Claire Friedland, George Stigler's long-time associate, fondly claims that "much of his work centered around saving the damsel in distress, neoclassicism, from her attackers" (Friedland, 1993, p. 780). This is a very fair summary of Stigler's career. But unlike the knights of Arthurian legend, Stigler's holy grail was already firmly in his grasp. Even his original contributions, such as work on the economics of information (1961) or on oligopoly (1964), were primarily aimed at bolstering the reach and power of price theory.
I believe, but cannot document directly, that he felt strongly that the neoclassical theoretical apparatus was, on the whole, quite powerful and, after a half century's investment in its development, that it should not be abandoned lightly. Rather, he sought to strengthen it further by extending the theory and subjecting it to empirical verification. [Demsetz, 1993, p. 794]
The consequence of such a strongly felt vocation was his increasing transformation from scholar to preacher, from a researcher analyzing without fear or favor to an advocate persuading with whatever tools came to hand. His critical work inevitably demonstrated an unwillingness to yield any ground or to consider any alternative. Opponents were given no quarter. Arguments were ignored, sneered at, even misrepresented, but never granted legitimacy.[2]
Given these predilections, when examining the work of George Stigler, especially his critical pieces, the reader is drawn to question whether economics is truly served by such champions. When economists stoop to preach, do they do their own profession a disservice?[3] The answer I would hazard is yes. By acting as an unswerving advocate, George Stigler set others a poor example. The very success of his career seems to present a repudiation of the virtues of an open mind. He embodied the attributes of a skilled debater seeking to win at all costs. Employing those skills effectively and consistently, Stigler made use of every available opportunity to deride those he viewed as serious opponents.
This one overriding objective made Stigler's critical work consistent in both content and approach. Viewed in this light, a symposium marking the sixtieth anniversary of Berle and Means's The Modern Corporation and Private Property (1932) could only provide Stigler with the chance to renew a decades-long feud with Means under the guise of a scholarly reexamination. The problem is not so much that Stigler mercilessly attacks the work of Berle and Means but that in doing so he fails to provide a reasonable portrait of the work he is intent on demolishing. Stigler's desire not only to defend neoclassical economics but to spread those articles of faith led him, whether intentionally or not, to misrepresent the work of others.[4] As a result, the terms of debate were often redefined in a manner favorable to the neoclassical case.
Before we can fully understand the how and why of this particular misrepresentation and assess the harm done, some additional background on Stigler's approach to academic work, as well as the values and methods he pursued, may help to place a somewhat specific examination in a broader context. A properly constructed backdrop of Stigler's academic battles will prevent us from taking any one of his critical works at face value. In many of Stigler's papers, what is left unsaid is as important as what is clearly apparent.
Economical preaching: Stigler's role as an advocate
It is difficult to understand [Reid's] approach except on the assumption that a proposed theory is presumed innocent until shown guilty. This is the precise opposite of the presumption I would use: namely, that a new hypothesis has to explain some things presently unexplained in order to be useful. [Stigler, 1982, p. 204]
Without discounting George Stigler's pioneering contributions in the fields of information and regulation, it was as a ferocious and brilliant advocate of neoclassical price theory that he made his most lasting impact on the economics profession. For years, George Stigler played a brilliant and acerbic John Calvin to Milton Friedman's more ebullient Martin Luther as they conducted an ongoing reformation of economics. As a shared canon of faith, both insisted on going back to the fundamental truths of price theory. In their eyes, much of the interwar and certainly all of the postwar years had seen an accretion of peripheral and misleading dogmas that eventually had obscured the message of neoclassical economics. In its fallen state, the reigning apostles of the prevailing status quo defended government intervention with models based on sophistical logic rather than the cold hard evidence of empirical data.
Stigler, as well as Friedman, was obviously successful in turning this situation around, partly because of their unswerving belief in and support of price theory. In and of itself, advocacy is neither intrinsically wrong nor shameful. As Donald McCloskey (1985) has repeatedly pointed out, we need not be ashamed to admit that we use whatever rhetorical skills and tricks we can muster. But there should be a difference between persuasion that forms the heart of academic conversation and that which seeks to bully others into submission. Under the latter's sway, the marketplace of ideas becomes a foram where persistence and stubbornness are routinely rewarded. Ideas are championed not simply by arguing their own merits, but by denigrating any and every opposing theory.
Some of these traits of intellectual leaders are caught in the statement that they lack a sense of humor. I mean by this, not the inability to laugh at the tight point when heating a joke, but the ability to view oneself with detached candor. Ridicule is a common weapon of attack but amused self-examination is a form of disarmament; one so endowed cannot declaim his beliefs with massive certainty and view opposing opinions as error uncontaminated by truth. [Stigler, 1988. pp. 213-214]
Much of what a scholar does, particularly an economist, is full of ambiguity. To present theories as simple polar alternatives only misleads. By substituting an overly simplified version of an opposing model[5] for a more complex original, Stigler sought to shift the terms of debate onto more congenial territory, ultimately removing the offending idea from any serious discussion. As Stigler himself admits, when economists appear as expert witnesses in adversarial proceedings, even the most virtuous of academics tend to focus on favorable arguments and eliminate any ambiguities (Stigler, 1988, pp. 130-133). Unfortunately, Stigler took the same attitude when engaged in professional discussions. Such occasions became a series of debates, each one of which Stigler would try to win by careful selection of available evidence, if not by simple bullying. Stigler did not merely try to point out the weaknesses in alternative theories but instead focused his efforts on obfuscating the issues at stake.[6]
Stigler did not seem to know how to indicate the existing problems within a model without also beating that model into the ground. If a model in some way challenged the universality of price theory, then it had to be completely without merit, an imposter and fraud. Not only did he want to rescue the neoclassical maiden by slaying the dragon of irrational thought, but he then wanted to burn the bloody carcass so that even the memory of its existence would be eradicated.
A lifetime spent as an advocate for a single broad-based approach certainly led to consistency. Whatever early beliefs proved to be peripheral to the core of neoclassical price theory were jettisoned. Those ideas that were consistent with price efficiency gained a hearing and came to replace earlier, more conventional views.[7] What George Stigler said never came as a surprise. The reader of one of his articles or the listener at one of his lectures knew beforehand what his conclusions would be. Such persistent and unswerving advocacy of neoclassical price theory made him, by the end of his career, one of the most influential microeconomists of this century. Ironically, it was not so much for his own analytical work but for the moral suasion he exerted in rescuing price theory from its postwar critics.
Adam Smith's best friend
There is a well-known story, still worth retelling, about a word game George invented for young children. He would give them, he said, a million dollars if they correctly answered three questions. The first, "Who was buried in Grant's tomb?" and the second, "Whose head was on the Lincoln penny?" inspired great confidence in the child for a prospective life of luxury and leisure. Invariably, all hopes were dashed with the third question: "Who was Adam Smith's best friend?" Except one time the son of a friend responded, "Why you are, Uncle George." [Rosen, 1993, pp. 809-810]
Stigler's main tenets were simple.[8] If anything, Stigler became more single-minded about pursuing them as he grew older. There were essentially five interrelated articles of faith composing the Chicago doctrine that Stigler was instrumental in formulating and increasingly successful in advocating: (1) theories should be general and unambiguous; (2) they should provide hypotheses that are testable against existing empirical data; (3) neoclassical price theory provided the best (most general, precise, and versatile) tool available for economic analysis; (4) markets, unless convincing evidence to the contrary could be found, were competitive and efficient; and (5) government action was guided by self-interest.
Universality
Like many other researchers, economists abstract in order to generalize. In this search for a common thread binding together disparate events, economists find the basis for framing testable hypotheses. Price theory reflects the logical fruit of this process. Stigler would allow that it was perfectly legitimate to discuss alternative methods in which price theory might be extendeded (nontraditional areas a la Becker) or ways in which it might be improved (the Coase theorem, for example). However, under Stigler's rules of engagement, price theory itself could only legitimately be challenged by an alternative theory that was equally general in its application. Thus, throughout his career, Stigler's attacks were aimed at what he saw as the enemies of this approach.
He despised the ambiguity and lack of broad principles that went into the sort of case-by-case method advocated by many of his opponents. Or to be more precise, Stigler's opponents were self-defined by their chosen methodology. All they needed to do to achieve Stigler's certain enmity was to proclaim support for the analysis of particulars rather than that of generalities. The natural consequences of maintaining support for an all-encompassing theory meant that his greatest pitched battles were fought against Sweezy's kinked demand curve, Chamberlin's monopolistic competition,[9] Means's administered prices, Mason, Kaysen, and Bain's case study approach to industrial organization, Galbraith's countervailing power, and Leibenstein's X-inefficiency.
Stigler's uncompromising methodology runs into at least one potential problem. It is possible to argue, as Keynes did (1964), that economics, by its very nature, is not meant to provide grand unifying theories. All it can humbly offer is an approach, a bag of analytical tools with which to grapple with a set of rather diverse problems. This would make the insistence on universal principles largely misguided. By determinately ignoring what distinguishes one economic event from another, we may even lose much of what is important. Stigler seems to ignore that any theory can be spread too thinly. A theory that is specific to only a limited number of cases is not by definition unsatisfactory. A theory that tries to explain everything may end up explaining nothing.
Precision versus accuracy: is any number better than some number?[10]
Empirical testing explicitly defined George Stigler's mission as an economist. "Because our views have been guided by casual observation, ours has become a flabby science" (Stigler, 1949, p. 104). He was dismissive of work not solidly tethered to the ground by empirical data. Questions for him, at least those that counted, were questions of fact, that is, those that could be determined by an appropriate test.
Stigler believed that the progress of economics as a discipline had to be measured in terms of its ability to develop propositions that could be subjected to empirical testing and refutation. Economics for Stigler was always an empirical as well as an analytical discipline. [Rosenberg, 1993, p. 846]
Stigler can be seen as one of the driving forces behind the postwar quantification of economics, the insistence that theorizing without evidence was empty. If anything, he seemed to make a near fetish out of numbers. If to be accurate in economics at least occasionally involves dealing with ambiguity, then one would say that, given the choice, Stigler would opt for numerical precision over accuracy.[11]
Ironically, he takes what can only be described as a somewhat cavalier approach to statistics. "When we must reach a conclusion (i.e., when policy is involved), I believe that the received theory deserves more respect and quantitative materials less respect than are commonly accorded them" (Stigler, 1951, pp. 127-128). At times he seems quite happy to tailor his facts to fit what he seeks to prove.[12]
The computer has made it easy to fish for results. If the statistical analysis doesn't come out "right" the first or the twentieth time, one can drop a year from the data, add a new variable to explain contradictions, take the logarithm of another variable, and so on until, lo, the desired answer appears--all in just a few minutes. [Stigler, 1988, p. 116]
Nor are Stigler's convictions consistently empirically based. His firm support of Telser's (1960) approach to resale price maintenance (Stigler, 1988, p. 165) or to Demsetz's (1968) approach to natural monopoly (Stigler, 1988, p. 164) is uncategorical despite the lack of any strong empirical evidence. For someone so avowedly enamored of empirical testing, this inconsistency of approach may indicate other than strictly quantifiable priorities.
Price theory and markets
Stigler's career was marked by an ever growing belief that there was a single, simple theory of prices that could explain the whole range of human actions. To understand the relevant set of market prices was to understand the inner workings of rational choice. His colleague, Harold Demsetz, precisely summed up Stigler's creed:
Three distinguishing characteristics of neoclassical price theory are important here. First, the theory exudes confidence that rational behavior succeeds in realizing mutually beneficial exchange opportunities. Second, it counts the individual--whether consumer, laborer, or business owner--as unimportant, despite its reliance on self-interested individual behavior, it uses aggregations of the behavior of individuals to construct its equilibria, and in doing so it deprives the individual of any force in the economic system. Third, it relies on Marshall's two-bladed scissors, supply and demand, to construct these aggregations of the behavior of individuals. [Demsetz, 1993, p. 795]
As already noted, this creed allowed Stigler to minimize the importance of interdependency among economic agents. It was the aggregate decisions of producers and consumers that dominated. Given this focus, economic analysis could be nicely encompassed by neoclassical price theory without needing to develop additional or even competing theories of oligopoly. Armed with these views, Stigler very early in his career (1949d) rejected the tack taken by proponents of monopolistic competition since it demanded specific information about firms. By its very nature this represented a non-equilibrium approach to economics. As previously pointed out, the stony disinterest that a case study approach met with in Chicago was a natural outcome of the method favored there. Subsequent theories that looked to the actions and interactions of individual firms were in turn rejected. Attempts to examine the inner workings of organizations were likewise uncongenial to Stigler and other Chicago-trained economists. Not because such attempts necessarily yielded misinformation, but rather they were seen to be superfluous to the task facing a serious economist.
Stigler also pushed rationality very hard, regarding self-interested behavior not as a useful assumption expediting economic analysis, but rather as a testable hypothesis that he was confident could be proven true (Stigler, 1982c).[13] This insistence on transforming what others would call only operational assumptions into testable hypotheses extends to profit maximizing as well. Why does Stigler insist that these core assumptions are neither conveniences or heuristic devices? The possibility that other assumptions could equally well be substituted for these two core assumptions brings into question the efficiency of market outcomes. As a preacher, Stigler would abhor such heretical tendencies. An unruly spirit is the devil' s own companion. Or what is much the same thing, failure to accept the wisdom of the marketplace is accompanied by the specter of government intervention.
The thin edge of the wedge: the role of government in the economy
As a young economist, George Stigler could entertain deviations from strictly U-shaped cost curves (1939), a relatively mainstream approach to monopoly (1942), welfare payments in kind determined by government bureaucrats (1946), and a strict enforcement of antitrust legislation (1950). By the 1960s, he was beginning to reject even these concessions. His presidential address to the AEA (1965) took issue with the tacit acceptance of government economic policy at a time when such policy was gaining greater acceptance. By then, Stigler, with the help of Claire Friedland, had started to question the efficacy of regulation.
Government, like firms, had usually been treated as a black box with transaction costs for government action implicitly assumed to be zero. A government could simply step in to maintain economic efficiency when the market faltered. What was new in Stigler's approach was not his questioning of governmental efficiency. Stigler, as a scholar of the history of his own discipline knew this all too well. His deliberate contribution was to take what previously had been a pure assertion and to try to test its validity. This is to be applauded, though the nature of statistical analysis when applied to economics, and in particular the way in which Stigler tended to use it, makes one wonder whether such tests did not become a way to make simple assertions via manipulated numbers. In effect, it was no more convincing than citing anecdotal cases (or perhaps even less so).[14]
Stigler (1971) added to what he saw as the first solid evidence for governmental incompetence his complementary work on the role of self-interest in political and governmental decisions. This again was nothing brand new, as Stigler himself clearly pointed out.[15] Stigler, however, pushed the matter further by attributing all government regulation, tax policies, and the like to the power of individual self-interest To understand a policy, one must start (and perhaps end) by asking who would chiefly benefit from it. For Stigler, the regrettable postwar straying from neeclassical theory, compounded by a lazy acceptance of principles asserted rather than empirically tested, condemned economists to follow rather than lead in policy matters. Until economists could reasonably estimate the consequences of alternative policies, economists were in no position to proffer policy advice
Stigler's motives are quite clear. He is setting up something of a second line of defense. Markets, according to this argument, are inherently competitive and efficient. Even in those instances where this appears not to be the case, government intervention can only make matters worse, since government action is by nature inefficient and driven by narrowly defined interest groups. This threat of intervention definitively frames the question of income redistribution.[16]
Share and share alike: Stigler's distributive interests
[W]hen they had been running half an hour or so, and were quite dry again, the Dodo suddenly called out, "The race is over!" and they all crowded round it, panting, and asking, "But who has won?"
This question the Dodo could not answer without a great deal of thought, ... At last the Dodo said, "Everybody has won, and all must have prizes." [Carroll, 1974, pp. 31-32]
The unannounced issue lurking beneath the surface of Stigler's work, especially the more critical pieces, is the question of income distribution. If we are to delve beneath the explicit admissions that Stigler makes about his own work, we need to be aware of his preoccupation with problems of distribution. Thus, his work on oligopoly, his rejection of interdependent firm analysis, his insistence on profit-maximizing firms and utility-maximizing consumers stem from the implications such models have for distributive theory. For Stigler, market distributions are efficient in the sense that redistributions would yield lower total outputs. These distributions are not by nature arbitrary. Technical considerations determine a factor' s reward in direct proportion to his or her contribution to the productive process.[17]
For Stigler, laissez-faire policy was not just an expedient, the best of a poor set of options, but the efficient choice as judged by theoretical as well as by applied standards. Alternative theories that allowed for random elements, that did not yield a describable equilibrium (such as monopolistic competition and other theories of oligopoly), undercut the justification for existing market distributions. If there was no compelling necessity for the current market outcome, what basis remained that would deter experimenting with alternatives? Once this was conceded, the wedge of government intervention could be successfully inserted (illegitimately, in the opinion of George Stigler, since government failure and the cost of government intervention were not taken into account). To reject marginal productivity theory, Stigler would need to be presented with an alternative possessing greater virtues than the current prevailing standard.
The labor economist can properly reject the received theory without proposing alternative generalizations only if the received theory is useless. In the present case, this is wholly untenable. The marginal-productivity theory can explain and predict a large number of important phenomena: why real wages are higher in America than in China; why salaries of college professors are more equal than the earning of lawyers; ad infinitum. To ask us to abandon this useful theory without giving us something better is a most unreasonable request, and it gains no reasonableness from a demonstration that the theory is incomplete. [Stigler, 1949, p. 98]
Berle and Means (1932) not only reinforced the idea that market distributions were the arbitrary result of bargaining, but openly presented a case for radical income redistribution. The book was in fact everything that Stigler objected to in economic analysis. It was policy making preceding economic theory. While critical of neoclassical production theory, it offered no well-thought-out alternative. It raised issues and jumped straight away to policy implications. There would be nothing in such work that Stigler could possibly find appealing. Given his usual advocacy approach in such matters, it should not be surprising that Stigler's version of their thesis and his testing of it bore no strict relationship to the propositions that the two coauthors put forth.
No end to Means
I think that it was about this time that Gardiner Means and I met at a meeting of the Committee for Economic Development. Means approached me and said, "George, I'm not as stupid as you think." [Stigler, 1988, pp. 110-111]
On the fiftieth anniversary of the publication of The Modern Corporation and Private Property (1932), the Hoover Institute hosted a symposium on that work. Most of the participants were not particularly sympathetic to the main theses of the book, but "many of the participants ... George Stigler, Harold Demsetz, Gene Fama, Michael Jensen, Oliver Williamson, Henry Manne, Frank Easterbrook, Daniel Fischel, and Leonard Weiss [had] worked on questions raised in this seminal work" (Moore, 1983, p. 235). Some of the contributors took the opportunity to explore issues raised in the original work. Others gave a retrospective evaluation of the book itself.
Though Berle and Means did not collaborate again, each continued on his own to pursue the ideas initially developed in their 1932 book. A good idea of the main points of that book can be garnered not only by focusing on the statements made originally but by subsequent articles as well. During the 1982 symposium, Means laid out four points that he felt summarized the aims of that early work:
Our book provided a framework showing that by 1930
1) roughly three quarters of the business wealth of this country was held by corporations;
2) practically half of this corporate wealth was controlled by the 200 largest;
3) a substantial part of this wealth involved a separation between ownership and control;
4) the free market system had shifted from one dominated by markets in which competition was among the many to a system of such markets combined with markets in which competition was among the few, with significant market power in the hands of managements ...
. . . This was the economic problem we presented along with the legal and economic implications of the separation of ownership and control, which so greatly increased the power of individual corporations to grow in size. [Means, 1983, p. 469]
In 1932, Berle and Means observed (based on available data) that large corporations were taking the place of the smaller owner-operated firms that had previously defined the norm. As they put it, the largest 200 firms in the United States owned an increasing share of the country's total wealth (in the form of industrial structure). Competition within individual markets was not the focus of their overall discussion. They would both separately argue in their subsequent work that the level of price competition was decreasing, but that was not the issue here. The Modern Corporation and Private Property focused on the rising dominance of publicly traded corporations without exploring the implications for individual markets.
The expansion of corporate size grew out of a corresponding growth in the corporate share market. The natural consequence of this expansion was a wider dispersion of shareholders. The increased number of owners made it difficult for any one (or any coalition) to dominate. These were merely observations backed by available data, though open to interpretation. The consequence of such an evolutionary development was, in their view, a corresponding separation between ownership and control. Property rights no longer translated into an ability to dispose of one's property according to one's wishes.
In the modern corporation, with its separation of ownership and control, these two functions of risk and control are, in the main, performed by two different groups of people. Where such a separation is complete one group of individuals, the security holders and in particular the stockholders, performs the function of risk-takers and suppliers of capital, while a separate group exercises control and ultimate management. In such a case, if profits are to be received only by the security holders, as the traditional logic of property would require, how can they perform both of their traditional economic roles? Are no profits to go to those who exercise control and in whose hands the efficient operation of enterprise ultimately rests? [Berle and Means, 1967, p. 301]
The traditional logic behind private property assumed that this institutional arrangement was conducive to greater efficiency. In an environment where risk and control are indivisible, effort is directly rewarded. There is thus every incentive for an owner of property to put it to its best use. Those who think they can do a better job in increasing the productivity of a given asset would be willing to buy it at a price mutually advantageous to both the current and prospective owner. When, in the case of the modern corporation, these roles are effectively separated, the traditional logic tends to break down.
The standard economic theory of the firm is built upon the principle that rewards for efficiency are to be given to those who initiate them. If we are to retain the prevalent idea that the owners of private property are entitled to all the returns generated from that property, we are then faced with an incentive problem. Those who control the corporation (management) have no incentive to increase the performance of the firm.[18] They will gain nothing by it. As a consequence, we need to rethink our ideas concerning private property; specifically, we need to reformulate the economic theory based on this premise--that is, the standard neoclassical price theory.
From the economic point of view, the crucial implication of this corporate revolution was the extent to which it made obsolete the basic concepts underlying the body of traditional economic theory which was then the basis of public policy. Wealth, enterprise, initiative, the profit motive, and competition, each was shown to have become so changed in character with the revolution as to make traditional theory no longer applicable. [Berle and Means, 1967, p. xxi]
Berle and Means saw economics as marooned on a Crusoe-like island of self-reliance and simple independent action. The visible hand of Adam Smith weighed too heavily on the profession, blinding it to the relevant institutional changes since his time. In effect, Berle and Means are raising what today we would call the principle-agent problem, most apparent in Berle's discussion of his fiduciary theory of the corporation. Management and owners do not have identical objectives. While it would impair efficiency if share owners received their traditional rerum (having the rights of passive property completely upheld), going to the other extreme and allowing the controlling group free rein would only increase the probability of management plundering. Either choice would prove unsatisfactory, although the latter is even less desirable than the former (see Bede and Means, 1967, p. 301).
What the authors raise is the very modem issue of incentive contracts to insure that management works to increase a firm's performance. The book also touches on a number of other issues that form the heart of the modem theory of the firm. These include an implicit attempt to define a firm by its contractual relationships with a variety of constituencies, much in the mode in which Jensen and Meckling (1976) define a firm as a nexus of contracts.[19] Similarly, the growing domination of the economy by large corporations led Berle and Means to discuss the distinction between markets and hierarchies, an area of research latter developed by both Williamson (1975) and Chandler (1977).[20]
It is equally important to make clear what Berle and Means do not claim. There is no assertion that large corporations are not efficient. Though management may not have the fight incentives to strive after maximum profits, the added competency flowing from the specialization of the management function must surely make up for, if not surpass, the potential loss flowing from the separation of ownership from control. Otherwise there would be no reason for the corporate form increasingly to dominate the market economy.
It is not claimed that owner/managers do not themselves engage in onsite consumption rather than profit maximization. Nor is it asserted that managers of these modem corporations do not pursue profits.[21] Rather, the implication is that an economic model relying on a simple assumption of profit maximization is insufficient to account for the actions of a modem corporation. The goals of a firm will not simply reflect the goals of its nominal owners.
One need not, therefore, deny that a form of "profit maximization" is involved. But the results, market-wise, substantially modify the uncomplicated predictions of classical economists. Elaboration here is impossible: the situations are at once too varied and too fundamental. [Berle, 1965, pp. 34-35]
It is not difficult to argue that the inadequacy of the standard theory has been sufficiently borne out by the wide variety of work that has been carried out since 1932. The very existence of such models bears witness to Berle and Means' original assertion that new approaches are indeed needed given the change in the structure of the dominant firms.
Clearly, they claimed that there had been a revolution in the organizational structure of the economy. Standard economic theories would no longer do. This by itself would be controversial enough and sufficient to arouse the ire of George Stigler.[22] But Berle and Means had a broader objective in mind than a purely theoretical issue. Following Veblen (1964), they saw a shift in the economic power structure. Power, rather than some inherent technical basis, determined distributive shares. Relative bargaining power depended on the input one controlled. Implicitly, in a manner foreshadowing the work of Galbraith (1967), Berle and Means assume that the key input had shifted from being capital to being management. The reflection of such a shift is exemplified by the struggle between corporate owners and corporate controllers. But what is important for the analysis is to notice that the basis for distributive shares is rather arbitrary. Shareholders have to be paid enough to cover the opportunity cost of their capital. Managers need sufficient incentive to perform effectively. But what division of shares will best accomplish such goals is not clear. Nor is it obvious that these groups are the only ones that should benefit from the growing efficiency of corporations.
Eliminating the sole interest of the passive owner, however, does not necessarily lay a basis for the alternative claim that the new powers should be used in the interest of the controlling groups. The latter have not presented, in acts or words any acceptable defence of the proposition that these powers should be so used. No tradition supports that proposition. The control groups have, rather, cleared the way for the claims of a group far wider than either the owners or the control. They have placed the community in a position to demand that the modern corporation serve not alone the owners or the control but all society. [Berle and Means, 1967, p. 312]
Given the increasing concentration of ownership and the growing dispersion of share holding, Berle and Means thought such social goals posed no real problem. Government could rather easily encourage the trend by having pension plans hold increasing shares of corporate stock. Drawing up a social agenda, the government could then direct major corporations to carry it out (smaller firms finding it more onerous to carry out this sort of social planning would become increasingly less viable). We would be faced with a de facto socialization of the economy with the large corporation becoming "the dominant institution of the modem world" (Berle and Means, 1967, p. 313).
It is conceivable--indeed it seems almost essential if the corporate system is to survive--that the "control" of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity. [Berle and Mean, 1967, pp. 312-313]
This sort of agenda was anathema to George Stigler. It reinforced a belief that any dalliance with alternatives to price theory inevitably led to damnation or more precisely to alternative distribution systems. More than anything else, the underlying distributional issue, rarely explicitly mentioned, drove Stigler to try to annihilate any work that entertained doubts and ultimately threatened apostasy from the well-founded doctrines at the heart of neoclassical analysis.
Stigler's response
Fifty years after publication, this issue of distribution became the driving force behind Stigler's paper. Ostensibly the reevaluation by Stigler and Friedland[23] is an attempt to understand "the process by which a proposition of great potential scientific and political significance gets established in a discipline" (Stigler and Friedland, 1983, p. 237). Though claiming that they are not so much interested in sorting out the validity of the work's claims, the bulk of their paper seems an attempt to demolish totally the economic basis of the book. To be honest, Stigler should rather confess that he is trying to point out how an invalid bit of analysis can gain wide acceptance by simply saying what influential groups want to hear. As part of his demolition work, Stigler refused to concede any virtue to the work. The underlying supposition being that to give any credit is ultimately to weaken one's own argument.
As Stigler saw it, Means was one of the major forces pushing economics down the wrong road in the postwar period. Decades were wasted in trying to combat Means's ill-thought-out claims. Because of him, and others like him, neoclassical theory in this crucial period was a damsel in distress, rescued ultimately only by the persistent efforts of the Chicago School and its allies. In his memoirs, Means is the only economist on whom Stigler bestows (with great irony) the title "Doctor." I doubt this is any more coincidental than the way he and other American economists scorned Keynes by inevitably referring to him as Lord Keynes. Moreover, in the same section of his memoirs, Stigler separates the themes appearing in The Modern Corporation and Private Property as either the responsibility of that "brilliant law professor" (Stigler, 1988, p. 33) Berle or perpetrated by "Dr. Means" (p. 55), "a most inventive economist" (p. 53). The rhetorical purpose is to put the onus of all that is wrong in the book on the shoulders of Gardiner Means despite the nearly complete agreement between Berle and Means on the ideas espoused in the book.
Stigler's battle plan is the same simple one he adopted throughout his career. Formulate a testable hypothesis that, though not accurately representing the gist of the work, does allow Stigler to shift the terms of debate in ways conducive to his own objectives. Test his own creation using available empirical data (Claire Friedland surfaces to perform the necessary analysis). Claim a telling victory that allows the work in question to be dismissed without a chance of recall, no matter how inconclusive the results. Repeat the conclusion of one's article in such a way as to imply that it is now part of generally accepted doctrine (as Stigler does in his memoirs). What, then, does Stigler test and why are both the test and results questionable? He sums up the book as making three points:
1) The large corporation is owned by so many stockholders that no one or even no score of them typically own a significant fraction of the outstanding stock.
2) Corporate officers in general own a very small fraction of the stock of their corporations.
3) The interests of management and stockholders diverge widely. [Stigler and Friedland, 1983, p. 238]
The third statement is a misleading simplification. What Berle and Means point out is the potential for a large divergence in the objectives of the two relevant groups. Certain incentive structures (as in fact pointed out by the two authors) could narrow this divergence. Surely there must be a much greater possibility for this divergence when the two roles are assumed by different individuals than when there is no such separation. This would seem to be almost definitional. The issue, of course, is whether such a separation leads to serious difficulties. This does not imply that Berle and Means expect widespread corporate plundering to characterize the firm. They only point out the increased probability of this occurring if there is no check on management's action.
Stigler's denial that Berle and Means present an agency problem (1983, p. 240) is peculiar. There is no assertion in The Modern Corporation that the owner/manager is by definition efficient, or that separation of the two functions leads to a more inefficient firm. The only definite claim is that, where there is no such separation, the firm's objective will reflect that of its owner. Any careful reader must be equally nonplussed by Stigler's claim that no attention (as opposed to an insufficient amount of attention) "is paid to incentive systems of remuneration of management" (Stigler, 1983, p. 240). This is clearly incorrect, as a cursory examination of the work will reveal. The further quarrel, that the only agents considered are managers, is not particularly relevant given the subject matter of the book--that is, the separation of ownership from control in the modem corporation.
Stigler proceeds to put three issues up for discussion, two of which he then tests using data available to Berle and Means at the time in which they were writing.
1) Who controlled the large corporations?
2) Did management-controlled corporations treat their executives differently from executives in owner-controlled corporations?
3) Did corporate profits behave differently in the two types of corporations? [Stigler and Friedland, 1983, p. 247]
Stigler makes no attempt to resolve the first point, conceding that the rather complex test he devises (1983, p. 248) is, to say the least, difficult if not impossible to implement. Translating a particular degree of ownership dispersion to an effective amount of separation of that ownership from control seems foolhardy at best. Nor is it clear that the same dispersion pattern will indicate the same level of control when comparing finns. However, Stigler's later attempt to confuse control, with the ability to contest for control (1983, p. 248) hardly clarifies the problem.
The last two points are empirically tested, but before we consider what Stigler does in the way of testing, we must ask ourselves if the two hypotheses are relevant to the work under examination. The answer must clearly be no. Neither claim is made by Berle and Means, which indicates that the tests, though interesting in themselves, are irrelevant to any analysis of the book in question. Ideally, we would expect the salaries for similarly qualified executives at comparable firms to be roughly equivalent. A disparity in salaries would make it difficult for owners to hold onto effective executives. Nor is there any reason for owners who double as operating managers to pay themselves less than their counterparts at management-controlled firms. It is hardly surprising then that, when controlling for asset size, the dummy variable representing the type of enterprise (owner or manager controlled) is not statistically significant. This result is further muddled by a possibly strong correlation between the size of the firm and whether it is owner or management controlled.[24]
Profitability is yet another questionable test. As already discussed, one is imposing an interpretation on Berle and Means by claiming that profits will significantly differ in owner-versus management-controlled firms. To be more exact, the difference is between the standard assumption of profit maximizing and the assumption of a profit-seeking firm. These are both assumptions rather than testable hypotheses. The issue is whether the simpler assumption of profit maximization yields satisfactory results from the models it generates. Stigler does not touch on this far more complex problem. The tests that Stigler makes simply fail to inform.
Having to his own satisfaction undermined the logic of Berle and Means, Stigler in his conclusion attempts to deny its importance. This is undoubtedly a curious project since, as Douglas North (1983, p. 270) indicates in his commentary on the piece, it would be strange to hold a symposium to celebrate the fiftieth anniversary of a completely forgotten work. Thomas Moore (1983, p. 235) points out in his introduction to the symposium that the work was cited twenty-nine times in 1981, making it one of the most cited prewar books. A decade before, Stigler himself granted that Means was "among the most influential of economists in the history of this country" (Stigler and Kindahl, 1973, p. 717).
Stigler's concluding attack on the influence of the book is in two parts, neither of which convinces. First, he reckons that the 1932 work had no effect in its own decade. Certainly there was no obvious influence on the economists Stigler cites, namely: Chamberlin, Robinson, Hicks, Keynes, or Kaldor. This is not surprising since their respective projects were quite different from that of Berle and Means. Profit maximization was not crucial to their work (except perhaps that of Hicks at the time), nor did they deem that a theory concerning the internal working of a firm was particularly relevant. Again, as North points out, this is not a telling point. The fact that Coase's 1937 work was largely ignored for more than three decades did not ultimately make it any less influential.
In fact, the ideas described by Bede and Means had more influence than the scant few names--Baumol (1967), Galbraith (1952, 1967), or Edwards (1955)--that Stigler is willing to concede. The issue of profit maximization was taken up by Scitovsky (1943) (reprinted in a volume that Stigler himself coedited), as well as by Alchian (1951). The question of whether standard price theory using marginal analysis was still viable created a controversy that spanned the war years. Lester (1938) took the offensive, with Machlup (1946) leading a spirited defense aided at times by the young George Stigler (1947). The leading postwar school of industrial organization created by Mason, Bains, and Kaysen all have roots in the idea of the modern corporation defined by Berle and Means. In a similar manner, the work of Marris, Nelson, Winter, Chandler, and Williamson stem from the issues raised in this 1932 work. Finally, the principle-agent literature also must owe a debt to this same book. The claim then that, in regard to serious economic theory, the book sank without a trace remaining is fanciful, unless we mean that it had no effect on the economics championed by the Chicago school.
We can see then the classic Stigler attack at work in this piece coauthored with Claire Friedland. First define the work in such a way that carefully framed empirical tests will cast doubt on the validity of the authors' conclusions. Declare the tests conclusive whether or not they actually are. Finish by conducting a scorched-earth approach to any shreds of respectability that remain. As stated before, it is not an approach that welcomes debate but rather aims to close it off.
We are not amused: consequences of advocacy
If a physician mishandles a number of patients, there is the danger that they will lose their lives. If a teacher interprets a poem to his students in an impossible manner, "nothing further happens." But perhaps it is good if we speak more cautiously here. By ignoring the question concerning the thing and by insufficiently interpreting a poem, it appears as though nothing further happens. One day, perhaps after fifty or one hundred years, nevertheless something has happened. [Heidegger, 1967, pp. 53-54]
Perhaps nothing much is lost if we misread a book or an article, even one as oft-cited as The Modern Corporation and Private Property. The issues raised by Berle and Means have long since been taken up by other researchers. The book is now of interest only to a self-selected group of historians of the profession. This automatically reduces its relevance. Stigler made one of the few apparent about-faces in his career when he moved from being a strong advocate for, to conceding that the study of the history of economic thought was largely a luxury that most graduate students could do without.[25] (His move from ferocious trust buster to the opposite pole is quite different. In that case he was simply becoming more internally consistent in his views.)
The issue that Stigler's critical work raises is not really about any particular work or an individual's contributions to economics. It is not even about who was right or who was able to present the stronger case. Rather, it is whether the profession should attach an opportunity cost to misrepresenting work either past or current. As it stands now, there are no costs involved in putting forth misleading claims whether due to laziness, incompetence, or an attempt to shift the terms of debate defined by the offending article. Given the no-risk nature of the offense, it is not surprising that the practice is common.
Following Stigler's example, we seem to have become an increasingly competitive discipline. Objectives have shifted from listening to one's professional colleagues to silencing them to advance one's own ends. This is the economics of the courtroom, of the skilled advocate pleading for a client. There is a tendency to look for data or statistical methods that support one's aims. As a consequence the debate has narrowed. It has turned economists into pleaders for special interests and the sort of guns for hire that Stigler himself deplored in his autobiography (1988, pp. 132-134). The result is a loss of public esteem What this approach cremes is a profession stocked with hard-heads who butt each other until one topples over. It creates a public picture of a profession racked by violent disagreements. By pouring scorn on one another, we devalue our entire output. It is doubtful that researchers who are trained only to accept ideas that agree with their own basic precepts do much to advance the cause of knowledge.
Not only do we not know how to teach students to invent theories, but much of the advice that is offered is surely wrong. The admonition to keep one's mind open and skeptical, for example, is fatal. Every useful hypothesis will soon encounter facts that are at least superficially adverse, and one must love his own creations and cling stubbornly to them until the contradictory evidence is overwhelming. [Stigler, 1951, p. 126]
George Stigler has been appropriately honored for his many contributions to the profession. As such, his career stands as a model for future workers in the field. But his tendency to indulge in academic bullying, for whatever purpose, should be deplored.[26] Rhetorical bullying transforms the seminar, symposium, or conference into a gladiatorial event. The prize goes to the most aggressive, to the economist who is most unswerving in his or her pursuit of an objective. Ultimately, if we allow adversarial rhetoric to become the norm, we lose more than just the meaning of one historical work.
1 George Stigler uses "No End to Means" as a subheading of a section of his autobiography (Stigler, 1988, p. 108). The phrase indicates not only his frustration at the extent to which Means' ideas persisted, but more subtly seems to imply that there is no end or point to Gardiner Means and his work.
2 As an advocate, Stigler used a slashing satirical style rather than a measured, deliberate approach. He became master of the rhetorical sneer. His colleagues uniformly claimed that his barbs were aimed not at the individual but rather at the relevant work.
As for George's caustic wit, he never let go one of his barbs for the sake of mere one-upmanship. They were always aimed at the target's ideas, not the target himself. [Friedland, 1993, p. 781]
And yet it is hard to see how you can make this neat distinction. If you suggest all too clearly that you think someone's ideas or recommendations are idiotic, it is nearly impossible not to see this as a personal reflection. In her recollections, Claire Friedland (1993, p. 781) recounts the time a speaker asked whether he should present a paper standing up or seated. Stigler replied, "With a paper like this, under the table would not be inappropriate." Though very funny and perhaps an accurate reflection of the work itself, it is hard not to imagine that the particular speaker would be devastated and moreover not fail to take such a remark personally. It is true that Stigler made something of a fetish out of speaking his mind. But such an approach can easily lapse into self-indulgence. One almost wishes that Stigler had spared a few hours away from Adam Smith to take some counsel from Jane Austen as well.
3 See The Economist as Preacher (1982h) for Stigler's own thought on this subject.
4 Whether such a misrepresentation is intentional in nature or not is of no interest. This paper is not meant as an evaluation of either Stigler's personality or ethics. Scholars with missions tend to come to any work with strong preconceived ideas. As a result, they tend to find in anything that they read exactly what they expect. Since my goal is not to indict Stigler but rather to understand the process of advocacy, intention has no part to play.
5 The tendency to produce straw men is not uncommon among economists, nor is the practice unknown in other disciplines. in the past two centuries there have probably been a sufficient number created to stock revivals of The Wizard of Oz for the foreseeable future. The problem with this rhetorical device comes when the ersatz model replaces the original (see Freedman, 1994).
6 I have elsewhere looked at Stigler's transformation of the kinked demand curve (Freedman, 1995) and of Galbraith's countervailing power (Freedman, 1996).
7 The clearest example here is his embracing of what Stigler himself formulated as Coase's Theorem, as well as moving from seeing monopoly as a problem that required rigorous policing to recognizing the pervasive force of competitive efficiency as the means to decipher all market structures.
In particular, primarily under the influence of Aaron Director, we [the Chicago School] moved away from the assumption that monopoly was almost ubiquitous in modem economics. [Stigler, 1988, p. 162]
If anything, Stigler pushed Coase's work further than was warranted by the work itself. One cannot deduce market efficiency from Coase's work, but rather the reason for markets not operating at optimal efficiency (transaction costs). Whether this warrants any government action cannot be predicted apriori but must wait on a case-by-case examination (Freedman, 1994). This is the sort of approach George Stigler could never countenance.
Stigler was willing to abandon his rather conventional ideas about monopoly only when offered an alternative consistent with the broader application of competitive and efficient markets. In doing so, he could also reject the requisite need for a vigorous antitrust policy that he had championed prior to the 1970s.
8 A more in-depth discussion of the tenets embraced by the Chicago school (and thus by Stigler) can be found in Reder (1982).
9 "Edward Chamberlin's (1933) work on monopolistic competition, through its emphasis on differentiation and firm-specific demand, led many applied economists to believe that industries and firms were so unique that economics could progress only through detailed studies of them. This view contrasted with the Marshallian market and with Marshall's emphasis on scientific generalization. The industry study, and even the study of a single large firm, became popular after World War If" (Demsetz, 1993, pp. 793-794).
10 Precision here is not used as a term synonymous with mathematical rigor. Rather, the intention is to refer to the precision that measurable variables bring to analysis. See Mayor (1993) or Kamark (1983) for interesting discussions of precision versus accuracy. [Stigler, 1982e, p. 134]
11 In his 1964 presidential address to the AEA, he seems to go positively overboard when looking toward the glorious future that awaits applied economics.
It is a scientific revolution of the very first magnitude--indeed I consider the socalled theoretical revolutions of a Ricardo, a Jevons, or a Keynes to have been minor revisions compared to the vast implications of the growing insistence upon quantification I am convinced that economics is finally at the threshold of its golden age-nay, we already have one foot through the door. His dedication to testing explains his reluctance to deal with uncertainty. A concept rife with ambiguity makes the sort of empiricism Stigler demands difficult if not impossible to apply. He spent most of his career ignoring or dismissing the importance of this factor.
I sometimes think the baneful effects of uncertainty are exaggerated; perhaps the reason private investment did not revive before the war was that the future seemed too certain. [Stigler, 1949f, p. 95]
12 Keynes, when asked why he seemed to hold so many different views, is said to have replied, "When the facts change I change my mind. What do you do?" George Stigler might have replied, "I send Claire Friedland out to get some new facts." According to Lee (1997) and Morse (1995), Stigler and Kindahl seem to have played fast and loose with data in attacking Means' theory of administered prices.
13 One can't fault Stigler for his consistency in applying the principle of self-interest. He explains the behavior of economists by using the same approach. In only one respect does Stigler falter in applying the principle of self-interest. By turning the same analysis back upon himself, he should be able to account for his own motives in writing what he does. He allows that he runs into some difficulties in doing that. "I do not believe that every view of every person is market-oriented--indeed I am not able wholly to explain the views I am presenting here on this basis" (Stigler, 1982c, p. 63).
14 See Lee (1997) and Freedman (1995).
15 "Smith's Travels on the Ship of State" (Stigler, 1982f) is, as per usual, a provocative and interesting discussion of this issue.
16 "Income redistribution is the hall-mark of any special interest group: gains in aggregate output will usually be shared with everyone, so the efficient use of political power usually involves income redistribution. Almost all the great policy issues of modem economics are of this sort: progressive taxation, unemployment insurance and social security, public aids to education, and health and welfare programs; each is an example of policies which, whether they increase or decrease national income, effect important redistributions of that income" (Stigler, 1982e, p. 63).
17 Setting the returns earned by a factor equal to its marginal product will only exhaust the available output given perfect competition and constant returns to scale. The force of the argument falters if one assumes the dominance of imperfect competition.
18 Control is a tricky idea. The way the term is used relates it to the very ill-defined concept of power. It is probably a fair description of Berle and Means's aims to say that, when a given group is said by them to be exercising power, they intend to define those individuals in a firm who make the decisions that determine what a firm will do.
19 See Berle and Means (1967, pp. 309-310).
20 See Berle and Means (1967, pp. 306-307).
21 Lee (1990) claims that it was not until the late 1940s or early 1950s that Means called the profit motive into question.
22 McCann and Perlman (1993, p. 1008) point out in their review article that giving credence to large institutional shifts undermines the basis for developing general and unchanging economic laws. The sort of institutional ad hocery underlying Berle and Means is exactly what Stigler is least likely to countenance. Being a good Marshallian, Stigler would concur with his mentor that Natura non facit saltum (Marshall, 1982, p. iii).
If the problems of economic life changed frequently and radically and lacked a large measure of continuity in their essential nature, there could not be a science of economics. An essential element of a science is the cumulative growth of knowledge, and that cumulative character could not arise if each generation of economists faced fundamentally new problems calling for entirely new methods of analysis. [Stigler, quoted by McCann and Perlman, 1993, p. 1009]
23 As a short-hand I often refer to the joint authors solely as Stigler. This is not meant to diminish in any way the contribution made by Claire Friedland.
24 We normally accept at face value that when regressions are presented, they do represent the structural form that provided the best fit, and furthermore, that corrections for homoscedasticity were performed as well as attempts to get around multicollinearity. Given Stigler's casual approach to statistics, it is difficult to accept such things entirely on faith. Lee (1997), Morse (1995), and Freedman (1995) all raise questions about his use and interpretation of data and his statistical methodology.
25 See Stigler (1982f).
26 Stigler, conscious of his rhetorical tactics, realizes that he is engaged in such bullying but rationalizes it as self-defense. He goes so far as to claim that through such combative stances the discipline itself is advanced. But then again, what would you expect him to say? Convicted of assault, the perpetrator naturally lodges a claim of self-defense. This need to justify his own single-mindedness is perhaps at the core of Stigler's about-face on the issue of the history of economic thought. There is a distinct niggling worry that such study might breed tolerance for heterodox views.
The inevitable lesson is that after studying previous controversies one cannot become quite so engaged in the current controversies--one cannot become quite so convinced of either the correctness or the importance of one's new ideas. The more subtle lesson is that it does not pay to learn the first lesson: the temperate, restrained, utterly fair-minded treatment of one's own theories does a disservice to these theories as well as to one's professional status and salary. The scientist is loath to buy new models which have not been well advertised. [Stigler, 1982h, p. 111]
At the very least, the Chicago School helped to promote this confrontational style. It would then seem a bit too much a study in mannered innocence for them to claim that they were in fact merely victims, defending themselves in the only way possible. One must concede, though, that a good measure of their success was due to their no-holdsbarred approach. Stigler's acknowledgment of this creed is consistent with his championing of self-interest as the basis for an ethical system. Seeing it in action, it becomes clear why such an ethical system has not historically been embraced by most of the recognized philosophies or religions.
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