March 13, 2016

More Evidence for Stigler's Capture Theory

(p. A15) WASHINGTON -- Marilyn B. Tavenner, the former Obama administration official in charge of the rollout of, was chosen on Wednesday to be the top lobbyist for the nation's health insurance industry.

Ms. Tavenner, who stepped down from her federal job in February, will become president and chief executive of America's Health Insurance Plans, the trade group whose members include Aetna, Anthem, Humana, Kaiser Permanente and many Blue Cross and Blue Shield companies.

As the new voice for insurers, Ms. Tavenner will lead the industry in a time of tumultuous changes and challenges, including delicate negotiations with Congress over the future of the Affordable Care Act.

. . .

The board of America's Health Insurance Plans unanimously elected Ms. Tavenner at a meeting here on Wednesday, according to Mark B. Ganz, the board chairman, who is also the chief executive of Cambia Health Solutions, based in Portland, Ore.

. . .

Mr. Ganz said that Ms. Tavenner had "the trust and respect of members of Congress from both sides of the aisle."

Senator John Barrasso, Republican of Wyoming, described the selection in more negative terms. "While millions of Americans are still being hurt by Obamacare's soaring costs and fewer choices," he said, "Ms. Tavenner's appointment shows how the law has created a cozy and profitable relationship for some."

For the full story, see:

ROBERT PEAR. "Head of Obama's Health Care Rollout to Lobby for Insurers." The New York Times (Thurs., JULY 16, 2015): A15.

(Note: ellipses added.)

(Note: the online version of the story has the date JULY 15, 2015.)

October 7, 2014

Nader Enlists Mises, Hayek, Friedman and Stigler in Critique of Crony Capitalism

(p. A9) Mr. Nader, the consumer crusader who ran for president to the left of Al Gore, is perhaps the last person one would expect to admire a libertarian critique of the corporate state. But in "Unstoppable" he respectfully describes the views of Ludwig Von Mises, Friedrich von Hayek, Milton Friedman, George Stigler and other free-market economists. He praises their distrust of politicians, lobbyists and businessmen who seek to put government power in the service of corporate profit.

Not that the Republican Party is always guided by such thinkers. Mr. Nader neatly describes how corporatist RINOs (Republican In Name Only) co-opt the party's anti-statist crusaders. "The corporatist Republicans," he writes, "let the libertarians and conservatives have the paper platforms . . . and then move into office, where they are quick to throw out a welcome mat for Big Business lobbyists with their slush funds." He cites Adam Smith's suspicion of regulations that benefit special interests: "Such restraints favor the privileged interests that want to entrench their economic advantages through the force of law."

These are profound observations and ones that I saw play out while editing the Americas column for this newspaper in the 1980s and '90s. Mercantilist Latin American businessmen who claimed to cheer market forces often thrived only because of their contacts in government. They reached out to the Journal's editorial page as allies but were more socialist in practice than some of their left-wing enemies. Little did I suspect that a similar form of mercantilism, or corporate statism, would take root in the U.S. It is a pleasure to see Mr. Nader doing battle against such cozy arrangements.

For the full review, see:

DAVID ASMAN. "BOOKSHELF; Let's Make a Deal; Ralph Nader's latest crusade is against the convergence of big business and government power. Let's hope he succeeds." The Wall Street Journal (Fri., July 18, 2014): A9.

(Note: ellipsis in original.)

(Note: the online version of the review has the date July 17, 2014, and has the title "BOOKSHELF; Book Review: 'Unstoppable' by Ralph Nader; Ralph Nader's latest crusade is against the convergence of big business and government power. Let's hope he succeeds.")

Book under review:

Nader, Ralph. Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York: Nation Books, 2014.

May 26, 2013

Harry Reid Hires GE Employee to Be His Chief Tax Policy Advisor

The "Capture Theory" associated with scholars George Stigler and Gabriel Kolko says that government regulatory bodies tend to be captured by the companies that they are intended to regulate. Stigler and Kolko would not be surprised by the passage quoted below.

(p. B5) . . . on Jan. 25, Mr. Reid's office announced that he had appointed Cathy Koch as chief adviser to the majority leader for tax and economic policy. The news release lists Ms. Koch's admirable and formidable experience in the public sector. "Prior to joining Senator Reid's office," the release says, "Koch served as tax chief at the Senate Finance Committee."

It's funny, though. The notice left something out. Because immediately before joining Mr. Reid's office, Ms. Koch wasn't in government. She was working for a large corporation.

Not just any corporation, but quite possibly the most influential company in America, and one that arguably stands to lose the most if there were any serious tax reform that closed corporate loopholes. Ms. Koch arrives at the senator's office by way of General Electric.

Yes, General Electric, the company that paid almost no taxes in 2010. Just as the tax reform debate is heating up, Mr. Reid has put in place a person who is extraordinarily positioned to torpedo any tax reform that might draw a dollar out of G.E. -- and, by extension, any big corporation.

Omitting her last job from the announcement must have merely been an oversight. By the way, no rules prevent Ms. Koch from meeting with G.E. or working on issues that would affect the company.

For the full story, see:

JESSE EISINGER, ProPublica. "A Revolving Door in Washington With Spin, but Less Visibility." The New York Times (Thurs., February 21, 2013): B5.

(Note: ellipsis added.)

(Note: the online version of the story has the date February 20, 2013.)

July 1, 2012

Behavioral Economics Does Not Undermine Capitalism


Source of book image:

Daniel Kahneman first gained fame in economics through research with Tversky in which they showed that some of economists' assumptions about human rationality do not always hold true.

Kahneman, whose discipline is psychology, went on to win the Nobel Prize in economics, sharing the prize with Vernon Smith. (Since the Prize is not normally awarded posthumously, Tversky was not a candidate.)

I have always thought that ultimately there should be only one unified science of human behavior---not claims that are "true" in economics and other claims that are "true" in psychology. (I even thought of minoring in psychology in college, before I realized that the price of minoring included taking time-intensive lab courses where you watched rats run through mazes.)

But I don't think the implications of current work in behavioral economics are as clear as has often been asserted.

Some important results in economics do not depend on strong claims of rationality. For instance, the most important "law" in economics is the law of demand, and that law is due to human constraints more than to human rationality. Gary Becker, early in his career, wrote an interesting paper in which he showed that the law of demand could also be derived from habitual and random behavior. (I remember in conversation, George Stigler saying that he did not like this paper by Becker, because it did not hone closely to the rationality assumption that Stigler and Becker defended in their "De Gustibus" article.)

The latest book by Kahneman is rich and stimulating. It mainly consists of cataloging the names of, and evidence for, a host of biases and errors that humans make in thinking. But that does not mean we cannot choose to be more rational when it matters. Kahneman believes that there is a conscious System 2 that can over-ride the unconscious System 1. In fact, part of his motive for cataloging bias and irrationality is precisely so that we can be aware, and over-ride when it matters.

Sometimes it is claimed, as for instance in a Nova episode on PBS, that bias and irrationality were the main reasons for the financial crisis of 2008. I believe the more important causes were policy mistakes, like Clinton and Congress pressuring Fannie Mae and Freddie Mac to make home loans to those who did not have the resources to repay them; and past government bailouts encouraging finance firms to take greater risks. And the length and depth of the crisis were increased by government stimulus and bailout programs. If instead, long-term cuts had been made in taxes, entrepreneurs would have had more of the resources they need to create start-ups that would have stimulated growth and reduced unemployment.

More broadly, aspects of behavioral economics mentioned, but not emphasized, by Kahneman, can actually strengthen the underpinnings for the case in favor of entrepreneurial capitalism. Entrepreneurs may be more successful when they are allowed to make use of informal knowledge that would not be classified as "rational" in the usual sense. (I discuss this some in my forthcoming paper, "The Epistemology of Entrepreneurship.")

Still, there are some useful and important examples and discussions in Kahneman's book. In the next several weeks, I will be quoting some of these.

Book discussed:

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.

The Becker article mentioned above is:

Becker, Gary S. "Irrational Behavior and Economic Theory." Journal of Political Economy 70, no. 1 (Feb. 1962): 1-13.

The Stigler-Becker article mentioned above is:

Stigler, George J., and Gary S. Becker. "De Gustibus Non Est Disputandum." American Economic Review 67, no. 2 (March 1977): 76-90.

June 26, 2011

Diamond to Teach Honors Colloquium on Creative Destruction in Fall 2011


As of 6/22/11, space is still available in the honors colloquium.

June 4, 2010

At Apple Wozniak Was the Inventor, and Jobs Was the Entrepreneur


Source of book image:

iWoz is a fun read, with wild fluctuations in the significance of what is written. When Wozniak writes about the ingredients of inventiveness, it is significant. When he talks about his pranks, or his obsessions with certain number combinations, it is strange. (Maybe I just haven't figured out the significance of Wozniak's quirks---I once heard George Stigler say that even the mistakes of a great mind were worth pondering.)

In the next few weeks I'll be quoting a few of the more significant passages.

An over-riding lesson from the book, is the extent to which both Wozniak and Jobs were necessary for the Apple achievement. Wozniak was a genius inventor, but he did not have the drive or the skills, or the judgment of the entrepreneur.

Schumpeter famously distinguished invention from innovation. Wozniak was the inventor, and Jobs was the innovator (aka, the entrepreneur).

Book discussed:

Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.

May 18, 2010

Housing Crumbles Under Portugal's Rent Control Laws

Stigler and Friedman's only co-authored paper showed the flaws in rent controls. Although excellent, the paper apparently is seldom read in Portugal (or New York City).

(p. B3) LISBON -- José Gago da Graça owns a Portuguese real estate company and has two identical apartments in the same building in the heart of Lisbon. One rents for €2,750 a month, the other for almost 40 times less, €75.

The discrepancy is a result of 100-year-old tenancy rules, which have frozen the rent of hundreds of thousands of tenants and protected them against eviction in Portugal. Mr. Gago da Graça has been in a lawsuit for a decade over the €75-a-month apartment, since his tenant died in 2000 and her son took over and refused to alter his mother's contract, which dates to the 1960s.

"We're the only country in Europe that doesn't have a free housing market and that's just amazing," Mr. Gago da Graça said.

Rules like these, which economists also blame for contributing to Portugal's private debt load, help explain why this nation of 11 million has followed Greece and Spain into investors' line of fire.

. . .

The . . . rules helped protect tenants, but also led to a chronic shortage of rental housing. This, in turn, persuaded a new generation of Portuguese to tap recently into low interest rates and buy instead -- often in new suburbs -- thereby exacerbating the country's mortgage debt and leaving Portugal with one of Europe's lowest savings rates, of 7.5 percent.

"This system of controlled rents is a major problem for the Portuguese economy, but we will probably be waiting for a generational change to have room for institutional reform," said Cristina Casalinho, chief economist of Banco BPI, a Portuguese bank. Beyond fueling housing credit, she added, the system "basically stops flexibility and mobility in the labor market because you can perhaps find a new job in another city but it will then be very difficult to rent a house there."

. . .

"Nobody has had the political courage to change something like these rental laws and I don't see the situation changing in the short term, even if I don't think the Portuguese tend to react as dramatically as the Greeks," said Salvador Posser, who runs a family-owned company renting out construction equipment.

Besides distorting pricing in the housing market, the tenancy rules have left physical scars. Portugal's historic city centers are dotted with abandoned and crumbling houses that are either subject to a court dispute or have rental income that cannot cover repair and maintenance costs.

"This economic crisis is clearly keeping our very slow courts even more occupied because of the amount of conflict that it is creating between landlords and tenants," said Menezes Leitão, a law professor and president of PLA, a property owners association.

Mr. Posser cited a recent estimate that 8 percent of the buildings in central Lisbon were deserted, in large part because of rent-related obstacles. In Porto, the second-largest city, less than 10 percent of inner-city housing is available for rent, which has helped shrink the population by a third over three decades.

"We're still losing about 30 inhabitants a day," said Rui Moreira, president of the Porto Commercial Association.

For the full story, see:

RAPHAEL MINDER. "Like Spain, Portugal Hopes to Make Cuts, but It Is Mired in Structural Weakness." The New York Times (Fri., May 14, 2010): B3.

(Note: the online version of the article is dated May 13, 2010 and has the title "Portugal Follows Spain on Austerity Cuts.")

(Note: ellipses added.)

The original source of the Friedman and Stigler article (in pamphlet form) was:

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

September 26, 2008

Rent Control as a Form of "Hatred of the Bourgeois"

New York City is one of the few remaining cities that has rent control laws (aka "rent stabilization"). Economists view such laws as a version of price ceilings, and they generally argue that such laws reduce the incentives to build and maintain housing.

Libertarian philosophers would add that the laws also violate fundamental rights of property.

(p. 25) At its core, the fight involves a law allowing landlords to displace rent-stabilized tenants if the landlords will use the space as their primary residence. The Economakis family has prevailed, thus far, on the principle that the law applies even to a building this large. But the tenants continue to press the notion that given the scope of the proposed home -- which calls for seven bathrooms, a gym and a library -- the owners are just trying to clear them out so they can sell the building off to become so many market-rate condos.

Mr. Economakis insists his family would never have subjected itself to years of argument -- and tens of thousands in legal bills -- if they did not want to live there. He acknowledged that it is a lot of space, but said that having the place to themselves is also a matter of privacy. He said that the family long ago offered, as a halfway measure, to let the tenants in the five rear apartments stay, along with a couple on the first floor, and said he would happily sign a promise to turn over the profits to the existing tenants if he sold within 20 years.

"We really believe that, as owners, we have a right to live in the building," he said.

. . .

Last year, the tenants staged a rally outside the building and some 400 people showed up. Mostly, they lodge their silent protest daily on their doors. Mr. Pultz has his evil eye, while his first-floor neighbor, Laura Zambrano, has one poster giving the dictionary definition of the word hubris and another quoting Flaubert:

"Two things sustain me. Love of literature and hatred of the bourgeois."

For the full story, see:

MARC SANTORA. "Landlord's Dream Confronts Rent-Stabilized Lives." The New York Times, Section 1 (Sun., June 15, 2008): 25.

(Note: ellipsis added.)

Perhaps the most eloquent critique of rent control was penned in the only paper that Chicago Nobel Prize winners Milton Friedman and George Stigler ever wrote together (published as a pamphlet):

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

June 27, 2008

The Role of the Irish Potato Famine in the Repeal of the Corn Laws

In one of his more famous, and outrageous, essays, George Stigler argued that economists do not matter, because changes in policy do not arise from changes in ideas, but from changing circumstances and special interests.

One of the cases that he briefly mentions is the repeal of the English Corn Laws that had restricted the importation of wheat (in England "corn" is what we call "wheat) into Britain. The usual account is that the free market arguments of Cobden and Bright made the difference.

The account quoted below, might be taken as support for Stigler's position. But it might also be evidence for the more optimistic position of Stigler's buddy, Milton Friedman. Friedman held that on major issues, economists' policy proposals go ignored until some crisis occurs that sends the politicians looking for policy alternatives. (Friedman thought that this is what occurred in the case of his own proposal for floating exchange rates.)

(p. A23) THE feast of Ireland's patron saint has always been an occasion for saluting the beautiful land "where the praties grow," but it's also a time to look again at the disaster that established around the world the Irish communities that today celebrate St. Patrick's Day: the Great Potato Famine of 1845-6. In its wake, the Irish left the old country, with more than half a million settling in United States. The famine and the migrations changed Irish and American history, of course, but they drastically changed Britain too.

. . .

The first intimations of Ireland's looming calamity reached the British government in August 1845. Although Britain was responsible for the social and economic iniquities which had made Ireland so susceptible, the government of the day deserves some credit for its efforts to avert mass starvation. There were political as well as logistical difficulties.

. . .

To Peel it was obvious that the Corn Laws would have to go, but his electorate of large landowners was vehemently opposed to their abolition. The Duke of Wellington, leader of the House of Lords, complained that Ireland's "rotten potatoes have done it all -- they put Peel in his damned fright." Peel drew heavily on the news from Ireland as he urged Parliament to vote for abolition:

"Are you to hesitate in averting famine which may come, because it possibly may not come? Are you to look to and depend upon chance in such an extremity? Or, good God! are you to sit in cabinet, and consider and calculate how much diarrhea, and bloody flux, and dysentery, a people can bear before it becomes necessary for you to provide them with food?"

The bill abolishing the Corn Laws was passed in May 1846 in the House of Commons, with two-thirds of Peel's party voting against it and the entire opposition voting in favor. A month later, Peel was out of office.

. . .

. . . Ireland's famine, by ending the Corn Laws, prompted the beginning of the free trade that established the success of Britain's industrial economy.

For the full commentary, see the article referenced immediately below, or see his forthcoming book Propitious Esculent: The Potato in World History:

JOHN READER. "The Fungus That Conquered Europe." The New York Times (Mon., March 17, 2008): A23.

(Note: ellipses added.)

The Stigler essay mentioned above is:

Stigler, George J. "Do Economists Matter?" Southern Economic Journal 42, no. 3 (1976): 347-54.

(I will try to dig out a reference for the Friedman position when I have more time.)

May 24, 2008

The Importance of the City for Human Progress

I remember Stigler in his history of economic thought class, waxing eloquent about the wondrous idyllic life of the countryside, and then ending with a Stiglerian zinger; something like: 'and where there is no idea to be found for miles and miles.' (I believe, in his memoirs, that Stigler mentions that it is good for a great university to be located in a great city.)

Rosenberg and Birdzell attribute even greater importance to urban life:

(p. 78) The merchants were consigned to the towns, and the towns themselves were nonfeudal islands in a feudal world.


Rosenberg, Nathan, and L.E. Birdzell, Jr. How the West Grew Rich: The Economic Transformation of the Industrial World. New York: Basic Books, 1986.

May 20, 2008

Great Example of Stigler-Kolko Capture Theory of Regulatory Agencies

George Stigler and Gabriel Kolko are associated with the theory that eventually, govenment regulatory agencies come to be captured by the industry that the agency is charged with regulating.

At the time of the exchange documented below, Wendell Willkie was the head of an electric utility, and Lilienthal was one of the heads of the TVA, which was in the process of taking customers away from Willkie's utility. Willkie's argument to Lilienthal is consistent with the capture theory. (But that Lilienthal pushed ahead with his plans, might be seen as inconsistent with the theory.)

(p. 182) Lilienthal set up a meeting in early October 1933 at the Cosmos Club in Washington, the club being, in Lilienthal's words, "about as neutral a ground as we could think of."

. . .

(p. 183) Willkie tried yet another tack. No one, he argued to Lilienthal, went into government without the intention of going into the private sector later. The private sector, after all, was where the business lived. If Lilienthal was too nasty, then he was not likely to find work at private utilities companies. Lilienthal was, by his own admission, "pretty badly scared" by the time he left the Cosmos.


Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

May 18, 2008

Stigler on Berle and Means

I remember George Stigler in class making some reference to a book by Berle and Means, and asking if any of us had ever heard of them. None of us had. My memory is that he looked sort of sadly amused.

At least one of Stigler's important papers had taken on, and refuted, some of the important claims of the Berle and Means book.

Now, decades later, I recently read a wonderful book on the Great Depression called The Forgotten Man. It turns out that Berle was very important in the growth of government in FDR's New Deal.

I now realize what I did not realize when I took Stigler's class---that Stigler had done something significant in refuting errors that supported misguided policies that hurt the economy.

It is a sad fact of life that future generations will not remember, or appreciate, the triumphs of the 'good guys' because they do not appreciate the impact of the good guys' adversaries.

Stigler had beaten Berle so fully that the younger generation did not even recognize Berle's name. And in not recognizing Berle's name, or his significance, they could not appreciate the value of what Stigler had accomplished.

Book reference:

Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

November 2, 2007

Michael Powell Provides Support for the Capture Theory of Regulatory Agencies


The following brief story would seem highly compatible with the "Capture Theory of Regulatory Agencies" that is associated with the names of economist George Stigler, and historian Gabriel Kolko.  That theory suggests that regulatory agencies are frequently captured by the industries that they are intended to regulate.

One kind of evidence for the theory is that members of regulatory agency boards often are recruited from the industry, and often return to working for the industry after their terms are over.


The efforts of federal regulators to curtail cronyism on corporate boards have led to some odd outcomes. The case of Michael K. Powell, a new director of Cisco Systems, is a prime example. 

Mr. Powell, the former chairman of the Federal Communications Commission, happens to be a son of Colin Powell, the former secretary of state. Cisco happens to have paid the senior Mr. Powell more than $100,000 to deliver two speeches in 2005.

Under guidelines established by the Nasdaq stock market, that connection disqualifies the younger Mr. Powell as an independent director, so he cannot sit on the company’s audit, compensation or governance committees. But by the same definition, Richard M. Kovacevich, the chairman of Wells Fargo, is an independent director of Cisco, even though his company has promised to lend Cisco $120 million.

The difference is that Cisco’s line of credit is deemed too small a part of Wells Fargo’s overall business to present a conflict of interest, while the payments to the senior Mr. Powell exceeded the allowable annual limit of $100,000 to any family member of an independent director.


Source of story: 

PATRICK McGEEHAN.  "$100,000? Too High. $120 Million? Fine."  The New York Times, SundayBusiness Section (Sun., September 30, 2007):  2.


The key Kolko book is: 

Kolko, Gabriel. Railroads and Regulation, 1877-1916.  W. W. Norton & Company, 1970.


August 10, 2007

The Courage of Milton Friedman


The following two paragraphs are from a paper I am currently working on.


Milton Friedman wrote a Newsweek column many years ago that caused a firestorm of anger among his colleagues in the economics profession. Friedman’s argument was that, in general, the government is not going to do a good job of identifying the best and most productively innovative economists. In particular, he argued that economics funding by the National Science Foundation (NSF) had made the economics profession more mathematical than was appropriate.

Even his ‘Chicago’ colleagues, who were otherwise inclined to be sympathetic to his work, were appalled: Robert Lucas wrote against Friedman in the New York Times, and Zvi Griliches spoke against him before Congress. 


Not too long after Friedman’s article came out, I praised it during one of the sessions of a Liberty Fund colloquium held in California.  After the session, a very distinguished economist came up to me, and started talking about the Friedman article in a very irritated and animated manner.  He said that what Friedman wrote in the article, might be true, but he shouldn’t have written it in a public forum.[i]  He said that within the NSF, the physicists have always been opposed to funding economics, and that Friedman’s article gave the physicists just the ammunition they needed.  I remember distinctly that after this conversation, the distinguished economist got into his very large and very expensive car and drove off.  To the cynical, it may also be worth mentioning that this economist had received very substantial funding from the NSF.

I also remember mentioning to George Stigler my disappointment that Lucas had written contra Friedman, and Stigler gave me his cynical smile, and said that I should have expected that Lucas, and the rest of the profession, would defend NSF funding.

[i] Most of the conversation I remember in broad terms, but specifically, I remember he said something very close to:  ‘Friedman shouldn’t air the profession’s dirty laundry in public.’


The reference for the Friedman article, is: 

Friedman, Milton.  "An Open Letter on Grants."  Newsweek, May 18 1981, 99.

May 26, 2007

"A Triumph of Engaged Amateurism"


Steven Johnson has a great passage on the contribution of the amateur in The Ghost Map story (see below).

This is a theme that resonates.  In The Long Tail, Chris Anderson makes the case for amateurs in astronomy.  (Is it he, who points out that the root of the word "amateur" is to love?)

Stigler had an important early paper in which he discusses the professionalization of the economics profession.  He praises the results, but what he presents provides some grist for the mill of criticism too.  For example, the exit of the amateurs, reduced the applicability of the work, and turned research more toward internal puzzle-solving, and model-building.

The web is a leveler in science, as suggested in an NBER paper.  Maybe the result will be a resurgence of amateurism, and maybe that won't be all bad.


(p. 202)  But Broad Street should be understood not just as the triumph of rogue science, but also, and just as important, as the triumph of a certain mode of engaged amateurism.  Snow himself was a kind of amateur.  He had no institutional role where cholera was concerned; his interest in the disease was closer to a hobby than a true vocation.  But Whitehead was an amateur par excellence.  He had no medical training, no background in public health.  His only credentials for solving the mystery behind London's most devastating outbreak of disease were his open and probing mind and his intimate knowledge of the community. 



Johnson, Steven. The Ghost Map: The Story of London's Most Terrifying Epidemic - and How It Changed Science, Cities, and the Modern World. New York: Riverhead Books, 2006.


(Note:  A probably relevant, much praised book, that I have never gotten around to reading, is Martin J.S. Rudwick's The Great Devonian Controversy:  The Shaping of Scientific Knowledge among Gentlemanly Specialists.)


May 5, 2007

George Stigler on Astrology


I remember George Stigler saying (I think in conversation with me, but maybe as an aside in a lecture), that at first he had been inclined to reject a paper for the JPE that empirically tested astrology.  His reason was that, while he liked what the authors were doing, he was not sure that what they were doing, most appropriately belonged in an economics journal.

But when the authors convinced him that they would not be able to publish it anywhere else, he changed his mind and published it.

The episode tells us something about Stigler, and something about scientific method.  About Stigler, the episode provides strong evidence of the importance that Stigler placed on evidence, relative to theory.

On scientific method, the episode can be taken as an illustration of Karl Popper's distinction between the context of discovery and the context of justification.  There are many sources of hypotheses (the context of discovery).  Famously, Kepler's inspiration for the elliptical paths of planets, had a somewhat mystical source in the "perfect" solids.  But what makes a theory "scientific" is not its context of discovery, but its context of justification, viz., is the theory subjected to empirical test?

Hypotheses are not ruled out of science ab initio, but by being inconsistent with the evidence.  I agree with this view, which explains why I am a (passive) member of the Society for Scientific Exploration, which is devoted to the empirical testing of politically incorrect theories (such as UFOs, the Shroud of Turin, ESP, the Loch Ness Monster, etc.)


The JPE astrology article, accepted by Stigler as editor, was: 

Bennett, James T., and James R. Barth. "Astronomics: A New Approach to Economics?" Journal of Political Economy 81, no. 6 (Nov.-Dec. 1973): 1473-75.


A more recent empirical test of an astrological hypothesis is:

Wong, Ka-Fu, and Linda Yung. "Do Dragons Have Better Fate?" Economic Inquiry 43, no. 3 (July 2005): 689-97.


For more on Popper's views of science, consult:

Popper, Karl R. The Logic of Scientific Discovery. New York: Basic Books, 1959.


November 16, 2006

Milton Friedman, Freedom's Friend, RIP


A week or so ago my mother and I were sharing our disappointment at the firing of Donald Rumsfeld, who we both thought was a good man.  She told me that she had thought he would have made a good President.  I told her that she was in good company, because in his memoirs, Milton Friedman had expressed the same thought (p. 391).

We were in very good company while Milton Friedman was with us, and I feel a sense of loss, both personally, and for the broader world. 

By chance, I sat behind Milton Friedman, and his wife and son, at the Rockefeller Chapel memorial service to honor Milton Friedman's good friend George Stigler.  I can't remember if Friedman spoke it at the service, or wrote it later, but I remember him saying (or writing) that the world was a darker place without Stigler in it. 

And it is darker yet, without Friedman in it.  (It is reported that he died of heart failure sometime early this morning at the age of 94.)

My first memory of meeting Milton Friedman was in the early 1970s at Wabash College.  My Wabash professor, Ben Rogge, was a friend of Friedman's.  They attended Mount Pelerin Society meetings together, and Rogge, along with his senior colleague John van Sickle, had invited Friedman to deliver a series of lectures at Wabash College, that became the basis of what remains Friedman's meatiest defense of freedom:  Capitalism and Freedom.  (Free to Choose is better known, broader, and important, but Capitalism and Freedom is more densely packed with stimulating argument, and provocative new ideas.)

The members of the small, libertarian Van Sickle Club were gathered around Friedman in a lounge at Wabash, and I remember Rogge asking Friedman:  'If there was a button sitting in front of you, that would instantly abolish the Food and Drug Administration, would you push it?'  I remember Friedman smiling his incredibly delighted smile, and saying simply, with gusto:  "yes!"

I remember attending some meetings at the University of Chicago, I think the first History of Economics Society meetings, with Rogge in attendance.  (This was in my first couple of years as a Chicago graduate student, when I was mainly doing philosophy.)  Stigler invited Rogge up for a drink, and Rogge said said 'sure' as long as Diamond could come along.  (E.G. West, the Adam Smith biographer, was also there, I think at Rogge's behest.)  The apartment had been Milton Friedman's for many years.  In fact I think he had built the several story apartment building, because he wanted convenient, comfortable living quarters close to his Chicago office.  Friedman's apartment occupied the top floor, and I vaguely recall, afforded a nice view of the campus. 

I lived for a year at International House, next to the Friedman apartment building.  I remember on Sunday morning's seeing Friedman dash into International House to buy his copy of the Sunday New York Times.  ("Dash" is too strong, but he certainly moved with more vigor than I ever have on Sunday mornings.)

When Friedman left Chicago for the Hoover Institute in California, he sold, or sublet his apartment to Stigler, who apparently used it on evenings when he did not want to drive out to his modest home in the Chicago suburb of Flossmoor.

I was stunned to be in the presence of Stigler in Milton Friedman's former abode.  (I seem to remember E.G. West seeming almost equally overwhelmed.)  I remember much of the time being spent with Stigler trying to convince Rogge to join him for golf the following day.  Rogge demurred because he was wanting to see, for the first time, I think, a newly born grandchild in the Chicago area.  (Family was extremely important to Rogge, both in theory, and in practice.)

I also remember Stigler asking Rogge about Rogge's having convinced Friedman to give a speech at a fund-raiser at Wabash.  Stigler said something to the effect that this was the level of favor that he could not ask often of Friedman, and did the cause really justify it.  (I think one of Stigler's sons had been a Wabash student while Rogge was Dean of Students at Wabash.)  Rogge seemed to appreciate Stigler's point, but seemed to believe that solidifying Wabash's endowment was a worthy enough cause.

(This, by the way, is ironic, since Rogge agreed with Adam Smith that endowments were apt to be used for purposes different from the donor's intent.  In the founding of Liberty Fund, Rogge had tried to persuade Pierre Goodrich to have the Fund spend all of its funds in some modestly finite number of years.)

After I gradually made the switch from philosophy to economics, at Chicago, I got to know Stigler fairly well, but unfortunately did not know Friedman, personally, as well.

I remember attending a reception at Chicago in honor of Friedman's winning the Nobel Prize in 1976.  (It was at that reception, that I first struck up a conversation with my good friend Luis Locay.)

I registered for Milton Friedman's price theory class the final time he taught it, I think.  It was in a large, dark tiered classroom.  At the beginning of every class, Friedman would almost bounce into the classroom, bursting with pent-up energy.  I do not smile easily, or often, but I always smiled when I saw Friedman.  There was so much good-will, joy in life, enthusiasm for ideas. 

During one of these entrances, I noticed that Friedman, well into his 60s, was wearing the counter-culture-popular 'earth shoes'; apparently he was out-front in footwear, as well as ideas.

One characteristic that came through in class, as well as in his public debates and interviews, was that he was focused on the ideas and not the personalities expressing them.  I remember seeing Friedman debating some union official on television.  He talked at one point about how he and the official had had to work hard in their youth.  Friedman seemed to like the union official; he just disagreed with some of his ideas, and wanted the union official and everyone else, to understand why.  By the end of the "debate", the union official had a warm, amused, expression on his face.

I remember once Friedman saying that more of us should speak out more often on more topics; that the bad consequences to us weren't as bad as we supposed.  Probably he was right; though he had a lot working in his favor---his quick-wittedness, his good will, his sense of humor, and probably his being so short in physical stature---it was probably hard for anyone to feel threatened by him, so they were more apt to let down their guard and listen to what he had to say.

One of the unfair hardships of some of Friedman's years at Chicago, was the constant harassment from a group of Marxist students called, I think, the Spartacus Youth League.  Whenever Friedman was scheduled to speak, they would disrupt the event, and try to prevent his speaking.

So when it was time to tape the discussion half-hours of each hour episode of the original "Free to Choose" series, the discussions were scheduled as invitation-only.  I was in the audience for two or three of the discussions.  (They were fine, but personally, I would have preferred another half hour of pure Friedman.)


As a poor graduate student, I counted myself extremely lucky to find an auto-repairman who was a wizard at finding creative ways to keep old cars running, at low repair cost.  He was a man of few words, put he kept the words he gave.

I ran into him and his wife in a little Lebanese restaurant that was run out of the secondary student union just down from I-House.  He invited me to sit with them, which I did.  I remember him telling me that they were gypsies, and him mentioning that people sometimes had the wrong idea about gypsies.  He told me that he had been raised never to go into debt.  He told me how cheap White Castle hamburgers used to be.  When I told him that I was studying economics, he surprised me by saying that Milton Friedman had been a customer of his, and that he really liked Milton Friedman.

This gypsy was a simple, decent, hard-working fellow.  I don't know, but I strongly guess that Friedman saw the good in this fellow, and treasured what he saw.  And the gypsy liked Milton Friedman back.


Whenever I saw Friedman interviewed on television, or read one of his letters, or op-ed pieces, in the Wall Street Journal, I would feel a bit more optimistic about freedom, and life.  A lot of people give up, at some point, but Friedman never did---he just kept on observing, and thinking, and speaking.  The last time I had any interaction with him was at the meetings of the Association of Private Enterprise Education (APEE) on April 4, 2005.  He was hooked up with the conference via video camera from an office in California.  He gave a brief presentation, and then spent quite some time answering questions.  (I recorded some of these in grainy, small video clips that can be viewed on my web site, or viewed on the web site of the APEE.)

I asked him a question about whether he agreed with Stigler in Stigler's memoirs that Schumpeter had something important to say about competition.  I wasn't as impressed by his answer to this question, as I was to some of his other answers.

I think that Schumpeter may be remembered as a crucial economist for our understanding of the process of capitalism:  innovative new products through creative destruction.  But if capitalist innovation prospers, part of the credit will belong to Milton Friedman.  

Friedman and Stigler were led into economics in part because of the challenge to capitalism posed by the Great Depression.  If depressions of that magnitude were an essential part of what capitalism was about, then a lot of people would prefer to have nothing to do with capitalism.  Schumpeter's response basically was to say that every once in awhile, really bad depressions will happen as part of the process of capitalism, and we just have to suck it up, and live through them. 

One of Milton Friedman's major contributions to economics, was to show that ill-advised government policies, such as a contraction of the money supply, were responsible for making the depression much deeper, and much longer than it needed to have been.  (See, e.g,  A Monetary History of the United States.)

In other words, he showed that Great Depressions are not an inescapable price we must pay if we choose to embrace the economic freedom, and the creative destruction, of capitalism.


When Friedman cleaned out his Chicago office to head for California, he left in the hallway for scavenging, extra copies of some of his books, and offprints of articles various academics had sent him.  So I have a Spanish copy of Capitalism and Freedom (even though I don't read Spanish), and several offprints of articles from distinguished economists who sent "best wishes" to "Milton." 

After the office was cleared out, I remember sticking my head in, and looking around the empty office, one final time, for sentiment's sake.  I was stunned to see a bright red, white and blue silk banner left hanging on the wall.  It was festooned with American flags, and said, in large letters:  "Buy American!" 

I felt anxious and confused:  was one of my heroes inconsistent on such a basic issue?  So I entered the office, and went over to the banner, and examined it more carefully.  It was then that I noticed, in small letters at the bottom of the banner:  "Made in Japan".


Some book references relevant to the discussion above:

Friedman, Milton. Capitalism and Freedom. Chicago: The University of Chicago Press, 1962.

Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960, Nber Studies in Business Cycles. Princeton: Princeton University Press, 1963.

Friedman, Milton, and Rose D. Friedman. Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich, Inc., 1980.

Stigler, George J. Memoirs of an Unregulated Economist. New York: Basic Books, Inc., 1988.

West, E. G. Adam Smith: The Man and His Works: Arlington House, 1969.


 In vino veritas.  Photo from Tio Pepe Bodega, Jerez, Spain.  Photographer:  Dagny Diamond.


Continue reading "Milton Friedman, Freedom's Friend, RIP" »

October 2, 2006

Markets, Not Courts, Should Decide Intel Market Share

Intel executives, coming up on a pre-trial conference in a case that could decide their company's fate, should be looking with envy and admiration at Tiger Woods, and wondering how to make their business more like his.

If golf followed the same path as other businesses, Tiger could expect to face a lawsuit contending that his dominance of professional golf is based on unfair competition.  And in fact,  a few years back Sergio Garcia whined that Tiger got better practice times, favorable treatment around the course, more protection against distracting fans -- little things that could, Mr. Garcia intimated, explain Tiger's edge.  Sportswriters responded swiftly, deriding Mr. Garcia for looking to blame others for his being outcompeted.  They understood that sports contests belong on the field, not in the media or the courts.

The same should be true of business.  Market-based economies thrive on competition.  The competitive economy doesn't yield an infinite number of equally successful firms producing indistinguishable products, but lets winners and losers emerge from marketplace competition.  The (inevitably) temporary dominance of one product or one firm spurs others to compete harder.  Today, however, many businesses -- especially American ones -- find it easier to restrain a dominant competitor through the courts than to beat it in the market.

Take the case of Advanced Micro Devices and Intel, the dominant chipmaker for PCs and servers.  AMD for years played the role of Phil Mickelson to Intel Corporation's Tiger Woods -- the talented rival who keeps coming up short in head-to-head competition.  Last year, it decided to model Mr. Garcia rather than Mr. Mickelson, filing an antitrust action against Intel, charging it with a variety of unlawful actions.

. . .

AMD finds fault in Intel's continued market dominance:  Because Intel has had 80% or more of the x86 chip processor market for many years it must be doing something illegal to keep rivals out.  Yet, George Stigler, among others, long ago debunked the significance of market share as a measure of competition.  Duopoly markets, like the market for large commercial aircraft, can be fiercely competitive.  Ask anyone working at Boeing or Airbus.

Moreover, markets can change rapidly, especially high-tech markets, often in ways unanticipated by antitrust suits.  Witness the changes in computing that caused the government's antitrust case against IBM to implode.


For the full commentary, see: 

RON CASS.  "RULE OF LAW; Tigers by the Tail."  Wall Street Journal  (Sat., September 23, 2006):  A7.


August 4, 2006

Schumpeter Not Invited to Milton Friedman's Dinner Party

FriedmanRoseMilton.jpg   Rose and Milton Friedman.  Source of image:  the online venison of the WSJ article cited below.


Milton Friedman is one of my heroes.  But my dinner party invitation list would include Hayek and Schumpeter in place of Marshall and Keynes.


If they were to throw a small dinner party . . . for Mr. Friedman's favorite economists (dead or alive), who'd be invited?  . . . he reeled off this answer:  "Dead or alive, it's clear that Adam Smith would be No. 1. Alfred Marshall would be No. 2. John Maynard Keynes would be No. 3. And George Stigler would be No. 4. George was one of our closest friends."  (Here, Mrs. Friedman, also an economist of distinction, noted sorrowfully that "it's hard to believe that George is dead.")


For the full interview, see: 

TUNKU VARADARAJAN. "COMMENTARY: THE WEEKEND INTERVIEW; Rose and Milton Friedman; The Romance of Economics." The Wall Street Journal  (Sat., July 22, 2006):  A10.



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