George Stigler on Regulation: Lessons for Today

October 20 marks the 35^th anniversary of George Stigler’s Nobel prize, the first of Booth School of Business’s grand total of eight Nobels. To celebrate the occasion, his longtime colleague at Chicago Booth Sam Peltzman offers a preview of the memorial lecture he’ll deliver at our November “Stigler in the 21^st Century” conference.

George Stigler had more influence on the economic analysis of regulation than any of his contemporaries. How does his contribution help us to understand regulation today? That is the question I will try to answer in my talk.

I will start by summarizing what his contribution to the economic analysis of regulation was. This is easy, since it consisted almost entirely of two short, readable articles. The first was his 1962 Journal of Law and Economics article with Claire Friedland entitled “What Can Regulators Regulate? The Case of Electricity.” The second was his 1971 article in The Bell Journal of Economics and Management Science on the theory of economic regulation. The 1962 piece argued that regulation had no effect on electricity rates and the 1971 article famously laid out the “capture” theory of regulation: “Regulation is acquired by the industry,” Stigler argued, “and is designed and operated primarily for its benefit.” If you think about it, the two stories could be contradictory, at least in certain circumstances. How can regulation be operated for the benefit of the industry and yet have no effects? 

I’ll deal with a couple of explanations for this contradiction. One is that Stigler altered his views between 1962 and 1971. Another is that he characteristically stated his premises and conclusions boldly and without much qualification. This style played a part in his influence. I’ll give some examples of perhaps too much boldness in my talk.

That said, the more important reason for his influence was in the questions he posed. In the 1962 paper it was, “What are the actual, as opposed to the ostensible, effects of regulation?” Today this sounds like a no-brainer. Back then, as I can attest personally, it was quite eyebrow-raising. In the 1971 paper it was, “What kind of regulation will emerge from a political process in which all the players, including the regulators, are self-regarding?” That, too, seems like an obvious question today. But it was highly controversial back then—especially the self-regarding regulators part. And I must say that much mischief is still created by ignoring that bit.

Economists at least, by and large, do not ignore it. Nor do they, by and large, accept the ostensible goals of regulation at face value. We’re not totally innocent here—the hunt for externalities to be extirpated by empowering the selfless graduates of our elite universities continues. But serious scholarship on regulation has been irrevocably altered by the questions Stigler posed.

The answers are important, too. You should treat the effects of regulation like any economic problem. Set out a counterfactual without regulation and then compare the regulated outcome to the counterfactual outcome. In predicting the effects, you should not ignore the importance of collective action by interested parties. In particular, expect that the elements that shape effective collective action (organization and information) will also shape the distribution of gains and losses from regulation. The reason is that the regulators won’t make you a gainer unless they perceive that to be best for them, and you need to solve a collective action problem to shape their perception.

The questions and the shaping of the answers are, I will argue, Stigler’s enduring legacy. The single, bold answer—no effects, capture by the industry—helps more to sharpen the focus than provide an infallible guide. We know now that regulation sometimes does have important effects on market outcomes. Sometimes the regulation or the effects are sought by the industry, sometimes not. But you cannot understand what is going on by ignoring the importance of collective action within a political process. I will give a couple of examples (pharmaceuticals and financial services)—maybe more if there’s time—where regulation was not sought by the industry, but where collective action by the industry helped shape ultimate outcomes.

View the full program and register to attend the “Stigler in the 21^st Century” conference hosted by the Stigler Center for the Study of the Economy and the State at Chicago Booth on November 8–9, 2017.

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