George Stigler on mistaken decisions as an explanation of social phenomena
06 Aug 2014 Leave a comment
The power and self-discipline of parsimonious analysis
30 Jul 2014 Leave a comment
in Alfred Marshall, David Friedman, economics, George Stigler, Karl Popper Tags: methodology of economics
Some bristle over the small size of the basic analytical tool kit of economists and the leanness of the behavioural assumptions therein (Stigler 1987).
Simpler explanations and more parsimonious abstractions are better ‘engines for the discovery of concrete truth’ about how people will respond to changes in their economic and social environments.
A limited set of causes or postulates in a theory reduces the chances that one or more of the assumptions on a more extensive list inadvertently explains away in an ad hoc manner every possible anomaly, or allows for a deft reinterpretation and/or adaptation to temporise and escape refutation. An every growing number of auxiliary hypotheses and ah hoc assumptions to co-op inconvenient facts may forever immunise the basic theory under scrutiny against testing and falsification (Olson 1982; Popper 1963). More parsimonious abstractions are less likely to found theories that seem to have successfully explained a particular social phenomenon spuriously by chance.
Complex human objectives are not assumed in economic analysis because everything could be explained and nothing could be falsified. Every empirical anomaly could be covered in advance by assuming human objectives that are sufficiently complex and large enough in number that are pursued with a high frequency of error and inertia (Friedman 1990; Popper 1963).
Subsequent ad hoc reinterpretations that add new objectives or additional sources of human frailty can finesse major anomalies to make the basic theory compatible with the facts to side-step refutation. Heavily qualified theories and intricate explanations of narrow application rarely come in the open for long enough to be found wanting.
A good theory is a prohibition: the theory forbids certain things to happen. The more that a theory forbids, the better the theory is. Bold, novel and chancy predictions are even better still.
These predictions are less likely to explain social and economic behaviour spuriously by chance. If incorrect or incomplete, bold and novel predictions are more likely to be quickly found at odds with experience and the basic theory is either revised or is discarded (Popper 1963).
George Stigler on do business owners maximise profits?
29 Jul 2014 Leave a comment
in applied price theory, Armen Alchian, entrepreneurship, George Stigler, survivor principle, theory of the firm Tags: george stigler, market selection, profit-maximisation
Entrepreneurs often do not know why they survived in competition. George Stigler in his autobiography told this wonderful story about how you could not get businessmen to admit in a survey that they maximise profits.
You go to their office and asked them: Do they maximise profits?
Their answer would be, of course, not. I am here to provide employment to my workers and put a small amount aside for the education of my children.
The surveyor would then ask them: if you do were to raise your prices, do you expect to increase your profits?
The businessman answers no.
The surveyor how would then ask them: if you were to cut your prices, do you expect to increase your profits?
The businessman answers no.
The survey would then ask: can you point to a time in the last 12-months where you substituted profit for some other objective?
At this point of time, you would be thrown out of their office as some sort of lunatic.
George Stigler on Thomas Malthus – with relevance to his modern day successors
18 Jul 2014 Leave a comment
Regulation and competition are rhetorical friends and deadly enemies
06 Jul 2014 Leave a comment
in economics of regulation, George Stigler Tags: regulatory capture
George Stigler stubbornly insisted that regulations be judged by their actual results, not their intended results.
Gary Becker and George Stigler on continuity in economic thinking
17 Jun 2014 Leave a comment
in Gary Becker, George Stigler, history of economic thought Tags: methodology of economics
this recession had got a lot worse, we would have seen two major changes: much more government intervention in the economy, and a lot more concentration in economics in trying to understand what went wrong.
Assuming I’m right and, fundamentally, the recession is over—a severe recession but maybe not much greater than the 1981 recession, or those in the nineteen-seventies—I think you are not going to see a huge increase in the role of government in the economy.…
Economists will be struggling to understand how this crisis happened and what you can do to head another one off in the future, but it will be nothing like the revolution in the role of government and in thinking that dominated the economics profession for decades after the Great Depression.
If the problems of economic life changed frequently and radically, and lacked a large measure of continuity in their essential nature, there could not be a science of economics.
An essential element of a science is the cumulative growth of knowledge, and that cumulative character could not arise if each generation of economists faced fundamentally new problems calling for entirely new methods of analysis…
[Economics] will continuously be confronted with new circumstances which call for more than a routine application of standard knowledge. Thus the energy crisis of the nineteen-seventies has provided much employment to economists, but it has not called for important changes in economic science…
The responsiveness of economics to environmental problems will naturally be more complete and more prompt, the more urgent the problems of the day. The response will also be more complete, the less developed the relevant body of economic analysis.
The responsiveness of macroeconomics to contemporary events is notorious. Keynes’s conquest in the nineteen-thirties was due to the fact that the neoclassical theory could not account for the persistent unemployment of that decade. A generation later, persistent inflation even with less than full employment was equally decisive in ending Keynes’s supremacy. If and when macroeconomics produces a good theory of the business cycle, its responsiveness to environmental changes will diminish sharply
Stigler’s law of textual exegesis
18 May 2014 Leave a comment
in George Stigler, history of economic thought Tags: textual exegesis
There are cottage industries of academics living of the questions such as what did Marx actually say, or what did Keynes really mean? A sign that you have really made it is people squabbling over what you really said.
Stigler’s law of textual exegesis (1965) is that because even the great and the good are human enough to contradict themselves, change their minds, and even write in vague terms from time to time and are misheard, rely on their own summaries of their own work to work out what they really think rather than hand-picked quotation. You can then check if their analytical system supports their summaries of their main work:
Let us recognize the fact that the interpretation of a man’s position –– especially if the man has a complex and subtle mind –– is a problem in inference, not to be solved by the choice of quotations.
As for why we ponder over the great texts, our goal should not be to understand what an author really believed, instead it is
…to maximize the value of a theory to the science… The man’s central theoretical position is isolated and stated in a strong form capable of contradictions by facts. The net scientific contribution, if any, of a man’s work is thus identified, amended if necessary, and rendered capable of evaluation and possible acceptance.
Profit maximisation gets no respect
30 Mar 2014 2 Comments
in entrepreneurship, George Stigler, industrial organisation, survivor principle Tags: Armen Alchian, market selection, profit-maximisation, the market as an evolutionary process
Who would own up to personal greed and selfishness? But who sends a tip in with their taxes?
George Stigler said that if you ask business owners if they maximise profits, they say no, no, no. They are just there to provide employment, a service for their customers, and then they put a small amount aside for the education of their children.
Stigler then said that if you asked them if they lowered their prices, would they increase their profits, the answer is invariably no.
Stigler then said that if you asked them if they raised their prices, would they increase their profits, the answer is invariably no.
Stigler then said that if you asked them if they have in the last 12-months substituted some other objective for profit, they throw you out of their office.
What people do is far more important than what they say and what they say motivated them.
Alchian pointed out the evolutionary struggle for survival in the face of market competition ensured that only the profit maximising firms survived:
- Realised profits, not maximum profits, are the marks of success and viability in any market. It does not matter through what process of reasoning or motivation that business success is achieved.
- Realised profit is the criterion by which the market process selects survivors.
- Positive profits accrue to those who are better than their competitors, even if the participants are ignorant, intelligent, skilful, etc. These lesser rivals will exhaust their retained earnings and fail to attract further investor support.
- As in a race, the prize goes to the relatively fastest ‘even if all the competitors loaf.’
- The firms which quickly imitate more successful firms increase their chances of survival. The firms that fail to adapt, or do so slowly, risk a greater likelihood of failure.
- The relatively fastest in this evolutionary process of learning, adaptation and imitation will, in fact, be the profit maximisers and market selection will lead to the survival only of these profit maximising firms.
These surviving firms may not know why they are successful, but they have survived and will keep surviving until overtaken by a better rival. All business needs to know is a practice is successful. The reason for its success is less important.
Great store is placed in industry economics on how firms in direct competition in the same market producing even rather standard products such as cement can have far greater measured productivity than others. Some firms produce half as much output from the same measured inputs as their market rivals and still survive in competition (Syverson 2011).
As is too common, the conclusion is there is something wrong with the firms in these markets rather than with the analysis that fails to understand these puzzlingly large gaps in measured productivity.
Few ask the obvious question, which is how do these firms survive if they are so inferior to the market leaders. The important fact is they do survive. They must be doing something right for their customers that the productivity statistics miss.
One method of organising production and supplying to the market will supplant another when it can supply at a lower price (Marshall 1920, Stigler 1958). Gary Becker (1962) argued that firms cannot survive for long in the market with inferior product and production methods regardless of what their motives are. They will not cover their costs.
The more efficient sized firms are the firm sizes that are currently expanding their market shares in the face of competition; the less efficient sized firms are those that are currently losing market share (Stigler 1958; Alchian 1950; Demsetz 1973, 1976). Business vitality and capacity for growth and innovation are only weakly related to cost conditions and often depends on many factors that are subtle and difficult to observe (Stigler 1958, 1987).
An example is in Adam Smith’s study of religion. One thing he noticed was that religious sects with strict codes of honesty and intense mutual monitoring by co-congregants for the slightest moral lapses proliferated in cities. Many successful businessmen belonged to these strict religions. These highly religious businessmen were successful in their businesses because they were looked upon by the public as reliable trading partners in a time of weak law enforcement. These businessmen did not know that this was profit maximising but the businessmen with religious backgrounds slowly gained market share over rival firms that had less efficient ways of communicating both their reliability and that their personal honesty was under daily scrutiny.
Ethnic minorities are advantaged in the same way in business. Because of their extensive social interactions with each other because of their language or religious practices and inter-marriage, the costs of bad business behaviours are much higher due to the risk of social ostracism by everyone you know. This greater trustworthiness gives them a cost advantage in the marketplace even though they may be unaware of its source.
Utopia, you are standing in it! 
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