In 2009, Oliver E. Williamson, along with elinor ostrom, was awarded the Nobel Prize in economics. Williamson received it “for his analysis of economic governance, especially the boundaries of the firm.” He did this by bringing together economics, organization theory, and contract law. According to the Nobel committee, Williamson provided “a theory of why some economic transactions take place within firms and other similar transactions take place between firms, that is, in the marketplace.” Williamson found that common ownership, in the form of firms, helps to solve some market failures by mitigating transaction costs and uncertainty. The turning point in Williamson’s thinking about markets and firms happened when he was an economist in 1966-67 with the Antitrust Division of the U.S. Department of Justice. In his biography at the Nobel site, Williamson writes: Although the leadership and staff of the Antitrust Division in the late 1960s were both superlative, the prevailing attitude toward nonstandard and unfamiliar contractual practices and organization structures was that such “abnormalities could be presumed to have anticompetitive purpose and effect.” Indeed, given that the prevailing price theoretic orientation effectively disallowed economies of a non-technological kind, it could hardly have been otherwise. That economies could result from organizational and contractual design was simply outside the canon. Williamson changed “the canon.” Drawing on 1991 Nobel laureate Ronald Coase’s work on why firms exist, Williamson showed that these voluntary institutions solve problems that arms-length market transactions have trouble solving. Take, for example, a coal mine that depends on a railroad line to ship its coal. Before the mine owner develops the mine, he wants to be assured that the railroad owner won’t charge him a monopoly price. Before the potential railroad owner builds the spur, he wants to be sure that the coal mine owner, his only customer, will pay him a price that compensates for the high cost of building the railroad. Once the railroad is built, that cost is sunk. The solution in this case is to vertically integrate: that is, the railroad owner is also the mine owner. Thus, firms serve as a means of resolving conflicts. But where should the firm stop? Should it also produce the steel used in the trains? If so, should it produce the machinery used to refine the steel? Williamson proposed that firms will buy from the external market inputs that are uniform or nonspecific. Inputs that are more specialized will be more likely to be produced internally. In the prior example, the rail line was, from the mine owner’s perspective, specialized because it served the mine exclusively. If the mine had been able to use an existing rail spur, it would have been inefficient for the mining firm to acquire the railroad. Prior to Williamson’s work, many legal scholars and economists had seen vertical integration as a way to acquire market power. This argument made little sense, as antitrust scholars Robert Bork and the late Ward Bowman had pointed out much earlier: it’s hard to multiply market power using vertical integration and, indeed, vertical integration solves the problem of “successive monopoly” that can exist otherwise. Williamson’s work led to even less concern that vertical integration enhances market power. This lessening of concern has caused judges and antitrust officials to be less hostile to vertical integration. In his classic 1968 article, “Economies as an Antitrust Defense,” Williamson showed that horizontal mergers of companies in the same industry, even those that increase market power and even those where the increase in market power leads to a higher price, can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price. With an elasticity of demand of two, for example, even a one-quarter percent reduction in costs would cause more gains for the firm than the consumer losses from a five-percent increase in price. For such a merger, therefore, society, which, after all, includes consumers and producers, would benefit. For lower elasticities of demand, the required decrease in cost for the merger to be efficient is even lower than one quarter of a percent. Economics is typically thought of as the science of choice. Williamson avers that it should be equally treated as the science of contracts. This would better describe forms of organization, such as firms. When the transaction, rather than the commodity, is the base unit analyzed, the structure of firms becomes clearer. Williamson earned his B.S. in Management from MIT in 1955, his M.B.A. from Stanford in 1960, and his Ph.D. in Economics from Carnegie-Mellon in 1963. From 1963 to 1965 he taught industrial organization and public policy at the University of California, Berkeley. He was a professor at the University of Pennsylvania from 1965 to 1983 and a professor at Yale from 1983 to 1988. In 1988, he returned to the University of California, Berkeley, where he currently teaches. Selected Works   1981. “The Economics of Organization: The Transaction Cost Approach.” American Journal of Sociology, Vol. 87, No. 3 (Nov., 1981). pp. 548-577. 1975. Market and Hierarchies. New York: Free Press. 1968. “Economies as an Antitrust Defense: The Welfare Tradeoffs.” The American Economic Review, Vol. 58, No. 1 (Mar., 1968), pp. 18-36.   (0 COMMENTS)

Thomas Sargent was awarded, along with Christopher Sims, the 2011 Nobel Prize in Economic Sciences. The Nobel committee cited their “empirical research on cause and effect in the macroeconomy.” The Swedish economists who spoke at the press conference announcing the award emphasized the importance of Sargent’s and Sims’ thinking about the role of people’s expectations. Sargent was an early and important contributor to the rational expectations revolution in macroeconomics, an area for which his sometime collaborator, Robert E. Lucas, Jr. won the Nobel Prize in 1995. One of Sargent’s key early contributions, along with University of Minnesota economist Neil Wallace, was the “Policy-ineffectiveness proposition”—the idea that people’s expectations about government fiscal and monetary policy make it difficult for government officials to affect the macroeconomy in the ways they intend to. If, for example, people get used to the Federal Reserve increasing the money supply when unemployment rises, they will expect higher inflation and, thus, will adjust their wage demands higher. Therefore, the lower unemployment rate that the Fed was trying to achieve with looser monetary policy will not occur. This conclusion was at odds with the Keynesian model, which dominated economic thinking from the late 1930s to the early 1970s. The Keynesian model posited a stable tradeoff between inflation and unemployment. In 1970, major U.S. econometric models, built on Keynesian assumptions, predicted that the government could get the unemployment rate down to 4 percent if it accepted an increase in inflation to 4 percent. In a 1977 article, “Is Keynesian Economics a Dead End?” Sargent wrote: “[I]nstead of 4-4, in the mid-1970s we got 9-9, a very improbable occurrence if econometric models of 1969 had been correct.” In the 1980s, Sargent explored expectations in other contexts. Sargent and Wallace argue in their highly influential paper, “Some Unpleasant Monetarist Arithmetic,” that good monetary policy requires good fiscal policy. Building on this, Sargent detailed how a government can end high inflation in “The Ends of Four Big Inflations.” Sargent studied four countries that had hyperinflation in the early 1920s: Germany, Austria, Hungary, and Poland. All used inflation to finance high government deficits. They all succeeded in eliminating hyperinflation, but to do so, they had to be credible. They had to affect people’s expectations by committing to substantially lower budget deficits or even balanced budgets. All four governments did so. Sargent is actually quite ecumenical. In a 2010 interview,1 Sargent praised articles by left-wing economists Joseph Stiglitz and Jeffrey Sachs. Stiglitz and Sachs, he pointed out, “executed a rational expectations calculation to compute the rewards to prospective buyers” of toxic assets under President Obama’s Public-Private Investment Program of 2009. “Those calculations,” said Sargent, “showed that the administration’s proposal represented a large transfer of taxpayer funds to owners of toxic assets.” Although the Nobel committee did not cite his work on unemployment insurance, Sargent, with Swedish economist Lars Ljungqvist, found that high, long-lasting unemployment benefits in Europe have caused many European workers who lost their jobs to stay unemployed for years and, thereby, erode their human capital. This makes them less employable in the long run. The fact that the U.S. government extended unemployment benefits in many U.S. states to 99 weeks, said Sargent in the 2010 interview referenced earlier, “fills me with dread.” One of the main ways that Sargent has had influence is through his many, many students. An image of the students he has influenced, with Sargent in the middle of a flower, is worth a thousand words.2 Thomas Sargent earned his B.A. from the University of California, Berkeley in 1964 and his Ph.D. from Harvard in 1968. He taught at the University of Pennsylvania from 1970 to 1971, the University of Minnesota from 1971 to 1987, the University of Chicago from 1991 to 1998, and Stanford University from 1998 to 2002. In 2002, Sargent began teaching at New York University, where he has since remained. Sargent was a Research Associate for the National Bureau of Economic Research From 1970 to 1973, and has been again from 1979 to the present. Between 1971 and 1987, Sargent was an Advisor to the Federal Reserve Bank of Minneapolis. He has been a fellow of the Econometric Society since 1976, a member of the National Academy of Sciences and American Academy of Arts and Sciences since 1983, and a senior fellow at the Hoover Institution since 1987. He was President of the American Economic Association in 2007. Selected Works   1975 (with Neil Wallace). “‘Rational’ Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule.” The Journal of Political Economy Vol. 83, No. 2 (Apr., 1975), pp. 241-254. 1977. “Is Keynesian Economics a Dead End?”, Federal Reserve Bank of Minneapolis Working Paper #101. 1979. Macroeconomic Theory. Boston: Academic Press. 1981 (with Neil Wallace). “Some Unpleasant Monetarist Arithmetic”. Federal Reserve Bank of Minneapolis Quarterly Review Vol. 5, No. 3 (Fall, 1981), pp. 1–17. 1983. “The Ends of Four Big Inflations” in: Inflation: Causes and Effects, ed. by Robert E. Hall. University of Chicago Press, for the NBER, p. 41–97.   Footnotes 1. “Interview with Thomas Sargent,” The Region, Federal Reserve Bank of Minneapolis, September 2010 at: https://www.minneapolisfed.org/publications/the-region/interview-with-thomas-sargent   2. The image is on Sargent’s web site at http://www.tomsargent.com/personal/flower_2009_version.pdf   (0 COMMENTS)

  In 2009, Elinor Ostrom, along with oliver e. williamson, was awarded the Nobel Prize in economics. Ostrom, the only woman to ever win the prize, received it “for her analysis of economic governance, especially the commons.” She demonstrated “how local property can be successfully managed by local commons without any regulation by central authorities or privatization.” In her research, Ostrom applied rational choice theory and insights from development economics to ecological preservation. Yet she had little formal economics training, having earned all her degrees in political science. Possibly for that reason, Ostrom differed from most modern economists, basing her research on case studies. She studied arrangements in irrigation, fisheries, and forest use in a wide range of countries, including Nepal, Spain, Indonesia, Nigeria, Bolivia, Sweden, and the United States. Most economists are familiar with the late Garrett Hardin’s classic article, “The Tragedy of the Commons” (see Tragedy of the Commons). Hardin’s idea was that when no one owns a resource, it is overused because no one can control its usage and each person has an incentive to use it before others do. This insight has helped us understand much human behavior and has led people to advocate either having the resource privately owned or having it controlled by government. Ostrom’s work suggested, contrary to conventional thinking, that communities are able to self-organize in ways that punish those who free ride on the common resource. Examining dozens of real-world arrangements, she found instances of communal ownership that worked—that is, that did not lead to the tragic outcomes envisioned by Hardin—as well as ones that did not. Were there systematic differences? Yes, and interestingly, the ones that worked did have a kind of property rights system, just not private ownership. Based on her work, Ostrom proposed several guidelines, which the Nobel committee highlighted, for managing common-pool resources. Among them are that rules should clearly define who gets what, good conflict resolution methods should be in place, people’s duty to maintain the resource should be proportional to their benefits, monitoring and punishing is done by the users or someone accountable to the users, and users are allowed to participate in setting and modifying the rules. Notice the absence of top-down government solutions. In a 2006 article co-authored with Harini Nagendra, Ostrom wrote: “We conclude that simple formulas focusing on formal ownership, particularly one[s] based solely on public [government] ownership of forest lands, will not solve the problem of resource use.” This, they believed, is largely because “When users are genuinely engaged in decisions regarding rules affecting their use, the likelihood of them following the rules and monitoring others is much greater than when an authority simply imposes rules.” Indeed, in a 2008 interview on EconTalk1, Mercatus Center economist Karol Boudreaux noted that Garth Owen-Smith, who helped solve the common-resource problem of elephants in Namibia, drew explicitly on Ostrom’s work. His solution was to ensure that local residents shared in the financial benefits from tourism and trophy hunting. If locals benefit from having a resident population of elephants, they are much less likely to poach and more likely to stop other poachers. Forms of organization similar to those studied by Ostrom can be found in many other human interactions. Organized sports provide one such example. Sports organizations, from local pick-up games to the National Football League, create or codify internal rules and govern themselves. The U.S. Government never determined a “false-start” to be a football penalty, for example, and yet the rule is respected by the penalized team. Some have summarized Ostrom’s work by saying that institutions other than free markets often work well. But her findings do not conflict with a free economy: she observed communities sustainably managing shared resources without any central planning. Ostrom advocated dispersed decision centers, rather than a top-down hierarchy, because local actors possess information a central planning group cannot. Her skepticism about central planning was based, in part, on how badly top-down solutions worked in poor countries. Furthermore, institutional diversity allows ideas to compete. Ostrom earned her B.A. degree in 1954, her M.A. in 1962, and her PhD in 1965, all in political science and all from UCLA. Getting a Ph.D. in political science at UCLA in the early 1960s was a challenge for a woman. In her biography on the Nobel site, Ostrom writes: Political Science at that time was also skeptical about admitting any women to their Ph.D. program as they feared that only a city college would employ a woman with a Ph.D. That was not a good placement for building the reputation of the UCLA department. I was, however, admitted in a class of 40 students with three other women. We were told after we began our program that the faculty had a very heated meeting in which they criticized the Departmental Committee for admitting any women and offering them assistantships. Fortunately, our fellow male graduate students were friendly and encouraged us all to continue in our program. She was a professor at Indiana University in Bloomington from 1965 to 1991. In 1973, with her husband, political scientist Vincent Ostrom, she co-founded the Workshop in Political Theory and Policy Analysis at Indiana University, where she was a co-director until 2009. Selected Works   1990. Governing the Commons: The Evolution of Institutions for Collective Action. New York: Cambridge University Press 1997. “A Behavioral Approach to the Rational Choice Theory of Collective Action.” The American Political Science Review Vol. 92, No. 1 (Mar., 1998): 1-22. 2009. Understanding Institutional Diversity. Princeton: Princeton University Press.   Footnotes 1. Karol Boudreaux on Wildlife, Property, and Poverty in Africa. EconTalk, Sept. 22, 2008. http://www.econtalk.org/archives/2008/09/karol_boudreaux_1.html   (0 COMMENTS)

  The 2005 Nobel Prize in economic sciences was awarded to Thomas C. Schelling and Robert J. Aumann, ”for having enhanced our understanding of conflict and cooperation through game-theory analysis.” Schelling was a pioneer in behavioral economics, accomplishing significant and influential work in the ideas of coordination, commitment (both promises and threats), deterrence, focal points, and segregation. Schelling’s early work was on the most important issue of the Cold War: preventing it from becoming a hot war. In his classic 1960 book, The Strategy of Conflict, Schelling laid out some important applications of game theory to the issue of nuclear war. In one passage, he discussed the U.S.-Soviet conflict in the terms of a hypothetical duel. He wrote “if both [duelists] were assured of living long enough to shoot back with unimpaired aim, there would be no advantage in jumping the gun and little reason to fear that the other would try it.” Thus “schemes to avert surprise attack have as their most immediate objective the safety of weapons rather than the safety of people.” This means that to have a credible deterrent against a Soviet first strike that would destroy many of its people, the U.S. government needed to defend its weapons first, rather than its citizens first. While the government may appear to be placing the value of its weapons above the lives of its citizens, the threat of deterrence is not credible if the weapons are exposed. One of Schelling’s Harvard colleagues, Richard Zeckhauser, wrote: Those who read Schelling and participate in his games learn a more general principle: In any interactive situation it is vitally important to look at matters from the side of other party. (The other-people’s-shoes approach is often recommended by soft-hearted promoters of compromise. The core principle, however, is that by understanding the other party’s perspective you will improve your comprehension of the situation dramatically and will come out better yourself. This is an important lesson for hard hearts as well.) Surprisingly, many parties to important negotiations never grasp this simple principle.1 Schelling developed another important concept in game theory: the significance of pre-commitment in interactions. An actor can be made better off if his choices are limited in advance. For example, a firm may invest in now-unneeded capacity to deter competitors from entering a market. Or a general may destroy a retreat route to signal to the enemy, and his troops, that he is committed to the coming battle. A bus driver who cannot physically open the fare box is safer than one who can. Schelling studied the ability of actors to coordinate their behavior even when not able to communicate. He observed that coordinative solutions in games were arrived at more often than theory would predict. These “focal points” (sometimes called “Schelling points”) were reached frequently due to the actors’ shared frames of reference, Schiller reasoned, such as social conventions and norms. One such game consists of two people being asked each to select a positive integer. If both choose the same number, they both receive a reward. While there are infinite options, both people typically choose the number 1, since it is the smallest positive integer. Similarly, when a person is told that he must meet someone else in New York City at an unspecified place and time, many say — independently — that they would try under the clock in Grand Central Terminal at noon. The focal points just described represent beneficial coordination from actors who are unable to communicate. Automotive traffic can be considered an example of a lack of coordination from actors unable to communicate. For instance, congestion might occur in the inbound lane, even though an accident occurred in the outbound lane. If each driver inbound slows down by only three seconds to look, and if there are 300 slowing drivers, the result is a 15-minute delay. Schelling explained that even though each person knows this, the problem still exists. When a person has paid her 15 minutes, she wants the “reward” of seeing what happened. Schelling noted that many problems such as traffic congestion occur because it is too difficult to enter an exchange. In Micromotives and Macrobehavior he wrote, “Small children learn to trade stamps with an acumen that the real estate fraternity can only envy, but their parents can travel incommunicado behind a slow truck on a mountain grade without finding a way to make it worth the truck driver’s time to pull off the road for 15 seconds.” He also showed that an integrated neighborhood can become quite segregated as long as each person wants at least one third of the neighbors to be like him. When one person moves to get a preferred set of neighbors, it causes a chain reaction that settles down only when the neighborhood is fairly segregated. Schelling did not do formal proofs. Instead, he told illustrative stories and then explained why things happened the way they did. Zeckhauser wrote, in the tribute quoted above, that Schelling “stayed away from the Journal of Advanced Economic Gobbledygook.” In his 1991 presidential address to the American Economics Association,2 Schelling pointed out that the expected effects of global warming on developed countries would hardly be noticeable and might be good: He noted as evidence that when people retire, they typically move to warmer climates. Although the effects on poor countries would be more serious, he argued that compensating them would be cheaper than investing the then-$200 billion a year ($350 billion in 2016 dollars) to slow global warming. One of Schelling’s most-fascinating collections of stories is in his Richard T. Ely lecture on self-control to the American Economic Association. Schelling started with an “increasingly familiar occurrence” of women asking their obstetrician to withhold anesthesia during delivery even to the point of asking that there be no nitrous oxide available even if she changed her mind in the moment. He called this an instance of the “general anomaly of anticipatory self-command. This phenomenon, he said, does not fit “easily into a discipline concerned with rational decision, revealed preference, and optimization over time.”3 Early in the Vietnam war, Schelling advised his friend John McNaughton, an Assistant Secretary of Defense under Lyndon Johnson, on how to escalate bombing strikes against North Vietnam to intimidate the North Vietnamese government. Operation Rolling Thunder, begun on March 2, 1965, was not successful in conquering the North Vietnamese will. Later, Schelling was an advisor to President Nixon’s National Security Adviser Henry Kissinger. In 1970, according to Daniel Ellsberg, who had been a student of Schelling’s at Harvard, Schelling was among the Harvard scholars who visited Kissinger to resign en masse over the secret bombing of Cambodia.4 Schelling thought that refraining from using nuclear weapons is so important that he devoted his whole Nobel Prize lecture to the importance of the nuclear taboo. He stated: The most spectacular event of the past half century is one that did not occur. We have enjoyed sixty years without nuclear weapons exploded in anger. What a stunning achievement – or, if not achievement, what stunning good fortune.5 In that same lecture, Schelling stated: There has never been any doubt about the military effectiveness of nuclear weapons or their potential for terror. A large part of the credit for their not having been used must be due to the “taboo” that Secretary of State Dulles perceived to have attached itself to these weapons as early as 1953, a taboo that the Secretary deplored. Schelling earned his A.B. in economics from the University of California, Berkeley in 1944, and his Ph.D. from Harvard University in 1951. He worked for the Marshall Plan in Europe and the RAND Corporation. He has taught at Yale, Harvard, and the University of Maryland. He has been elected to the National Academy of Sciences, the Institute of Medicine, and the American Academy of Arts and Sciences. He was an adviser to movie director Stanley Kubrick for the classic 1964 movie Dr. Strangelove: or How I Learned to Stop Worrying and Love the Bomb. Selected Works   1960. The Strategy of Conflict. Cambridge: Harvard University Press. 1966. Arms and Influence.New Haven: Yale University Press. 1977. Micromotives and Macrobehavior. New York: Norton. 1984. Choice and Consequence: Perspectives of an Errant Economist. Cambridge: Harvard University Press.   Footnotes 1. Zeckhauser, Richard, “Distinguished Fellow: Reflections on Thomas Schelling,” Journal of Economic Perspectives, Vol. 3, No. 2, (Spring 1989), pp. 153-164.   2. A shortened version of that address is in Schelling, Thomas C., “Greenhouse Effect,” in David R. Henderson, ed. The Concise Encyclopedia of Economics, 1st ed. at http://www.econlib.org/library/Enc1/GreenhouseEffect.html.   3. Schelling, Thomas C., “Self-Command in Practice, in Policy, and in a Theory of Rational Choice,” American Economic Review, Vol. 74, No. 2 (May 1984), pp. 1-11.   4. Ellsberg, Daniel, Secrets: A Memoir of Vietnam and the Pentagon Papers, New York: Viking Penguin, 2002, p. 348.   5. “Thomas C. Schelling – Prize Lecture: An Astonishing Sixty Years: The Legacy of Hiroshima.” nobelprize.org. Nobel Media AB 2014. Web. 20 Jun 2016. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2005/schelling-lecture.html   (0 COMMENTS)

Edmund S. Phelps was awarded the 2006 Nobel Prize in economic science “for his analysis of intertemporal tradeoffs in macroeconomic policy.” He focused on two distinct areas of macroeconomics: the tradeoff between unemployment and inflation and capital accumulation and economic growth. In the early 1960s, many economists believed that the tradeoff between unemployment and inflation was stable. (See phillips curve) Government policy makers, according to this view, could pick a combination of inflation and unemployment almost as if they were ordering from a menu. In the late 1960s, however, Phelps challenged this view by going back to basics—that is, by considering how individual employees and employers act. He assumed that employees would act based on their expectations of future inflation. If they expected, say, 3% inflation, they would build this into their wage bargains. But what if the Federal Reserve increased the money supply at a rate that caused a 5% inflation rate? Then, with this higher inflation rate, wages offered would be higher than expected also. Unemployed workers looking for work would see wages that they would mistakenly think were higher in real terms and would, therefore, accept jobs at these wages sooner than otherwise. Millions of unemployed workers taking jobs just a few weeks earlier would result in a lower unemployment rate. Then, however, workers’ expectations would be adaptive; that is, they would adjust to reality. They would realize that the wages weren’t as high in real terms as they had thought, and some would quit and look for more lucrative work, thus slowly raising the unemployment rate. In other words, policy makers could temporarily reduce the unemployment rate by making inflation higher than people expected, but they could not achieve a long-run reduction in unemployment with an increase in inflation. In the long run, then, there is no tradeoff between inflation and unemployment. This striking finding is now mainstream economic wisdom. Phelps was not the first to point this out. 1976 Nobel laureate milton friedman had done so in his 1967 Presidential Address to the American Economic Association,1 as Phelps himself noted. And Phelps also credited Austrian economist ludwig von mises’ book The Theory of Money and Credit, first published in 1911. But Phelps gets the credit because—this is not his fault— academic economists now insist on formal models. Nor was Phelps the last to point out the “no tradeoff” result. 1995 Nobel laureate robert lucas introduced “rational expectations” rather than “adaptive expectations.” The idea is that people would try to anticipate the future based on how the monetary authorities had acted in similar circumstances in the past. With this approach, Lucas found even stronger results. Lucas’s model implied that the only way that policy makers could use monetary policy to affect the unemployment rate was by being unpredictable. Phelps’s other major work acknowledged by the Swedish Academy was on capital accumulation and economic growth. In the early 1960s, he derived the “Golden Rule” of capital formation. The rule is that if one’s goal is to attain the maximum consumption per capita that is sustainable in the long run, annual saving as a percent of national income should equal capital’s income as a percent of national income. In the late 1960s, Phelps did further work in this area with Robert Pollak. They argued that the government should force people to save more than they wish, on the grounds that people put too little weight on their children’s well-being. It seems that the political system, though, does the opposite, especially at the federal level. The federal government taxes the politically powerless younger generation to subsidize—through Medicare and Social Security—today’s politically powerful elderly. Edmund S. Phelps is difficult to categorize politically. On the one hand, he decries the lack of dynamism in Europe and wants European governments to deregulate their economies.2 On the other, he believes that low-end jobs do not pay enough and wants the government to subsidize such jobs. He understands that the minimum wage prices people out of labor markets, resulting in “idleness, deprivation, drugs and crime.” So, in his 1997 book, Rewarding Work: How to Restore Participation and Self-Support to Free Enterprise, he advocated a vast subsidy program that would have cost $125 billion in 1997 dollars, a substantial 1.5% of that year’s GDP. Among Phelps’s other contributions, two stand out. The first is on dynamism and entrepreneurship. In Mass Flourishing: How Grassroots Innovation Creates Jobs, Challenge, and Change, Phelps argues that a competitive innovative economy is good, not just for consumers, as joseph schumpeter argued (see creative destruction), but also for workers and producers. In Phelps’s view, a dynamic competitive economy helps humans to flourish. Phelps worries that the U.S. economy has become as sclerotic and corporatist as European economies. What is needed for dynamism, he argues, is not just a good amount of economic freedom but also individualism. The second is on population. In 1968, long before Julian Simon popularized the idea that population growth is good, Phelps made the same argument: The more people there are, the more ideas are developed, and ideas, once developed, can be transferred to others at almost no cost. He wrote: “One can hardly imagine, I think, how poor we would be today were it not for the rapid population growth of the past to which we owe the enormous number of technological advances enjoyed today. . . . If I could re-do the history of the world, halving population size each year from the beginning of time on some random basis, I would not do it for fear of losing Mozart in the process.”3 Edmund S. Phelps earned his B.A. from Amherst College in 1955, majoring in economics. He earned his Ph.D. in economics from Yale University in 1959, studying under future Nobel laureates James Tobin and Thomas Schelling. After graduating, he worked for the RAND Corporation for a year. He then taught at Yale (1960-1962), the Massachusetts Institute of Technology (1962-1963), Yale again (1963-1966), the University of Pennsylvania (1966-1971), New York University (1978-1979), and Columbia University (1971-Present), where he has been the Director of the Center on Capitalism and Society since 2001. He has also held positions in Europe, as a consultant for the European Bank for Reconstruction and Development (1992-1993), a Senior Advisor to the Consiglio delle Ricerche (1997-2000), and a Research Fellow at the Observatoire Français des Conjonctures Économiques (2001-Present). Selected Works   1961. “The Golden Rule of Accumulation: A Fable for Growthmen.” The American Economic Review Vol. 51, No. 4 (Sep., 1961), pp. 638-643. 1966 (with Richard R. Nelson). “Investment in Humans, Technological Diffusion, and Economic Growth.” The American Economic Review Vol. 56, No. 2 (Mar., 1966), pp. 69-75. 1967. “Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time.” Economica Vol. 34, No. 135 (Aug., 1967), pp. 254-281. 1968 (with Robert Pollak). “On Second-Best National Saving and Game-Equilibrium Growth.” The Review of Economic Studies Vol. 35, No. 2 (Apr., 1968), pp. 185-199. 1968. “Money-Wage Dynamics and Labor-Market Equilibrium.” Journal of Political Economy Vol. 76, No. 4, Part 2 (Jul. – Aug., 1968), pp. 678-711. 1979 (with Janusz Ordover). “On the Concept of Optimal Taxation in the Overlapping-Generations Model of Economic Growth.” The Journal of Public Economics Vol. 12, Iss. 1 (August 1979), pp. 1–26. 1979. “Justice in the Theory of Public Finance.” The Journal of Philosophy Vol. 76, No. 11 (Nov., 1979), pp. 677-692. 1997 (with Gylfi Zoega). “Persistent Unemployment: The Rise and Downward Trend of the Natural Rate.” The American Economic Review Vol. 87, No. 2 (May, 1997), pp. 283-289. 2013. Mass Flourishing: How Grassroots Innovation Creates Jobs, Challenge, and Change. Princeton, NJ: Princeton University Press.   Footnotes 1. Friedman, Milton. “The Role of Monetary Policy.” American Economic Review Vol. 58, No. 1 (Mar. 1968), pp. 1-17. http://www.aeaweb.org/aer/top20/58.1.1-17.pdf   2. See, for example, Phelps, Edmund S., “Capitalism vs. Corporatism”, Critical Review Vol. 21, No. 4, pp. 401-414.   3. Phelps, Edmund S. “Population Increase”, The Canadian Journal of Economics, Vol. 1, No. 3 (Aug., 1968), p. 512.   (0 COMMENTS)

In 2008, U.S. economist Paul Krugman won the Nobel Prize in Economic Sciences. Krugman, one of the best-known economists in the world, is familiar to the public mainly through his regular column in the New York Times and for his New York Times blog titled “The Conscience of a Liberal.” Besides being an original theorist in international trade, economic geography, and macroeconomics, Krugman has been one of his generation’s best expositors of good economics. His excellent book Pop Internationalism and his popular articles of the 1990s, many of them in the web publication Slate, make a strong case for free trade. Krugman’s defense of free trade is not what earned him the Nobel Prize. Rather, the prize was awarded for his work of the late 1970s, explaining patterns of international trade, and for his work in the early 1990s on economic geography. In the late 1970s, Krugman noticed that the accepted model that economists used to explain patterns of international trade did not fit the data. The Hecksher-Ohlin model predicted that trade would be based on such factors as the ratio of capital to labor, with “capital-rich” countries exporting capital-intensive goods and importing labor-intensive goods from “labor-rich” countries. But Krugman noticed that most international trade takes place between countries with roughly the same ratio of capital to labor. The auto industry in capital-intensive Sweden, for example, exports cars to capital-intensive America, while Swedish consumers also import cars from America. Krugman was not the first to notice this fact or even the first to explain it. Krugman himself attributed the insight to earlier work by Bela Belassa, Herbert G. Grubel, and Irving B. Kravis. Krugman explained it with a simple, yet elegant and rigorous, model in which monopolistic competition was key. Under monopolistic competition, each firm’s product is differentiated from each other firm’s product. But monopolistically competitive firms compete with each other and competition drives economic profits to zero. In the monopolistically competitive equilibrium, each firm has unexploited economies of scale. For example, both Volvo and General Motors could reduce average costs by producing a larger output in particular niches of the market. But they don’t because they could so only by reducing their price, and that would cost them profits. In presenting his trade model, Krugman planted the seeds for his later work in economic geography, in which he tried to explain the location of economic activity. He summarized his basic finding as follows: Because of economies of scale, producers have an incentive to concentrate production of each good or service in a limited number of locations. Because of the cost of transacting across distance, the preferred locations for each individual producer are those where demand is large or supply of inputs is particularly convenient—which in general are the locations chosen by other producers. Thus [geographical] concentrations of industry, once established, tend to be self-sustaining; this applies both to the localization of individual industries and to such grand agglomerations as the Boston-Washington corridor.1 In macroeconomics, one of Krugman’s key contributions is his 1998 paper on Japan’s liquidity trap. In that paper, he argued that Japan’s interest rates were so low that its economy was in a liquidity trap in which money and bonds were “essentially perfect substitutes.” This meant that increasing the money supply to get the economy out of a recession would not work because it would be like “pushing on a string.” Krugman’s suggested solution was not an expansionary fiscal policy and not an increased money supply per se. Rather, he argued for a credible commitment by Japan’s central bank to raise the expected inflation rate. Doing that would encourage people to reduce their cash balances and spend more. In his popular writing, Krugman is at his best when defending free trade. He becomes passionate, showing a deep concern for the well-being of people around the world. One such example is “In Praise of Cheap Labor,” published in Slate in 1997. In it, Krugman told of Smokey Mountain, a huge garbage dump in Manila in which men, women, and children made a living combing through garbage for valuable items. Low-wage jobs in multinational companies’ factories in the Philippines, Bangladesh, and other poor countries, he noted, are much better alternatives. Because multinational companies hired many of these poor workers, he wrote that “the result has been to move hundreds of millions of people from abject poverty to something still awful but nonetheless significantly better.”2 One of Krugman’s most powerful articles is “Ricardo’s Difficult Idea.” In that piece, Krugman shared his frustration, one that many economists have felt, that the vast majority of non-economist intellectuals do not understand the insight that david ricardo had about free trade almost 200 years ago. Ricardo’s insight was that people specialize in producing the goods and services in which they have a comparative advantage. The result is that we never need to worry about low-wage countries competing us out of jobs because the most they can do is change the items in which we have a comparative advantage. Krugman pointed out that, although we can explain Ricardo’s insight to our economics students, most non-economist intellectuals are unwilling to take even ten minutes to understand it. But that does not stop them from writing about trade as if they’re informed. Krugman singled out Robert Reich’s 1983 article, “Beyond Free Trade.” The article, wrote Krugman, “received wide attention, even though it was fairly unclear exactly how Reich proposed to go beyond free trade.” In 1990, on the issue of income inequality, Krugman wrote: One reason that action to limit growing income inequality in the United States is difficult is that the growth in inequality is not a simple picture. Old-line leftists, if there are any left, would like to make it a single story—the rich becoming richer by exploiting the poor. But that’s just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don’t work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor. (In constant dollars, the increase in per family income among the top tenth of the population in the 1980s was about a dozen times as large as the decline among the bottom tenth.)3 In a 1996 Slate column, “The CPI and the Rat Race,” Krugman wrote, “[M]ost families in 1950 had a material standard of living no better than that of today’s poor and near-poor.” He confirmed this with direct measures of people’s living standards: indoor plumbing, telephones, cars, and TVs. He argued that what matters to most people is their income relative to that of others. Nevertheless, he noted how well even the poor were doing in the 1990s. In 2000, Krugman also pointed to “eurosclerosis,” a term that German economist Herbert Giersch coined in the 1970s. Krugman defined it as “a labor market so clogged with government rules and regulations that European companies have had little incentive to create new jobs—especially the low-wage jobs that in the United States provide the young and minority groups with a first step into the world of work.”4 In his blog and his New York Times column, Krugman often denounces his opponents. One main target has been former President George W. Bush, but he also has attacked prominent economists such as robert e. lucas of the University of Chicago and Harvard University’s Kenneth Rogoff. One of his fans and supporters, former Boston Globe economics columnist David Warsh, wrote, “[Krugman’s] habitual thumb on the scale has become contempt for the balance itself.”5 Krugman is Distinguished Professor of Economics at the Graduate Center of the City University of New York. Previously, he was Professor of Economics and International Affairs at Princeton University and was on the faculties of MIT and Stanford University. In 1991, he received the John Bates Clark Award, given biennially (since 2010, it has been annual), to “that American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge.” He earned his B.A. from Yale University in 1974 and his Ph.D. from MIT in 1977. Selected Works   1979. “A Model of Balance of Payments Crises.” Journal of Money, Credit, and Banking. (August): 311-325. 1979. “Increasing Returns, Monopolistic Competition, and International Trade.” Journal of International Economics. 9 (November): 469-79. 1981. “Intra-industry Specialization and the Gains from Trade.” Journal of Political Economy. 89, no. 5. (October): 959-973. 1991. “Increasing Returns and Economic Geography.” Journal of Political Economy. 99, no. 3. (June): 483-99. 1991. “Target Zones and Exchange Rate Dynamics.” Quarterly Journal of Economics. 106, no 3. (August): 669-82. 1991. Geography and Trade. Cambridge, MA: MIT Press. 1996. “The CPI and the Rat Race.” Slate. December 21. http://web.mit.edu/krugman/www/ratrace.html 1996. “Ricardo’s Difficult Idea.” http://web.mit.edu/krugman/www/ricardo.htm 1996. Pop Internationalism. Cambridge, MA: MIT Press. 1998. “It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap.” Brookings Papers on Economic Activity 1998: 137-205. 2012. (With Gauti B. Eggertsson). “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach.” Quarterly Journal of Economics. 127, no. 3: 1469-1513.   Footnotes 1. Paul Krugman. Geography and Trade. Cambridge, MA: MIT Press, 1991, p. 98.   2. Paul Krugman. “In Praise of Cheap Labor.” Slate. March 21, 1997 at: http://www.slate.com/articles/business/the_dismal_science/1997/03/in_praise_of_cheap_labor.html   3. Paul Krugman. The Age of Diminished Expectations: U.S. Economic Policy in the 1990s. Cambridge, MA: MIT Press. 1992. (First published by Washington Post Company in 1990.), p. 22.   4. Paul Krugman, “Reckonings: Blessed Are the Weak,” New York Times, May 3, 2000 at http://www.nytimes.com/2000/05/03/opinion/reckonings-blessed-are-the-weak.html   5. David Warsh, “Footnote to a Current Controversy,” Economic Principals, May 26, 2013, at http://www.economicprincipals.com/issues/2013.05.26/1507.html   (0 COMMENTS)

  Robert Shiller received the 2013 Nobel Prize in Economic Sciences, sharing it with Eugene Fama and Lars Peter Hansen. The three received the prize “for their empirical analysis of stock prices.” Shiller argued that rational investors would price a stock at the present value of expected future dividends. However, he found (assuming that the real interest rate is constant) that stock prices fluctuate more than can be explained by fluctuations in dividends. Shiller attributed this larger-than-expected variance to psychological factors, arguing that investors must not be acting rationally (or, at least, not perfectly rationally). Because of this, he concluded, the stock market must be inefficient. This finding challenged the widely-accepted theory of efficient markets and set off a revolution in finance. It is now recognized that high stock prices relative to earnings signal lower subsequent returns and vice-versa. This means, as George Mason University economist Tyler Cowen has noted, that, in contrast to the efficient markets hypothesis, in the long-term a patient investor should be able to beat the market by betting against short-term market movements.1 So, for example, if the price has fallen more than can be explained by relatively steady dividends, the prudent investor would buy and hold. Shiller’s reasoning becomes more intuitive when it is applied to forecasting other binary events, such as sports games (stock price movements can be considered binary because the price either increases or decreases). Over many games, the forecasted point differentials have a smaller variance than the games’ actual point differentials. Sometimes a team will win by a lot and other times it will lose by a lot. The forecast reflects the average expected outcome of the game. Shiller equated the stock price to the forecasted point differential and the stock’s realized returns (its dividends) to the results. He found that market forecasts varied much more than their relatively stable observed results. If this occurred in sports, predicted outcomes would vary wildly even if a team nearly always won by a certain margin. In the 2009 edition of his book Irrational Exuberance, Shiller wrote, “The stock market increase from 1994 to 2000 could not obviously be justified in any reasonable terms. Basic economic indicators did not come close to tripling. Over this same interval, U.S. gross domestic product rose less than 40% and corporate profits rose less than 60%, and that from a temporary recession-depressed base. Viewed in the light of these figures, the stock price increase appears unwarranted.”2 It should be noted that the stock price is derived from the present value of expected future earnings. So if future earnings are expected to be substantially higher than current earnings, a high ratio of price to current earnings could well be justified. Shiller’s most important contribution to economic measurement is the Case-Shiller index of housing prices, which he developed with economists Karl Case and Allan Weiss. Its main virtue is that, unlike other housing price indices, it is based on data on repeat sales of single-family homes. Shiller predicted two major asset bubbles, assets prices that are higher than justified by market fundamentals. In March 2000, he claimed that the U.S. stock market had become a bubble. This, in fact, was the height of the dot-com boom. In 2003, Shiller began arguing that the U.S. housing market was experiencing a bubble. In the long run, he argued, housing prices should tend toward the sum of building costs and normal economic profit; this was far outstripped by the housing prices Shiller observed. In the years after 2003, though, housing prices continued to rise, and even at their bottom in 2009, U.S. housing prices were not well below their 2003 level. The Case-Shiller index was at 130 when he claimed the bubble, peaked in 2005 at 175, and fell to a low of 117 in 2009. In his 2013 book Finance and the Good Society, Shiller shows that while the public typically views finance as something sinister, this view is frequently unjustified. For example, Shiller explains and defends derivatives. The term “derivatives,” he notes, “has become a dirty word.” But a derivative “is merely a financial product that derives from another market, and is not inherently good or evil.”3 Shiller points out that derivatives go back a long way, even having been mentioned by Aristotle. Shiller’s case for derivatives is the standard one: They allow people to, in essence, buy insurance against a loss in the value of an asset. In Finance and the Good Society, Shiller also wrote that government pensions should be “indexed to some indicator of taxpayer ability to pay, such as GDP.”4 So, for example, the government might allocate x percent of GDP to Social Security and y percent to Medicare and then, based on those percentages, adjust payments and benefits annually. That way, taxpayers and pension recipients split the risk rather than having it all fall on taxpayers. Shiller has expressed support for substantial government wealth transfers. In an interview in the Wall Street Journal, asked what to do about wealth inequality, he said: “If billionaires turn into multi-billionaires, we don’t let that happen. If you want to make $10 billion and spend it on yourself, we won’t let you. We will take a good fraction of it, and you’ll still be a billionaire, so what?” When asked, “So we would more aggressively redistribute income from the top?,” Shiller responded, “From selfish people at the top who don’t want to give it away.” Robert Shiller earned his B.A. from the University of Michigan in 1967, and his Ph.D. from MIT in 1972. Shiller was Vice President of the American Economic Association in 2005, and President of the Eastern Economic Association in 2006 and 2007. He has been a research associate for the National Bureau of Economic Research since 1980. His main academic positions have been at the University of Pennsylvania (1974-81), the Wharton School of Business (1981-82), and Yale University (1982-Present. Selected Works   1980. “Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?” National Bureau of Economic Research Working Paper No. 456 (Feb., 1980). 1988. “The Dividend-Price Ratio and Expectations of Future Dividends and Discount factors.” Oxford Journals: The Review of Financial Studies Vol. 1, Iss. 3, pp. 195-228. 2000. Irrational Exuberance. New York: Random House. 2013. Finance and the Good Society. Princeton: Princeton University Press.   Footnotes 1. See Tyler Cowen, “Robert Shiller, Nobel Laureate,” Marginal Revolution, October 14, 2013. http://marginalrevolution.com/marginalrevolution/2013/10/robert-shiller-nobel-laureate.html   2. Shiller, Robert J. Irrational Exuberance, Second Edition, p. 2, Princeton University Press, 2009.   3. Shiller, Robert J. Finance and the Good Society, p. 75, Princeton University Press, 2013.   4. Shiller, Robert J. Finance and the Good Society, p. 149.   (0 COMMENTS)

Robert Solow was awarded the Nobel Prize in 1987 “for his contributions to the theory of economic growth.” His first major paper on growth was “A Contribution to the Theory of Growth.” In it he presented a mathematical model of growth that was a version of the Harrod-Domar growth model (see roy f. harrod). The main difference between his model and the Harrod-Domar model lay in Solow’s assumption that wages could adjust to keep labor fully employed. Out the window went the Harrod-Domar conclusion that the economy was on a knife edge. Solow soon followed that paper with another pioneering article, “Technical Change and the Aggregate Production Function.” Before it was published, economists had believed that capital and labor were the main causes of economic growth. But Solow showed that half of economic growth cannot be accounted for by increases in capital and labor. This unaccounted-for portion of economic growth—now called the “Solow residual”—he attributed to technological innovation. His article originated “sources-of-growth accounting,” which economists use to estimate the separate effects on economic growth of labor, capital, and technological change. Solow also was the first to develop a growth model with different vintages of capital. The idea was that because capital is produced based on known technology, and because technology is improving, new capital is more valuable than old capital. A keynesian, Solow has been a witty critic of economists ranging from interventionists like Marxist economists and john kenneth galbraith to relatively noninterventionist economists such as milton friedman. Solow once wrote that Galbraith’s disdain for ordinary consumer goods “reminds one of the Duchess who, upon acquiring a full appreciation of sex, asked the Duke if it were not perhaps too good for the common people.” Of Milton Friedman, Solow wrote, “Everything reminds Milton of the money supply. Well, everything reminds me of sex, but I keep it out of the paper.” Solow earned his Ph.D. from Harvard, where he studied under Wassily Leontief, and has been an economics professor at MIT since 1950. From 1961 to 1963 he was a senior economist with President John F. Kennedy’s Council of Economic Advisers. In 1961 he received the American Economic Association’s John Bates Clark Award, given to the best economist under age forty. In 1979 he was president of that association. Selected Works   1956. “A Contribution to the Theory of Economic Growth.” Quarterly Journal of Economics 70 (February): 65–94. 1957. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics 39 (August): 312–320. 1958 (with Robert Dorfman and Paul Samuelson). Linear Programming and Economic Analysis. New York: McGraw-Hill. 1963. Capital Theory and the Rate of Return. Amsterdam: North-Holland. 1967. “The New Industrial State, or Son of Affluence.” Public Interest 9: 108.   (0 COMMENTS)

  In 1969 Dutch economist Jan Tinbergen and Norwegian economist Ragnar Frisch shared the first Nobel Prize in economics “for having developed and applied dynamic models for the analysis of economic processes.” Tinbergen, who held a Ph.D. in physics, had become interested in economics while working on his dissertation, “Minimum Problems in Physics and Economics” (1929). He began to apply mathematical tools to economics, which at the time was a relatively verbal and nonmathematical discipline. In 1929 he joined a unit of the Dutch Central Bureau of Statistics to do research on business cycles. He stayed there until 1945, taking a leave of absence from 1936 to 1938 to work for the League of Nations in Geneva. Along with Frisch and others Tinbergen developed the field of econometrics, the use of statistical tools to test economic hypotheses. Tinbergen was one of the first economists to create multiequation models of economies. He produced a twenty-seven-equation econometric model of the Dutch economy, and his 1939 book, Business Cycles in the United States, 1919–1932, includes a forty-eight-equation model of the American economy that explains investment activity and models American business cycles. Another of Tinbergen’s major contributions was to show that a government with several economic targets—for both the unemployment rate and the inflation rate, for example—must have at least as many policy instruments, such as taxes and monetary policy. Selected Works   1939. Business Cycles in the United States, 1919–1932. Geneva: League of Nations. 1951. Business Cycles in the United Kingdom, 1870–1914. Amsterdam: North-Holland. 1952. On the Theory of Economic Policy. Amsterdam: North-Holland.   (0 COMMENTS)

George Stigler was the quintessential empirical economist. Paging through his classic microeconomics text The Theory of Price, one is struck by how many principles of economics are illustrated with real data rather than hypothetical examples. Stigler deserves a great deal of the credit for getting economists to look at data and evidence. Stigler’s two longest-held positions were at Columbia University (1947–1958) and at the University of Chicago (1958–1991). From the early 1950s to the late 1960s, most of his research was in the field of industrial organization. A typical Stigler article laid out a new proposition with clear reasoning and then presented simple but persuasive data to back up his argument. Take, for example, Stigler’s “A Note on Block Booking.” Block booking of movies was the offer of a fixed package of movies to an exhibitor; the exhibitor could not pick and choose among the movies in the package. The Supreme Court banned the practice on the grounds that the movie companies were compounding a monopoly by using the popularity of the winning movies to compel exhibitors to purchase the losers. Stigler disagreed and presented a simple alternative argument. If Gone with the Wind is worth $10,000 to the exhibitor and Getting Gertie’s Garter is worth nothing, wrote Stigler, the distributor could get the whole $10,000 by selling Gone with the Wind. Throwing in a worthless movie would not cause the exhibitor to pay any more than $10,000. Therefore, reasoned Stigler, the Supreme Court’s explanation seemed wrong. But why did block booking exist? Stigler’s explanation was that if exhibitors valued films differently from one another, the distributor could collect more by “bundling” the movies. Stigler gave an example in which exhibitor A is willing to pay $8,000 for movie X and $2,500 for Y, and B is willing to pay $7,000 for X and $3,000 for Y. If the distributor charges a single price for each movie, his profit-maximizing price is $7,000 for X and $2,500 for Y. The distributor will then collect $9,500 each from A and B, for a total of $19,000. But with block booking the seller can charge $10,000 (A and B each value the two movies combined at $10,000 or more) for the bundle and make $20,000. Stigler then went on to suggest some empirical tests of his argument and actually did one, showing that customers’ relative tastes for movies, as measured by box office receipts, did differ from city to city. Stigler’s thinking on government regulation was even more influential than his work on industrial organization. Because of Stigler’s research, economists view regulation much more skeptically than their counterparts of the 1950s did. His first article on the topic, coauthored with longtime research assistant Claire Friedland and published in 1962, was titled “What Can Regulators Regulate? The Case of Electricity.” They found that regulation of electricity prices had only a tiny effect on those prices. In the late 1970s, their finding was challenged by Gregg Jarrell, himself a Stigler student. But more important than this finding was their demonstration that one could examine the actual effects of regulation, and not just theorize about them. Stigler devoted his entire 1964 presidential address to the American Economic Association to making this point. He argued that economists should study the effects of regulation and not just assume them. He twitted the great economists of the past who had given lengthy cases for and critiques of government regulation without ever trying to study its effects. In Stigler’s view things were not much better in the twentieth century. “The economic role of the state,” he said, “has managed to hold the attention of scholars for over two centuries without arousing their curiosity.” Stigler added, “Economists have refused either to leave the problem alone or to work on it.” Many economists got the point. Since the mid-1960s, economists have used their sometimes awesome empirical tools to study the effects of regulation. Whole journals have been devoted to the topic. One is the Journal of Law and Economics, started at the University of Chicago in 1958. Another, the Bell Journal of Economics and Management Science, later the RAND Journal, started in 1970. As a general rule economists have found that government regulation of industries harms consumers and often gives monopoly power to producers. Some of these findings were behind economists’ widespread support for the deregulation of transportation, natural gas, and banking, which gained momentum in the Carter administration and continued until halfway through the Reagan administration. Stigler was the single most important academic contributor to this movement. Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal 1971 article, “The Theory of Economic Regulation,” he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession. It has now become the mainstream view. For his earlier work on industrial organization and his work on the effects and causes of regulation, Stigler was awarded the 1982 Nobel Prize for economics. Stigler was an uncommonly clear and humorous writer. Economics from him never seemed like “the dismal science.” With his sometimes biting wit, he could put a profound insight into one sentence. In discussing the benefits of capitalism, for example, Stigler wrote: “Professors are much more beholden to Henry Ford than to the foundation that bears his name and spreads his assets.” Not to be missed in a listing of Stigler’s contributions is his research on information. His 1962 article “Information in the Labor Market” was a watershed for further studies on unemployment. According to Stigler, job seekers needed short periods of unemployment in order to search for a higher wage. Even in industries with a “going wage,” variances in wage rates still exist. Therefore, the unemployed are as much information seekers as job seekers. His theory is now called the theory of search unemployment. Information is also a problem for firms when they collude, implicitly or explicitly, to set prices. They do not know whether their competitors are secretly undercutting them. This uncertainty can be reduced, wrote Stigler, by spending resources to gather information. Stigler applied this insight to show that collusion is less likely to succeed if there are more firms in a market. Also highly regarded as an economic historian, Stigler wrote numerous articles on the history of ideas in the early years of his career. His Ph.D. dissertation on the history of neoclassical production and distribution theories was highly acclaimed as a critical link in the chain of economic thought. Some of his articles in the area are collected in Five Lectures on Economic Problems (1950) and Essays in the History of Economics (1965). The entry on monopoly in this encyclopedia is one of Stigler’s last published works. Straight Talk from Stigler Sears, Roebuck and Company and Montgomery Ward made a good deal of money in the process of improving our rural marketing structure, but I am convinced that they did more for the poor farmers of America than the sum total of the federal agricultural support programs of the last five decades. Am I to admire a man who injures me in an awkward and mistaken attempt to protect me, and to despise a man who to earn a good income performs for me some great and lasting service? Smith’s intellectual heirs did little to strengthen his case for laissez-faire, except by that most irresistible of all the weapons of scholarship, infinite repetition. Advertising itself is a completely neutral instrument and lends itself to the dissemination of highly contradictory desires. While the automobile industry tells us not to drink while driving, the bourbon industry tells us not to drive while drinking…. Our colleges use every form of advertising, and indeed the typical university catalog would never stop Diogenes in his search for an honest man. When a good comedian and a production of Hamlet are on rival channels, I wish I could be confident that less than half the professors were laughing. Selected Works   1950. Five Lectures on Economic Problems. New York: Macmillan. 1965. Essays in the History of Economics. Chicago: University of Chicago Press. 1966. The Theory of Price. 3d ed. New York: Macmillan. 1969. The Organization of Industry. Homewood, Ill: Irwin. 1975. The Citizen and the State: Essays on Regulation. Chicago: University of Chicago Press. 1986. The Essence of Stigler. Edited by Kurt R. Leube and Thomas Gale Moore. Stanford: Hoover Institution Press. 1988. Memoirs of an Unregulated Economist. New York: Basic Books.   (0 COMMENTS)