oligopoly remains a central pillar in merger policy in most, if not all, anti-trust regimes around the world (Carlton, Dennis W. and Sam Peltzman (2010) “Introduction to Stigler’s Oligopoly”, Competition Policy International 6(2):237–251.)

The Herfindahl index is a commonly used concentration index in economics.

One of his more pointed remarks about Marx appears in: Stigler, George J. (1976) Do Economists Matter?” Southern Economic Journal 42(January): 347–54. “My friend Robert Fogel has told me that I am a Marxist, perhaps partly because of the role I assign to intellectuals as spokesmen of important groups within the society. My reply is that if I were a Marxist, Karl would not be a very good one. His acid-filled pen was indeed thrown often at the apologists of capitalism and earlier systems. The unrighteous indignation aside, I accept the view that Smith was the honourable spokesman for the agricultural and worker classes of England, as well as the premier economist of all time. But Marx with unbelievable vanity or myopia, excused himself and his doctrines from this description, whereas on my view he was obviously the spokesman for rising industrial proletariat, as well as a premier sociologist.” (p. 351)

This is an interesting attempt to analyse, quite critically, the Chicago approach from someone on the inside. See, Reder, Melvin (1982) “Chicago Economics: Permanence and Change”, Journal of Economic Literature 20 (March) 1–38.

Titel: Marching to a Different Drummer: Sam Peltzman Reflects on George Stigler
verfasst von: Craig Freedman
Verlag: Palgrave Macmillan UK
Buch: In Search of the Two-Handed Economist
Print ISBN: 978-1-137-58973-6

Electronic ISBN: 978-1-137-58974-3

Copyright-Jahr: 2016
DOI: https://doi.org/10.1057/978-1-137-58974-3_7