George Stigler on Carl Menger

|Peter Boettke|

As a young economist, George Stigler wrote a lot in the history of economic thought.  His doctoral dissertation, 'Studies in the History of Production and Distribution,' was written under the direction of Frank Knight and competed in 1938.  It was published in book form by Macmillian in 1941 as Production and Distribution Theories.  I recommend all graduate students to pick up a copy (a new edition was published in paperback by Transaction Press in 1994) and to see how Stigler sharpens his skills as an economic thinker through the critical analysis of the leading thinkers during the formative period of neoclassical price theory.

Of particular interest is his essay on Menger, first published in the JPE in 1937.  It is actually a very positive evaluation of Menger in comparison with the other marginal revolutionaries.  "Menger's success is clear in the light of Jevon's failure. The former faced no established theoretical tradition -- what little theoretical German economics there was at the time possessed a strong anticlassical bias; Menger's treatment was lucid, systematic, and comprehensive; and, to mention a factor of ambiguous importance, his was good economic theory." (1994, 136)

Milton Friedman famously said that there was no "Austrian" or "Chicago" or "Cambridge" economics, only 'good economics' and 'bad economics'.  This is usually interpreted as criticism of the Austrian school of economics, but it need not be.  In fact, I have argued that there is indeed only good economics and bad economics, it is just that what constitutes good economics has to incorporate the insights from Menger, Mises and Hayek.  At least with respect to Menger, it appears that a young George Stigler would have agreed with me.  Including Menger's emphasis on subjectivism, as opposed to the classical emphasis on material goods.

Comments

[Greg Ransom]

A well known old timer told me that Knight insisted that Stigler trash the Austrian tradition in capital theory in his dissertation.

Don't know whether that hearsay is true or not.

Rose Friedan was working on a dissertation on capital theory under Knight.

A bright student and clear writer, she never got anywhere under Knight.

She doesn't really explain why in her autobiography.

[Jonathan M.F. Catalán]

Going on Greg's point, I think there should be some recognition that young Austrians looking to enter the profession should embrace the "language" of modern macro, including the calculus of rational expectations and dynamic equilibrium. One thing that made Hayek who he was is that he was, for a long time, part of the mainstream debate. If Austrians knew the "language" to take part in modern macro debates then we'd have a much easier time continuing the case for, or the defense of, unique Austrian insights that should be more widely acknowledged (such as some variation of Austrian capital theory, for example).

[Mario Rizzo]

When Stigler won the Nobel prize I wrote to him (paper letter!) to say that I understood he won the prize for praising Menger. He wrote back to say that I was incorrect: He won for criticizing Boehm-Bawerk.

[nickik]

@Mario Rizzo,

Could you explain what that means?

[Mario Rizzo]

It is a joke. (In his book Production and Distribution Theories Stigler also has a chapter on Boehm-Bawerk severely criticizing him, especially for ignorance of mathematics.)

[Gabriel Oliva]

It must be remembered that, in the Hayek-Knight capital controversy, Knight criticizes what he calls the “Jevons-Böhm-Bawerk-Wicksell” theory of capital. Knight didn’t blame Menger of committing the same “fatal confusions” of the other authors. I think this is a very important reason why Stigler criticized Jevons so harshly and praised Menger.

[Mario Rizzo]

I think Stigler was impressed that Menger did not assume perfect knowledge. Don't forget that Stigler's great claim to fame was to initiate the (neoclassical) economics of information.

[Greg Ransom]

Except this isn't true.

"Don't forget that Stigler's great claim to fame was to initiate the (neoclassical) economics of information."

[Peter Boettke]

@Jonathan Catalan -- I think if you look at several of the academic Austrian economists who do active research in the journals, e.g., Roger Koppl, Larry White, George Selgin, to give but a few examples, then you will see folks who are very comfortable with the language and have devoted their careers to engaging in the sort of discussions within the profession that you are calling for. The limitations of success are a function of a few things -- some intellectual some sociological -- but what they aren't is for lack of effort.

Do a little cv surfing (there was a great Chronicle of Higher Education article the other day on just how few graduate students and prospective graduate students actually do one of the most important things they can do, which is familiarize themselves with CVs of other academics.

So quite a number of us speak the language and have worked in professional environments where competence in that language is necessary to enter that conversation. None of the folks I mentioned above, or for that matter any of my colleagues here at GMU, are speaking a private language outside the realm of mainstream economics -- even if (as in my case) I want to suggest that there exists a mainline of economic thought that is more deeply rooted in the intellectual tradition of economics than what is recognized by the currently popular mainstream.

Koppl has a few very intriguing papers on the emerging alternative consensus in economics that you might want to look at. I have, on the other hand, been pushing students to engage the imperfect knowledge economics (Roman Frydman) and the theory of theory consistent expectations, as well as the work on the irreversibility of investment that Dixit worked on, as possible inroads into the the conversation. Both White and Selgin (and White's student Luther) have been pushing the dialogue with a search theoretic model of the medium of exchange, etc. And again I think the work by Pissarides on the positive role of frictions harks back to early work of Alchian's which is very much akin to the work of market process theorists (though Piassarides co-Nobel prize winner Diamond is in fact the opposite though he works with friction as well).

There is plenty of work to do, and it would be good to get competent young scientists/scholars at work on real economic science rather than just popular economics and social media. I hope that the technical puzzles in economics and the philosophical questions of social inquiry will once again excite young minds to study the discipline in-depth and in a professionally serious way.

[Peter Boettke]

@Mario -- timing isn't quite right because the information stuff comes along in the late 1950s (published in 1960). I think it is the market as a process of dynamic adjustment that at its static conclusion generates the equilibrium properties and in this particular instance the pricing of factors along marginal productivity lines. No?

[Jonathan M.F. Catalán]

Professor Boettke,

That's true, and maybe I should have more explicitly considered them in my comment. I had things like what Greg mentioned more in mind, though: capital theory and, more generally, Austrian macroeconomics. It seems to me that macro is a more inclusive field, where you need to know specific models to publish in major journals.

[Mario Rizzo]

@Pete -- When I am wrong, I am very wrong. Yes, you are right. However, I think I have diagnosed the source of the problem. Even just the name "Stigler" turns me into a time-Newtonian. Time is unreal. Everything is laid out together (past and present). So when Stigler wrote about Menger he was also thinking about imperfect knowledge a la his "later" work.

[Russell]

One thing I noticed about Menger's writing was that it was clear and understandable, even for someone like me that's never had a real econ class. Bohm-Bawerk was similarly clear. In contrast, I've also tortured myself with Keynes' General Theory, and actually finished it, but was thoroughly confused at times and parts of it just seemed downright dumb (burying bottles of money, etc.).

[Jonathan M.F. Catalán]

Russell,

When reading Keynes you should keep in the back of your head that he tends to use sarcasm and subtle humor. For example, while I don't remember exactly, I think the reference to burying bottles is a criticism of the gold standard (if it's good to mine gold for use as money, then it must be good to bury any money and dig it out).

[Xerographica]

"I hope that the technical puzzles in economics and the philosophical questions of social inquiry will once again excite young minds to study the discipline in-depth and in a professionally serious way."

So many puzzles...so little time! Here are the Wikipedia entries that I just created...

http://en.wikipedia.org/wiki/Benefit_principle
http://en.wikipedia.org/wiki/Club_theory
http://en.wikipedia.org/wiki/Preference_revelation

How did I miss the benefit principle? That's a real puzzle. How did I miss Samuelson's "Pure Theory of Public Expenditure"? http://www.econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/sampub.pdf It's been cited over 5,000 times! That's another puzzle.

But the BIGGEST puzzle of them ALL...how long before somebody challenges me on including Sesame Street's "5 Bears in the Bed" song as a reference for club theory?

[Jim Rose]

Stigler’s writings in the 1960s, 1950s and before are all worth reading.

He made a marvellous critique of what became behavioural economics back in the early 1960s by saying that in every decade for the last 150 years, economists dabble in psychology.

They miss the point of economics as a method. The simple hypothesis behind economics is so powerful in accounting for so much of human behaviour.

[Greg Ransom]

"They miss the point of economics as a method. The simple hypothesis behind economics is so powerful in accounting for so much of human behaviour."

From the perspective of Hayek's scientific explanatory strategy, Stigler got the basic 'hypothesis' of economics wrong, along with its method.

When Hayek made fun of "given givens" and the false 'hypothesis' and mistaken scientific explanatory strategy behind it he could have been writing about Stigler's work.

[Niko]

@Catalan:
That is not subtle humor, it's schizophrenia.

Lets try to be funny:
If it's good to drink water, then it's good to piss it and drink it again.
[Lots of laughs from the crowd]

[Barkley Rosser]

Regarding Menger and the neoclassical tradition, it is usually argued that Jevons, Walras, and Menger all sprung out of more or less nowhere with the idea of marginal utility independently and simultaneously around 1870, although there were these much earlier predecessors such as some Spanish scholastics and Bernoulli.

However, while that may be true of Jevons and Walras, Menger was in many ways the culmination of a pan-Germanic proto-neoclassical tradition that had been going on for several decades including such figures as Rau and Gossens that had understood marginal utility and more or less developed a form of neoclassical supply and demand analysis, Rau being the first to draw supply and demand curves the way we do now with P on the vertical axis as early as 1841. This tradition had developed in various scattered locations, but was largely suppressed in most of them after the unification of Germany in 1870 by Bismarck, who was associated with the German Historical School based in Berlin. The Methodenstreit that followed largely betweeen von Schmoller and Menger had its political counterpart in the fact that Austria had not been absorbed into the Germanic empire within with the German Historical School reigned supreme.

[Neel]

Stigler's had also reviewed a book (in French!) on Menger in the American Economic Review two years before his 1937 paper. As for the 1937 paper, its very title "The ECONOMICS of Carl Menger" suggests that Stigler was not interested in questions of method per se (as he later said, economists should get interested into questions of method only after the age of sixty-five!). He thus made a positive evaluation of Menger's economics, but did not make the link between Menger's methodology and his economics. Menger's "good economic theory" was the product of good economic methodology.

Beyond Rau, Gossens, and Adam Smith, it is worth noting that one important influence on Menger (according to Menger himself) was the French mathematician Augustin Cournot. And I venture to say that the lucid and logical character of Menger's Principles of Economics (noted by Stigler, Schumpeter, Rothbard and many others) owes much to this influence. Menger's book is "exact" as Schumpeter said, like a mathematical demonstration, except that it uses words instead of symbols.

This brings me to what Jonathan says about the importance of using the language of mathematics. I agree with him, but there already are very good papers doing this. My favorite example would be George Selgin's paper in the Economic Journal (2003) on "Adaptative Learning and the Transition to Fiat Money." "Good economics" should incorporate subjectivist insights from Menger, Mises and Hayek, but it can - and probably should - also use mathematics. Mathematics has its limitations, so do economic theory, economic history, etc. As Alfred Whitehead - who was a mathematician, wrote on natural sciences, social sciences, philosophy, etc. - wrote at the end of his life in his aptly-titled "Adventures of Ideas", "each method has its limitations and the challenge is to find a method that transcends the limitations of each." We have not found any such method, and the best we can do is to be aware of the limitations of each method and use them. This is what Elinor Ostrom did, she could use within the limits of a single paper (or book), game theory, experimental economics, surveys on the ground, subjectivist insights, economic history, etc. Her work was in this sense unique according to me.