I. INTRODUCTION
Textbooks on economic theory often evoke mixed reactions, because among them there are the good, the bad, and the ugly. At any rate “textbooks … cannot be cavalierly dismissed as the simple stories we tell our students. Widely used, multi-edition specimens reflect the consensus views of the profession” (Craig Freedman Reference Freedman1995, p. 178). The Theory of [Competitive] Price by George J. Stigler is one such “multi-edition specimen,” coming out in 1942, 1946, 1952, 1966, and 1987 (hereinafter we refer to these volumes as Stigler 1, 2, 3, 4, and 5, respectively). Most critics and contemporaries agree that The Theory of [Competitive] Price is not just good; it is a classic.
In The Theory of Competitive Price (as it was called when first published in 1942), Stigler explains the book “is a preliminary edition of a textbook in advanced economic theory. By advanced theory we mean … not that the subject matter is more inclusive than that of elementary courses … but rather that fundamental concepts are presented with more precision and that there is greater emphasis upon technique” (Stigler 1, p. v).Footnote 1 At the time the volume was intended as an introductory textbook for graduate students of economics. Eventually, later editions were used at the intermediate undergraduate level. (The 1942 edition had dealt only with perfect competition.) In the 1940s there was an excellent graduate text by Alfred Marshall (Reference Marshall1920). Stigler started out as a Marshallian and through the various editions became a Stiglerian. Marshall's text was elegant intuition. Stigler's text, not shying from employing mathematics to prove his point, presented much sharper analytical concepts and much more rigor in his analysis. But it was tough to read. Stigler emphasized the importance of positive theory, which was not true of Marshall.
The second, “augmented version” of The Theory of Competitive Price, renamed The Theory of Price, was published in 1946. The title of Stigler 2 was changed to indicate the expanded scope of the book, which included “a survey of imperfect competition, multiple products, and interest theory” (Stigler 2, p. v). We will use the title The Theory of Price to refer to all five editions.
A third edition (Stigler 3) appeared in 1952. The content remained mostly unchanged, but its presentation was drastically altered. In 1966, Stigler published the fourth edition (Stigler 4). In the preface he notes, “I have rewritten the present edition almost completely, but I have no doubt that it is the same book, and by only a slightly different author” (Stigler 4, p. v). Finally the fifth and last edition (Stigler 5) was written five years after Stigler won the Nobel Prize. In it he says, “In an age when textbooks are revised almost as often as presidents are elected, The Theory of Price in its infrequent revisions harks back to the leisurely age of English kings” (Stigler 5, p. v).
Stigler was influenced in his earlier editions by the between WWI and WWII or inter-war School of Frank H. Knight, Lloyd Mints, Henry Simons, and Jacob VinerFootnote 2 and in later editions by the post-WWII Chicago School of Gary Becker, Milton Friedman, and Robert Lucas. Stigler admits (1962) that he broke with Knight in many areas over the years as his text became all Stigler. Becker in the Stigler Memoriam (Numerous authors, Reference Numerous1993, p. 761) claims that while Stigler was one of the few to work under Knight, Viner may have had the greater long-run impact because of his emphasis on empirical and historical as well as theoretical analysis.
Thus, over a period of forty-five years, five versions of the book appeared. This paper compares and contrasts these versions. His book generally reflects the consensus views of the profession, but with Stigler's own brand of differentiation clearly delineated in places.Footnote 3 But the fact that these books were authored by a former student of the University of Chicago who went on to become one of its greatest teachers allows us to greatly extend the scope of this study. The “Chicago School,” of which Stigler was an integral part, is arguably one of the most influential schools in modern economic thought. The website http://cepa.newschool.edu/het/schools/nobel.htm#statistics shows through 2001 that there were nine Nobel Laureates “associated” with the University of Chicago at the time of the award (the next highest school has four) and seven Nobel Laureates received their “highest degree” with the University of Chicago (the next highest school has five). As of 2008, the University of Chicago held a remarkable 40% of Nobel prizes awarded in economics.Footnote 4 Thus, a long-run monopoly in receiving the Nobel Prize in economics is one that the Chicago School would surely agree is not because of government intervention and is socially justified in the Austrian School tradition that monopoly is good, as it is a precondition for technical progress. For our purposes, we will pigeonhole the Chicago School, although the Economics Department entertains a number of different views on several issues. This paper also explores Stigler's contribution to the so-called “Chicago School” paradigm and how this is reflected in his textbooks.Footnote 5
Why is a study of Stigler's various editions relevant and/or interesting? First, there were not many graduate economics textbooks in 1942 when The Theory of Competitive Price was first published. While numerous texts for principles courses were available, graduate students were taught from professors’ notes, which in turn were fashioned out of the great classics of the day. So Stigler's text might have been one of the first of its kind. Second, Stigler wrote his textbooks and revised them “to reflect current trends,” thereby documenting the extent to which new theories gained acceptance into the discipline at the time and/or reflecting the evolution of his own ideas as seen in his other writings. Third, this study is as important as any undertaking in the history of economic thought, for “there is even more to learn from an interesting mind than its owner wished to teach us” (Stigler Reference Stigler1969, p. 218). Fourth, Stigler was a historian of economics foremost and Chicago “was somewhat unique among departments of economics because of the importance attributed to the history of economic thought …. At perhaps no other university were economic theory and the history of thought combined for the purpose of developing a particular point of view” (John P. Henderson Reference Henderson1976, p. 144). Footnote 6 Stigler brings this unique perspective to his textbooks. Fifth, we hope that this exercise will help show the large influence he had in shaping post-war economics, as Stigler is often not given his due, relative to his close friend, Milton Friedman. Stigler's texts played a crucial role in the education of both Chicago and non-Chicago economists.
Our study of the development of a textbook is not the first of its kind. For example, Kenneth G. Elzinga (Reference Elzinga1992) discussed the eleven editions of the enormously successful textbook Economics by Samuelson. Mark Skousen (Reference Skousen1997) did even a more detailed study of Samuelson's Economics. James Tobin (Reference Tobin1997, pp. 430–432) briefly analyzed the importance and impact of Irving Fisher's (Reference Fisher1912) introductory textbook that went through ten editions.
Before we examine The Theory of Price, a very brief biographical sketch of Stigler may be useful.
II. A VERY BRIEF BIOGRAPHY: GEORGE JOSEPH STIGLER (January 17, 1911 – December 1, 1991)
George Joseph Stigler graduated from the University of Washington with a BBA in 1931. He did an MBA at Northwestern University (1932) where he was influenced by his professor of economics at Northwestern, Coleman Woodbury. In 1933, Stigler came to the University of Chicago as a graduate student in economics and graduated with a PhD in 1938.
At Chicago, Stigler could not have chosen a more appropriate time to pursue economics. He was in the company of some of the most distinguished minds in economics. He wrote his doctoral dissertation under the noted scholar Frank H. Knight (1885–1972), who “so far as Chicago is concerned, … was the teacher and the major promulgator of its particular point of view” (Henderson Reference Henderson1976, p. 144). Knight was and continues to be a major intellectual force in economics, and his views on ethics and economic theory dominated Stigler's learning.Footnote 7 Stigler's dissertation, which he completed in 1938, was published as a book, his first, in 1940 and was called Production and Distribution Theories.
Stigler took up his first teaching position in 1936 at Iowa State College (later University). After two years, he moved to the University of Minnesota (1938–1946) and published in the next three years several articles on price theory. In 1942, drawing upon the success of these articles, he wrote The Theory of Competitive Price at the age of thirty-one. Between 1942 and 1945, Stigler was employed at the National Bureau of Economic Research (NBER) in New York. He focused on quantitative studies on output, employment, and productivity trends. In 1946, Stigler was offered a professorship from the University of Chicago. After a meeting with the President, Ernest Colwell, Colwell thought Stigler was too empirical and Stigler was not appointed. The professorship went to the apparently less empirical Milton Friedman! Stigler returned to Minnesota for a year before taking his 6-feet-3-inch frame to Brown University in 1946, where he stayed until 1947. He then taught at Columbia from 1947 to 1958, before being invited back to Chicago, this time to stay. Stigler remained at Chicago from 1958 until his death on January 17, 1991, serving as the Charles R. Walgreen Distinguished Service Professor of American Institutions.Footnote 8 He was a Journal of Political Economy editor from 1972 until his death, and was president of the American Economic Association in 1964. He was awarded the Nobel Prize in Economics in 1982 and the United States National Medal of Science in 1987. He published approximately 30 books and pamphlets, 130 articles, and 70 book reviews.
III. FIVE VERSIONS OF THE TEXT
This section reviews the contents and presentation of the five versions of The Theory of Price. Important departures from previous editions are noted, but an analysis of these departures in a historical context is reserved for a subsequent section. The first two editions were written in Minneapolis,Footnote 9 the next one in New York,Footnote 10 and the last two in Chicago.Footnote 11
1. The Theory of Competitive Price (1942) was intended at the time to be an introductory text for graduate students of economics where “fundamental concepts are presented with more precision and … there is greater emphasis upon technique” (Stigler 1, p. v). The 1942 book's 197 pages, ten chapters, and no appendices were divided into two parts: first, the “Introduction,” second, “The Theory of Competition.” The former contains some of the most elaborate and lucidly written expositions on the scope, method, and basic concepts of economics one could hope to find in an economics textbook. Without hesitation Stigler delves into the nature of economics as a science, the importance of logic, the logic behind and the need for abstraction, the nature and definition of competition, and the characteristics of an equilibrium, to name just a few topics. In these sections, and especially in the chapter “The Functions of an Economic System,” Stigler relies heavily on the work of Frank H. Knight.Footnote 12 A chapter on the quantitative relationships in economics concludes the first part. In the introduction to one chapter, Stigler says, “[T]he arithmetical method has yielded much ground to graphical analysis, and even symbolic mathematical analysis (the infinitesimal calculus in particular) has increased in popularity – or perhaps one should say that it has decreased in unpopularity” (Stigler 1, p. 41).
Part Two is more routine (in retrospect, since at the time it was presumably Stigler who was initiating this conventional approach) with chapters on the theory of demand, costs, and production, laws of return, and pricing of goods and services under competition. “[T]he treatment is, in many respects, quite conventional. Of course, as in all his writing, Stigler's exposition is lively and spiced with wit…” (Ronald H. Coase Reference Coase and Shils1991, pp. 473–74).Footnote 13
2. The second edition, consisting of 17 chapters, 340 pages, and no appendices, followed relatively quickly in 1946. But the book was retitled The Theory of Price, adding 143 pages and the following topics: the theory of monopolistic price, multiple products, and interest theory. No revisions were made to the first two parts from the 1942 book (Stigler 2, p. v), “chiefly to … complete the volume according to original plan rather than embark of patch-work changes; it is not at all due to complacency” (Stigler 2, p. v). In effect, the section on imperfect competition was merely appended to the 1942 edition.
The book was now in its full glory with treatments of perfect and imperfect competition. Of the latter Stigler says, “This material can be viewed as either a detailed statement of the author's Weltanschauung which underlies the selection of content in subsequent chapters or a survey of the major factors underlying the important departures from perfect competition” (Stigler 2, p. 198).
The section opens with a discussion of the theoretical bases for imperfect competition. The main form of imperfect competition discussed is monopoly. On other departures from competition, which occur fundamentally because of consumer ignorance, Stigler says, “[I]t can be argued that the recent literature of economics has materially exaggerated the importance of such departures from competition” (Stigler 2, p. 215). This is the first indication in the series of Stigler's lifelong criticism of monopolistic competition. A separate section in the paper analyzes the debate on this issue. But to return to his sections on monopoly, the treatment is exhaustive. There are two motives behind monopoly: first, the desire for monopoly gains, and second, the desire for power.Footnote 14 The groups attracted by monopoly gains are the entrepreneurs (more so to combat “excessive” competition than to reap returns in excess of the competitive rates), investment bankers, and organized labor groups. Monopoly firms employ many tactics to prevent further entry by rivals into the market. One tactic, which he discusses in detail, is the state support of monopoly. Stigler says, “In this age of political cynicism it should not be necessary to belabor the point that governmental assistance can frequently be invoked to organize or support monopolies” (Stigler 2, p. 211). This assistance could be in the form of erecting geographical barriers, discriminating between different types of organizations, licensing new competitors, suppressing new substitutes, preventing price competition, and restricting output. Stigler furnishes many real-life examples of such monopoly-facilitating activities. Subsequent chapters explain demand, costs, and pricing under imperfect competition. Part four concludes the book with a chapter each on the theory of multiple products and capital and interest.
3. Six years later the revised edition of The Theory of Price (1952) came out, consisting of 16 chapters, and 310 pages, with some “Mathematical Notes” at the end. Stigler undertook “a general rewriting of the volume … to emphasize the intimate relationship between theory and empirical evidence: how the theory is tested by evidence – not merely by logic – and how evidence instructs us on the forms of relationships” (Stigler 3, p. v). While his intellectual development diverged from Milton Friedman's after the middle 1940s, Stigler was helped in the revision by the comments of his friend,Footnote 15 who was reading Stigler (and Marshall) while preparing to teach the price theory class at the University of Chicago.Footnote 16 This terse approach is reflected in the presentation of this volume, and the first indication appears on page three. While the first two editions labored long and hard in the introductory chapters on elucidating the role and importance of economics, the 1952 book says, “The study of economic organization has important purposes … but they scarcely require discussion in an era when the importance of economics is so widely appreciated and so frequently exaggerated” (Stigler 3, p. 3). That Stigler was not much of a fan of quantitative jugglery or economic jargon is evident from his apologetic introduction to the chapter on basic concepts, where he says, “In economics … there is a language to be learned. And as elsewhere, the language is probably carried to excess: it is possible to have one's ideas snubbed merely because they violate the grammar of the profession” (Stigler 3, p. 11). In fact in this book the chapter on methodology is dropped. In its stead, “A few mathematical notes are placed at the end, where they are easier to ignore” (Stigler 3, p. v). The old guard fiercely resisted a quantitative approach. Stigler was not averse to using mathematical formulation and was a major force behind the call for more empirical research. He was probably trying to allay the fears of some of his potential readers by placing the mathematics at the end.
Stigler keeps his promise of emphasizing empirical evidence in the chapter on the theory of demand. In previous editions the theory of demand discussed only indifference curves and their applications. This book refines its presentation by analyzing “the consumption of the individual” (Stigler 3, p. 43) under demand theory and postponing indifference curves to a subsequent chapter on utility theory. The theory of demand is encased within a framework of results from empirical studies. The findings of as many as five studies are mentioned, accompanied by graphs with fitted regression lines to explain the factors influencing consumer demand and to demonstrate the inverse relationship between quantity demanded and price. This emphasis on empirical, especially quantitative, research is consistent with the main body of the Chicago School, but not with Knight, who had outspoken disdain for it (see Melvin W. Reder Reference Reder1982, p. 6).
The theory of utility is a separate chapter. This aspect of the book is dealt with in the section on Stigler and utility theory. Stigler's famous two-part article, “The Development of Utility Theory” (1950a, 1950b), may have prompted this form of presentation.
The chapters that follow are those on the theory of the firm, and constitute roughly two-thirds of the book. The nature of and reasons for this imbalance between consumer theory and firm theory as a proportion of the text are examined in the next section. From the introduction to his chapter on costs and production functions, it is clear where Stigler's ideological sympathies lie. Just as in the previous edition, he maintains his stand that production rather than consumption has the greater role in economic analysis. Vilfredo Pareto (1848–1923), the economist most associated with welfare economics, is mentioned in this and the previous edition only in the context of his theory on coefficients of production functions. Pareto believed that some production coefficients are fixed and others are variable – a view Stigler did not agree with.Footnote 17 He thought that the Pareto form of production function might work in the short run, but not in the long run.
The chapter on laws of returns from the 1946 book is also reformulated here into two chapters. The basis for this is the distinction between the short run and the long run. Accordingly the first of these chapters is called “Diminishing Returns and Short-Run Cost Curves” and the subsequent chapter is called “Returns to Scale and Long-Run Cost Curves.” Similarly the chapters on pricing are divided into one on the pricing of fixed supplies (of goods), another on pricing variable supplies, and a third on the pricing of productive services under competition. In the introduction to these chapters on pricing, there is a section on what entrepreneurs seek. “In order to predict how firms will behave, we must know what their owners seek” (Stigler 3, p. 148). The most obvious and overriding goal is profit maximization. But there may be others like “the desire for security,” “fair profits,” and so on. The knowledge of these goals, however, is not useful, as they do not translate into economic rules that are convenient and valuable to apply to general analysis. “And we would support the controversial position that persistent patterns of entrepreneurial behavior can usually be explained on profit maximizing grounds” (Stigler 3, p. 149). It was controversial, because some economists had raised issues on the theory of profit maximization, such as uncertainty. In addition, some raised issues about the empirical significance of profit maximizing as a result of such things as surveys, poorly executed as it turned out, among business people, the results of which questioned the ubiquity of profit maximizing by firms.
A related section, which appears later in the book, is on profits. Stigler discusses profits under perfect competition as those that may arise because of differences among firms or because of a state of disequilibrium. The former arises because of certain entrepreneurs with superior skills and the latter because of constant innovation.Footnote 18 But disequilibrium is not possible while one is analyzing a stationary economy, and if profits due to superior skills are looked upon as payments to superior qualities of productive services, then this becomes rent. Then, “In this … terminology, profits are zero in the competitive stationary economy” (Stigler 3, p. 182).
Departures from competition are again divided into two chapters: one on monopoly and the other on oligopoly. The Chicago School then and now maintains a “tight prior” that a purely competitive model can be used to explain all persistently observed behavior in real-world markets (see, e.g., Melvin W. Reder Reference Reder1982). Government facilitation in one form or another is largely responsible for any short-run deviations from this norm. This book does not discuss monopolistic competition at all, nor do any of the subsequent editions of the book for reasons discussed later. Also for the first time in this series, Stigler talks about antitrust policy, an area to which he contributed a great deal. Antitrust policy is mentioned as one barrier to entry under oligopoly. In contrast to some later Chicago School members and sympathizers, Stigler believes that antitrust policy, especially in eliminating or arresting price-fixing collusion, has been successful in the United States. Stigler says, “The American economy has been considerably more competitive than those of England and Western Europe in recent times, and it is proper to attribute some part of this difference to the anti-trust laws” (Stigler 3, p. 231). It is reasonable to infer that Stigler would choose to lead and influence professional thinking rather than simply follow prevailing norms. For instance, in the forties and fifties, Stigler followed the Simons approach of being strongly anti-big business. But compare his writings in the 1940s and 1950s with his later approach. For instance, while his antitrust approach to price collusion did not change, his approach to sellers’ concentration did.
Three new chapters on subjects hitherto largely unexplored by Stigler in previous editions conclude this edition: one on cartels and unions, another on the distribution of income, and the last on general equilibrium. The distribution of income is the focus of debates on issues concerning economic justice, and value judgments cannot be made as to what constitutes a “good distribution of income” (Stigler 3, p. 262). The chapter instead presents some of the findings and problems related to this area, namely the various measures of distributions of income and measures and sources of their dispersion. In his conclusion to the chapter Stigler points to the “absurdity of a criterion of a good income distribution that ignores the complexity of the economy's structure…” (Stigler 3, p. 284).
The last chapter, on general equilibrium, recognizes the interrelationships between prices in an economic system. The chapter begins with a brief history behind the general equilibrium model for those among us “who cannot visualize the economic content of equations” (Stigler 3, p. 288). The mathematical Walrasian model is also outlined, “because many relationships cannot be dealt with precisely and economically by words alone” (Stigler 3, p. 288).
4. The third edition of The Theory of Price (1966) was written after Stigler's pioneering article “The Economics of Information” (1961) and consists of 18 chapters, 355 pages, and two appendices consisting of “Fundamental Quantitative Relationships” and “Mathematical Notes” at the end.Footnote 19 The opening pages of the book, an introduction to economic analysis, discuss the central tenet of this landmark article. He uses the same example as he did in the article to illustrate that the greater the value of the commodity being purchased, the more expensive its search would be.
The broad pattern of this 1966 edition is similar to that of the 1952 book, but this edition was “rewritten almost completely” (Stigler 4, p. v). Most of the differences are in the characterization of the book and its presentation. However, a few interesting inclusions and omissions deserve mention.
The 1952 book promised a discussion on economic growth in a later edition. The 1966 edition does have a section on the same, and Stigler ties it into his central theme of price theory. He says, “The constituents of growth are basically two: increases in productive resources, and increases in the efficiency with which they are used. Both types of increase can be directed by a price system” (Stigler 4, p. 19).
The chapter on the theory of demand is renamed consumer behavior. The purpose of the chapter is to treat the consumer as an enterprise and examine if consumers initiate important changes in the economy spontaneously and how they react to changes in the economy. Stigler says of this approach, “It would of course be bizarre to look upon the typical family – that complex mixture of love, convenience, and frustration – as a business enterprise. Therefore economists have devoted much skill and ingenuity to elaborating this approach…” (Stigler 4, p. 21). This elaboration is done in the next chapter on utility theory.
For the first time Vilfredo Pareto is mentioned with respect to utility theory. Thanks largely to Pareto's critical examination of the utility theory, economists gave up measuring utility in cardinal terms, making interpersonal comparisons of utility and using utility-based arguments in for or against public policy. “What was retained was the concept of what we may term a rational consumer” (Stigler 4, p. 47). A rational consumer has consistent tastes, and makes correct cost calculations and utility-maximizing decisions. The chapter also has a new section on revealed preference, developed by “some economists, disenchanted with the subjective overtones of utility” (Stigler 4, p. 68).
Following the chapter on pricing with fixed supplies (the companion chapter on pricing with variable supplies was dropped), which includes sections on perishing commodities, storable goods and speculation, is the chapter on costs and production. The latter includes for the first time an exposition on private and social costs based on Arthur C. Pigou's (1877–1959) The Economics of Welfare (1920), and “upon the profound article of Ronald Coase” (Stigler 4, p. 111), referring to Coase's pioneering article “The Problem of Social Cost” (1960).
Chapters on production, imperfect competition, and cartels and mergers follow the 1952 edition broadly. New chapters included are on rents and quasi-rents and wage theory. The chapter on capital and interest included in the second book, but dropped in the third, makes its way into this one again. The scope of this chapter is vastly different from that of its predecessor. It now includes treatments of consumption loans and savings, investment possibilities, and capital and investment. The earlier version had talked about the stationary economy versus the progressive economy with uncertainty and the economics of exhausting resources.
5. The Theory of Price (1987) came out twenty-one years later and consisted of 20 chapters and 371 pages with the same two appendices at the end as in the previous edition. Surprisingly very few changes were made. In the preface (Stigler 5, p. v) he remarks on how the continuity of his book reflects the fact that “Microeconomics is the mature, stable corpus of economic theory, and its continuity is a reflection of its innumerable and infinitely varied successful applications.” In fact the first chapter is identical to the corresponding first chapter in the 1966 book. But Stigler does slide in a new second chapter where the emphasis is on the nature of prices. He has three interesting sections on prices as reporters, prices as incentives, and prices in equilibrium and disequilibrium. About prices as reporters Stigler says just as “the golf ball … unfailingly detects and registers every significant detail of the way in which it is hit … prices are … if not quite so infallible, still remarkably effective messages on demands and production” (Stigler 5, p. 12). The book also has portraits of 20 economists, each a page long and scattered throughout the book, accompanied by a lithograph. The portrait includes three members of the Chicago School: Paul N. Douglas, Gary S. Becker, and Milton Friedman.
A new chapter deals with the supplies of productive services. Apart from discussing the supply of labor and leisure with respect to wage rates, it also deals with owners of resources that differ in risk. The analysis of the probability of loss in the future, the expected utility associated with a loss, and insurance are covered here for the first time. Also for the first time the book talks about externalities in its chapter on costs and production.
This edition was changed or revised the least in comparison to the previous editions.Footnote 20 In fact chapters are reproduced verbatim from the 1966 edition with no changes in some and minimal changes in others. The book does, however, add two more new chapters (the total number of new chapters is four), one on the economics of information and the other on the economy and the state. The former is discussed in a following section. The chapter on the economy and the state is an introduction to public choice. Stigler provides a detailed discussion on the role of the legal system, drawing heavily on Richard A. Posner's famous book Economic Analysis of Law (1973 and later editions). The chapter talks about public goods, externalities, and the free-rider problem. This is an example of how Stigler's own growing interest in the political marketplace perhaps dominated the profession. The Stigler research program in his later years involved extending the economic theory to the political processes, especially the tight prior. In short, economists of the Chicago School not only believe that allocation of resources should be done by the market and that government intervention in such economic decision-making should be minimal, but extend the scope of economics to encompass less traditional areas so that the discipline transcends abstract mathematical structure to more concrete problem solving. This book adds substantially more problems at the end of each chapter than any of the previous editions.
IV. COMMENTS ON THE TEXTBOOK
While references to the Stiglerian textbook by other economists are brief, they are mostly complimentary. They are unanimous that the book is difficult, though adept, in its treatment of fundamental concepts. According to Coase (Reference Coase and Shils1991, pp. 473–74), “It is not an easy text but it is excellent for anyone seriously interested in training to become an economist.”
Thomas Sowell, who studied Stigler's book in the introductory graduate theory course in economics at Columbia around 1958 (so he must have used the third edition of the book), concurs and says, “This book is probably the least readable thing Stigler ever wrote. It was not a matter of convoluted writing or confused thought – Stigler was never guilty of either of these common academic sins – but of excessive condensation that required painstakingly slow pondering over every concentrated thought. If the book had been three times as long, it could have been read in half the time…. It was the kind of book that teachers of price theory courses read themselves, while they assigned some other text to the class” (Sowell Reference Sowell1993, p. 785).
In essence, Stigler's book was the first modern graduate textbook in microeconomic theory. He apparently had little or no interest in macroeconomic theory and was honest enough never to comment on this area. Footnote 21 So what kind of a textbook is it really? The preface to the first edition says it is on advanced economic theory. The second says that it is devoted to modern price theory. The third speaks of economics primarily as the study of the economy and places great emphasis on empirical evidence juxtaposed with economic theory. The preface to the fourth says the book's “concentration [is] upon the traditional central core of economic theory – the theory of value” (Stigler 4, p. v). Book five says it represents basic microeconomic theory.
According to Harold Demsetz (Reference Demsetz1993), The Theory of Price (1946) was actually a book on industrial organization, which both influenced and was influenced by the field. But Stigler himself contended that “There is no such subject as industrial organization” (Stigler Reference Stigler1968, p. 1). Rather, he believed that the topics taught under this heading constituted the content of economic theory, also known as price theory or resource allocation theory. In this context he said that price theory is “now often given the unfelicitous name of microeconomics” (Stigler Reference Stigler1968, p. 1).
The domain of microeconomics, as defined by Stigler, has undergone a major change, as shown by the contents of current intermediate microeconomics textbooks. Stigler's books, on the other hand, maintained a broad consistency in that, barring a few exceptions, the books did not bring into their purview areas that were any different from those elucidated in the 1946 edition. Only the presentation and emphasis changed. So what Stigler thought price theory was all about in 1946, he maintained in his final book in 1987. He says, “In one respect this continuity misrepresents the field of economics… . In another respect we believe the continuity of the book reflects that of basic microeconomic theory. Microeconomics is the mature, stable corpus of economic theory…” (Stigler 5, p. v).
Very little is known about the sales of these books, despite our repeated requests by us to the publisher for such figures. The publisher regards these figures as proprietary. Kurt R. Leube (Reference Leube, Leube and Moore1986, p. xvii), in The Essence of Stigler, said the book was “successful” and that it was being used in “graduate schools nationwide” at that time. But Demsetz (Reference Demsetz1993, p. 794) refers to it as a “once popular text.” Stigler's book fell out of favor in the non-Chicago school community as the economic profession became quantitative (see e.g., Kamerschen Reference Kamerschen1977) with such texts as Paul A. Samuelson (Reference Samuelson1947), James M. Henderson and Richard E. Quandt (Reference Henderson and Quandt1958), and Hal R. Varian (Reference Varian1978), and out of favor in the Chicago school community with the previously mentioned texts plus the appearance of Milton Friedman's text (Reference Friedman1962) and Gary S. Becker's text (Reference Becker1971).Footnote 22 In fact, the Stigler book is now out of print. Amazon.com, in March 2009, showed these “from” prices: Stigler 1, $68.52; Stigler 2, $3.67; Stigler 3, $13.39; Stigler 4, $22.00; and Stigler 5, $36.99.Footnote 23
V. IMPORTANT TOPICS DISCUSSED IN THE VARIOUS EDITIONS
The main agenda of this section is to analyze in some detail the treatment of some aspects of economic theory in the multiple editions of The Theory of Price.
Utility Theory
According to Stigler, both indifference curve theory (or the substitution theory) and utility theory are equivalent in explaining consumer behavior (Stigler 1, p. 8). He says the “Criterion for choosing between the two is simplicity … analytical simplicity … since the indifference theory … requires one less assumption than the marginal utility theory, the former is preferred” (italics in original). Stigler, quite out of character, does not explain further what these assumptions are, nor does he promise to discuss them later in the book. He proceeds to explain consumer behavior using indifference curve analysis and does not mention diminishing marginal utility again.
This is interesting because of the great debate on utility theory before Stigler's time, the most prominent dissenting voice against the new developments made in the theory of demand being Frank H. Knight's. Knight said, “The law of diminishing utility, correctly stated and qualified, is valid and useful… . It is no use suggesting that we rank value sensations but do not ‘quantify’ them in the ‘cardinal’ sense” (Henderson Reference Henderson1976, p. 131). This was Knight's response to Hicks' proposition that utility must be measured in terms of Pareto's ordinal principle and not Marshall's cardinal principle for reasons we are all now familiar with.
As one of Frank H. Knight's most distinguished students, Stigler continued to pay lip service to the theory of diminishing marginal utility in his first two editions. However, in the third book Stigler's approach is different and represents another example of his break from Knight. He says, “We could … speak of diminishing marginal utility as once was customary. [But] this … approach is not quite as nominal as it may appear” (Stigler 3, p. 81). He recognizes and mathematically illustrates that “diminishing marginal utility does not imply convexity” (Stigler 3, p. 301). But this conclusion is stated with some ambivalence. Economists believe that differences in utilities arising from different combinations of goods can be ranked but not measured. Stigler refers the student to the Milton Friedman and Leonard J. Savage (Reference Friedman and Savage1948) article “The Utility Analysis of Choices Involving Risk.” “But,” he says, “in any event they [the economists] are right in believing that indifference curves are sufficient to rationalize the demand and income curves and to deal with a considerable variety of welfare problems, and the marginal utility theory would not be much simpler to develop once we recognized the fact that the utility of a commodity usually depends upon the quantities possessed of several commodities” (Stigler 3, p. 81).
Monopoly and Monopolistic Competition
The inter-war Chicago School believed in monopoly power and the systematic problem it created. The post-WWII Chicago School worked its way into believing in very little besides perfect competition. But this only evolved over time. The early Stigler followed his teachers, and Stigler wrote extensively on monopoly. The Chicago tradition continued to be that while monopoly is not very important (Stigler Reference Stigler1941, and Arnold C. Harberger Reference Harberger1954)Footnote 24 and not growing (G. Warren Nutter Reference Nutter1951), government intervention was growing.
Stigler was a critic of monopolistic competition. That he did not agree with its basic tenets is evident from his treatment of this form of imperfect competition in The Theory of Price. However, Stigler believed that the explanatory or predictive value of monopolistic and/or imperfect competition offered little that was not afforded by the assumption of perfect competition, oligopoly, or monopoly. Whether the theory of monopolistic competition was more realistic in its assumptions or more descriptively accurate was not the focus of positive theory. The test should be whether the theory was good at predicting the behavior of economic agents. Stigler was also troubled by (1) the problems in defining the amorphous concept in monopolistic competition of an “industry group” and (2) the crucial assumption of monopolistic competition that each firm has an equal chance to attract any of the buyers in an industry despite the presence of product differentiation.
In the 1946 book, though, he does devote a section to monopolistic competition. But he concludes the section saying that “since demand problems [of monopolistic competition] are in essentials similar to those already discussed in the case of homogeneous products, the … analysis need not be repeated” (Stigler 2, p. 240). The phrase “monopolistic competition” is not included in the index. Subsequent editions of the text do not talk about monopolistic competition at all, even in passing. Edward H. Chamberlin (1899–1967), who coined the phrase to describe competition for a product with several good substitutes, is cited six times in the 1946 textbook. This drops to one citation in the 1952 book. And if you studied out of the 1966 textbook, you would not even know that Edward Chamberlin existed.
Stigler (Reference Stigler1988a) mentions his differences with Chamberlin's ideas. So heated was this debate that Chamberlin acknowledged it in his book Towards a More General Theory of Value (1957), written largely to defend his first book The Theory of Monopolistic Competition (1933). Chamberlin (Reference Chamberlin1957, p. 13n) says, “Stigler … although opposing the theory for a jumble of reasons … states forcefully its revolutionary character… .” Elsewhere in the same book he devotes an entire chapter to the Chicago School and says, “It is distinguished by the zeal with which the theory of monopolistic competition has been attacked … we shall therefore call it the Chicago School of Anti-Monopolistic Competition” (Chamberlin Reference Chamberlin1957, p. 296).
Stigler's response in his autobiography to this characterization was, “What was a minor recreational activity to us was the raison d'etre to him!” (Stigler Reference Stigler1988a, p. 150).Footnote 25 But was it more than just a recreational activity? In “Monopolistic Competition in Retrospect” (1949), Stigler acknowledges the revolutionary contents of the theory of monopolistic competition and Chamberlin's contribution.Footnote 26 Chamberlin's theory fails in that it uses the theoretical framework of Marshall, most suited to perfect competition or monopoly. But in the context of monopolistic competition, the framework does not deliver (Stigler Reference Stigler1949).
The Economics of Information
Stigler was awarded the Nobel Prize in 1982 for “his seminal studies of industrial structures, functioning of markets and causes and effects of public regulation” (see, e.g., http://cepa.newschool.edu/het/schools/nobel.htm#statistics). Clearly, his contribution to the economics of information was an important part of this body of work. So it is not surprising that he devoted a whole new chapter to it in his 1987 book. In fact Stigler's association with the effects of advertising started even in the 1946 edition, where he says that advertising would take place in a situation of substantial but not perfect competition. But very little is known about the effects of advertising on demand curves, and even less is known about advertising's impact on the elasticity of demand.
In the 1952 book, Stigler says that economists are critical of advertising because monopolists have become entrenched through advertising, but he was not. For example in an article about Henry Simons’ life and work, Stigler noted that Simons had listed six elaborate tasks for the state, one of which is the “severe restriction of advertising and merchandising” (Stigler Reference Stigler1974, p. 4). Stigler's response: “All these policies, with the possible exception of the limitation of advertising, could be argued to be necessary to the preservation of a large and efficient private enterprise sector” (Stigler Reference Stigler1974, p. 4).
The 1966 book, written after the famous article on the economics of information appeared, contained a strong section on advertising in the chapter on monopoly. But in Stigler 5, advertising was discussed under the chapter on the economics of information.
The Chicago Connection
Stigler studied at Chicago during the times of Frank H. Knight and Jacob Viner. In his autobiography, he writes of the vigorous arguments between them that suggested to him that there was no dominant school of thought at the time. But according to a number of historians of economics, Knight was the major teacher who started to define the ideologies of the Chicago School, as we know it today.Footnote 27 But even Stigler acknowledges that the great debates between Knight and Viner were more wars of words than of basic ideologies. For example, they had a continuing argument over whether the costs of producing goods and services were ultimately psychological costs such as the irksomeness of labor or simply the foregone benefits that one might have enjoyed had the resources been employed in some alternative use. Stigler points out that the irksomeness of labor could actually include the benefits foregone. In the 1942 (Stigler 1, p. 2) book he says, “Almost any activity can be viewed as oriented toward maximization of the attainment of ends. Carefully planned laziness can be looked upon as the maximization of not working; if it is not planned, it can be viewed as the simultaneous maximization of not working and not thinking.” So in effect they were saying the same thing. Costs of production could contain both components.
Craig Freedman (Reference Freedman1995) believes that Stigler misinterpreted Paul M. Sweezy's (Reference Sweezy1939) article on the kinked oligopoly demand curve and that he wrote his critique of Sweezy's article in an attempt to retain the neoclassical paradigm that was under threat by Sweezy's exposition. None of Stigler's textbooks talk about the kinked oligopoly demand curve, though modern industrial organization textbooks discuss it, albeit generally in a negative fashion.
Stigler is credited with having developed the static equilibrium dominant firm price leadership model as is taught in modern neoclassical economics today (Christoph Schenzler, John J. Siegfried, and William O. Thweatt, Reference Schenzler, Siegfried and Thweatt1992). According to Schenzler et al. (Reference Schenzler, Siegfried and Thweatt1992), some economists had understood the essence of the model in the 1920s, but it was Stigler in 1940 who gave it its final form. Stigler (Reference Stigler1968) also makes the most celebrated empirical application of the survivor principle, whose classic statement is in Armen A. Alchian (Reference Alchian1950), although its roots go way back in time. The concept is extensively used in the tight prior.
VI. CONCLUSION
The Stigler texts are important because of the crucial role they played in the education of generations of economists both inside and outside the environs of Cook County, Illinois. While the texts reflect some themes current (e.g., Friedman) and past (e.g., Marshall), in the end Stigler included what he thought was germane.Footnote 28
Reading the five versions of the Stigler book remains a delight. His imagination, creativity, style, and a general zeal to teach price theory correctly are alluring to a reader of any economic persuasion. The first book was strongly Marshallian in its approach. Each succeeding version became more and more Stiglerian until the final book which was, well, all Stigler. The history of Stigler's book is that he started largely Marshallian and ended largely Stiglerian by being precise and rigorous, and constantly drawing attention to the predictions of the analysis for positive testing and emphasizing that the perfect competition model was a powerful tool for general economic analysis. Here was a man who had seen the elephant and was not afraid to discuss the beast in great detail and with considerable style. His charm, grace, lucidity, and brilliance can also be found in his collected essays such as Stigler (1950, Reference Stigler1965, Reference Stigler1968, Reference Stigler1975, Reference Stigler1969, Reference Stigler1982, and Reference Stigler1988a).Footnote 29
An invaluable source containing personal recollection and retrospection of his work from friends and colleagues, as well as a complete bibliography, is contained in the In Memoriam issue of the Journal of Political Economy (Numerous authors 1993).
