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 rationally
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.