20 October 1982
THIS
YEAR's PRIZE IN ECONOMICS IS AWARDED FOR RESEARCH ON MARKET PROCESSES AND THE
CAUSES AND EFFECTS OF PUBLIC REGULATION
The
Royal Swedish Academy of Sciences has decided to award the 1982 Alfred Nobel Memorial
Prize in Economic Science to
Professor George Stigler, University
of Chicago, USA,
for his seminal studies of industrial structures,
functioning of markets and causes and effects of public regulation.
George Stigler's Principal Contribution
Through long and extensive
research efforts with strong empirical orientation, George Stigler has
made fundamental contributions to the study of market processes and the analysis
of the structure of industries. As part of this research he has investigated how
markets are affected by economic legislation. His studies of the forces which
give rise to regulatory legislation have opened up a completely new area of economic
research.
Stigler's achievements establish him as a leader in applied
research on markets and industrial structure - a field often known as industrial
organization. Through particular features of his research, Stigler is also recognized
as the founder of "economics of information" and ''economics of regulation", and
one of the pioneers of research in the intersection of economics and law.
Market Processes and Industrial Structure
Despite strong simplifications,
basic economic theory has proved effective in explaining and predicting the dominant
features of market events. At the same time, the high level of abstraction has
left many individual market phenomena unexplained. This is the premise for Stigler's
research work. His underlying ambition has been to seek explanations for the distinctive
features and peculiarities of markets and structural developments within the framework
of basic theoretical assumptions about firms' and households' optimizing behavior
and the interplay between supply and demand.
This is exemplified
in Stigler's studies of the role of information in market processes. According
to traditional theory, the result of optimization and market processes should
be that every commodity, except for transport costs, is sold for one and the same
price everywhere. But, in practice, price variation is observed on most markets.
Stigler has shown that this can be explained if the costs of searching for, and
diffusing information about, goods and prices are incorporated in the model along
with production and transport costs. The basic properties of traditional theory
do not have to be challenged. It has merely been too schematic by assuming "perfect
information", in the same way that fundamental theories in physics simplistically
assume the existence of a vacuum.
A market participant's lack of
knowledge about goods and prices can, of course, be alleviated by collecting and
furnishing information. The amount of information a firm or household acquires
is guided by the same comparisons between costs and benefits as the production
of any commodity. That is, information is gathered until the expected utility
of further search no longer outweighs additional search costs. The information
a subject acquires is consciously chosen. Conversely - and more provocatively
- even a lack of market information is rattionally and deliberately chosen
These, and similar achievements prove an indispensable complement to basic
theory. Subsequent research has shown how phenomena such as price rigidity, variations
in delivery periods, queuing and unutilized resources, which are essential features
of market processes, can be afforded a strict explanation within the framework
of basic economic assumpions. They are no longer unnecessary market imperfections
which can give rise to government intervention. The results have also contributed
to explaining inflation and unemployment. An appreciable amount of the research
on these phenomena during the last decade has also followed this line of reasoning.
Thus, Stigler is not only the foremost originator of economics of information.
He is also among those who have provided the basic postulates for today's research
on the theoretical foundations of macroeconomics.
In another important
study, Stigler examines the traditional theoretical prediction that differences
in rates of return are rapidly erased though movements of capital and from low-yield
to high-yield firms - one of the cornerstones of the neoclassical concept of market
mechanisms. On the basis of extensive compilation of American earnings and capital
data - in itself a pioneering effort in economic statistics - Stigler also finds
that differences in rates of return are effectively equalized, even if the process
might take as long as a decade. The fact that an industrial sector is profitable,
or unprofitable, one year indeed indicates that it can be expected to remain so
in the coming 2-3 years. But it says hardly anything whatsoever about the condition
of the sector after 7-8 years. Sluggishness can postpone equalization, but it
will emerge eventually. Differences in rates of return between firms or sectors
may appear to last a long time, but this is often because new, highly-productive
firms and sectors rise, while firms and sectors which were profitable fall. There
are many indications that these tendencies have recently been reinforced by increased
internationalization of the economic system. In principle, these processes appear
to be equally prevalent in many countries as they are in the USA.
In another study, Stigler shows that, in practice, clear-cut conclusions about
economies of scale and similar phenomena cannot be drawn on the basis of traditional
cost data in order to determine optimal firm size in every industrial sector.
A firm's vitality and development capacity are only weakly related to cost conditions
in production itself, but depend instead on various factors which are difficult
to observe. This brought Stigler to the so-called survivor principle which states
that, first, those categories of firms which actually exhibit an ability to survive
should be determined; then, the properties which yield this ability should be
sought. Stigler himself has carried out a study along these lines which has had
many successors.
Stigler's contributions to the empirical study of
markets and sectoral structure based on economic theory also include a number
of further investigations. One of them is a survey of pricing behavior in American
industry. Others refer to the significance of monopoly and oligopoly.
Causes and Effects of Public Regulation
As early as the 1940s, Stigler
studied the effects of some features of regulatory legislation in the USA, particularly
rent controls and minimum-wage legislation. He indicated that far-reaching, unintended
side-effects could arise alongside the primary desired effects. A later study
showed that regulation of electricity rates completely lacked observable effects.
As a conceivable explanation, Stigler saw that regulation can be based on erroneous
perception of real conditions and thus, in practice, be difficult to implement,
and on the fact that the intended effects can be neutralized by external pressures.
This work on the consequences of regulatory legislation have set a pattern for
numerous similar studies, performed by other researchers in many countries.
In later studies of regulatory legislation, Stigler has emphasized its
causes rather than its effects. Preliminary observations led him to the hypothesis
that, in practice, some regulations protect firms, organizations and professional
and occupational groups - i.e., producer interests - instead of the general
public that, according to stated motives, they were intended to protect. Stigler
himself found firm empirical support for this hypothesis in a number of studies;
it is still too early to assess its ultimate scope. But Stigler's results do show
that legislation can also be an outflow of market participants' optimizing behaviour.
To the extent that this is so, legislation is no longer an "exogenous" force which
affects the economy from outside, but an "endogenous'' part of the economic system
itself. This approach constitutes a further step towards extending the sphere
of application for the basic assumption of economic theory.
Stigler's studies have opened up a new area of research known as economics of regulation. In many quarters, it has resulted in fundamental testing of the forces, purposes and effects of different aspects of legislation. These achievements have also made Stigler one of the pioneers in another new field of research, law and economics.
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