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The Preaching of George Stigler and His Impact upon the End of Communism and the Formation of Free Society

English Pages, 4. 5. 1998

It is a great and extraordinary honor for me to be invited to deliver this Memorial Lecture. It is a great honor because of George Stigler himself, because of the preeminence of the two previous speakers (George Shultz and Milton Friedman) and, finally, because of the enormous prestige of the University of Chicago.

I am probably the only one in this room who did not know George Stigler personally, who met him only very briefly at the Mont Pelerin Society Meeting in Munich (in September 1990) where he attended my speech about the collapse of communism in Central and Eastern Europe (see 1).

However, I had been reading his works for years or decades during the communist era, starting with his textbook “The Theory of Prices”, which was quite accidentally (and, of course, illegally) translated into Czech at the Institute of Economics of the Czechoslovak Academy of Sciences prior to the Soviet occupation in 1968.

There is no doubt that George Stigler belonged to the most influential, most productive, most innovative and most consistent economists in the second half of this century, that he influenced several generations of American (as well as foreign) economists, that he made enormous contribution to the Chicago school of economics and that he stood firmly on the side of those who believed more in markets than in the capability of governments. This is well-known and I do not possess any comparative advantage in scholarly assessing his work and intellectual heritage, especially to this audience.

I will, therefore, try to use my special perspective which may – perhaps – reveal something different, because it comes from the outside, from someone who spent most of his life in a world which was based on totally different ideas and policies. I must admit, however, that this is not my first speech devoted to George Stigler. In the communist era, between 1979 and 1985, I succeeded in using (or perhaps misusing) a relatively minor, and therefore irrelevant institution, the Czechoslovak Society for the Promotion of Science and Technology, for organizing a regular economic seminar which at that time became the meeting place for many non-conformist economists and social scientists. Afterwards, the group of its participants was the main supplier of members for the first post-communist government in my country which was formed at the end of 1989. Once a year the topic of the seminar was the Nobel Prize in Economics, and a lecture, given mostly by me, was used for presenting the non-Marxist economic theory and market-oriented ideas. The lectures were published in an internal bulletin (in several hundred copies) and in a book in 1991 (see 2).

I intend to use my arguments from 1982 now, mainly for two reasons:

- to demonstrate what was known in Prague at that time (when the so-called bourgeois or non-Marxist economics was considered wrong, dangerous and useless);

- to show what we (or I) – then – considered as most relevant for our intellectual enrichment.

I hope this approach will be productive.

Sixteen years ago, I started with stressing and admiring George Stigler´s conservatism, his individualism, his criticism of government interventionism which was very rare, especially in the fifties and sixties. I quoted mostly from his famous 1964 Presidential Address to the American Economic Association (The Economist and the State, see 4). His very strong message – similar to that of Milton Friedman and of Mises and Hayek – was extremely important for us. I mentioned as well his warning that our philosophy or ideology should not dominate or substitute our economic analysis and that our economic policy suggestions should not express our personal tastes or preferences but should be based on a serious theoretical and empirical work. Looking at the economic literature and policy recommendations, I am afraid that the economists do not pay enough attention to these George Stigler´s arguments.

Stigler believed neither in the motivation of the state to intervene in the economy (which was – afterwards – developed in the Public Choice School writings), nor in the capability of the state to intervene rationally (which is more a Hayekian argument). Both points are absolutely crucial. I also remember that I stressed his warning about the dangers of amateur politologization on the side of economists. He suggested – on the contrary – to always compare costs and benefits of alternative institutional settings and economic policy solutions. It is probably not necessary to stress here that our communist experience demonstrated to us very clearly that the costs of irrational institutional arrangements could be enormous.

Centrally administered economy was – at least at first sight – dominated by vertical relations (it was, therefore, described as a command economy), not by horizontal ones. That is probably the main reason why we originally studied (and understood) more macroeconomics than microeconomic theory. George Stigler, however, never paid any attention to the macroeconomic field. For him economic theory was identical with the price theory. He used price theory as his main instrument of analysis, he tried to apply it in many non-traditional fields of inquiry and, e.g. in his article with Gary Becker “De Gustibus non Est Disputandum (see 5), he stressed that we should not look too much beyond the two crucial variables – prices and incomes – for the explanation of human behavior, and that we should not passively wait for the explanation of various economic phenomena from other behavioral sciences. This “pure economism” helped us to look at the communist command economy in a new way, and to come with some surprising observations about its distorted, but economic character which should be analyzed with economic instrumentarium, not with psychology or politology.

George Stigler (together with Milton Friedman) believed in instrumentalism of economic assumptions (see his 1947 polemics about marginalism, 6), in the productivity of a proper hypothesis, in the comparative advantage of its predictive power regardless of its realism. It was extremely important for the defense of abstract theories, of theories which we learned at that time from textbooks without having teachers and instructors. Without theories, one lives in a world of empirism and of historicism, in a world of attempts to “describe” reality which is, of course, a hopeless endeavor.

This approach of George Stigler was connected with his strong emphasis on quantitative economic analysis - especially in the field of market structure, price flexibility (or rigidity), duopoly or oligopoly structure and behavior, antitrust legislation, etc. Many of us were at that time victims of playing with sophisticated macroeconometric models and, as a result of it, elementary empirical analysis was almost non-existent.

I was aware of the fact that Stigler got Nobel Prize for his work on regulation. In his 1971 article, he argued that regulation frequently reduced competition, that regulation was done mostly on behalf of regulated firms and not of consumers and that it often made matters worse rather than better. Because our libraries had only several Western economic journals and the Bell Journal of Economics was not among them, I did not read his famous article at the moment of writing my speech and I knew it from quotations only. But Stigler´s ideas coincided fully with our experience. Even the whole immodest “communist” planning (not just modest “capitalist” regulation) was done “from bellow”, the actual planning power was in the hands of the “planned” firms, not in the hands of the Central Planning Commission.

Finally, I would like to mention another field – the economics of information and Stigler´s 1961 seminal article (see 7). The idea that information is a good as any other, that it has its costs and that there is, therefore, a supply of and a demand for it was a simple but crucial contribution. In countries of Central and Eastern Europe, we permanently discussed the search for an optimum degree of centralization and decentralization of economic decision–making and we used George Stigler´s approach as another way of attacking the nature of the command economy.

I just mentioned five basic points I stressed in my speech in 1982 and I have to repeat that all of them helped us to understand and later dismantle the old, inefficient and oppressive regime. Because ideas have consequences.

What to add to it in 1998? There is no doubt that eight years after the collapse of communism, the market economy in my country and elsewhere works. It is not perfect and especially the markets are not perfect but from the economic theory point of view we know – together with George Stigler – that the best way to prevent monopolistic practices is to encourage domestic and especially foreign competition. Therefore, we liberalized markets without waiting for a perfect market structure. We accepted Stigler´s concept of a minimalist anti-trust policy and of a minimalist market regulation. With the benefit of hindsight we may argue, however, that more regulation in capital markets could have prevented some recent problems of our economy but I am afraid of the misuse of government intervention and have troubles to accept it a priori. It is difficult to constructively generate markets. It is very easy to kill them or to block their spontaneous evolution. And I hope that this is exactly what George Stigler would say being here with us today.

There is no doubt as well that a change in institutional arrangements has its non-zero costs, that there is not only no free lunch but no free reform. We paid quite heavily in lost output and income and this was - and is - difficult to explain to the citizens of a country undergoing transformation who expect a visible and tangible betterment of their living conditions.

In the first stage, the reforms “worked”. After a short and inevitable economic decline which lasted two-three years and represented the healthy shake-off of non-viable economic activities associated with the old economic system, the economy began to recover. The rate of growth of GDP reached 4-6% range in following years (three consecutive years in our case), investment ratio became extremely high, domestic spending visibly grew, imports skyrocketed, foreign capital inflows were enormous (as a share of GDP).

I believed in the possibility of a longer continuation of such a relatively smooth development. The experience of the last two years, let´s call them the second stage, tells us, however, that we have underestimated the enormous vulnerability of such economy (even if I think that it was, probably, more our incapability to change it than our underestimation of this vulnerability). The economy became characterized by

- dangerously growing expectations of all economic agents (consumers as well as investors) and by our inability to slow them down without heavy political costs;

- overinvestment (from the macroeconomic point of view) both in directly productive and non-directly productive activities, which led to investment-saving disequilibrium;

- growing trade imbalance which was gradually accompanyied by balance of payments´ current account deficits;

- slow improvements in the institutional framework, weak regulation of monopolistic or otherwise non-perfect markets and unsystematic law enforcement;

- the disturbances connected with aggessive and merciless global capital markets, especially when they were confronted with weak domestic banking and financial intermediation.

As a result of that, the second stage led to an economic slowdown (or stagnation) and to a political crisis, which meant the interruption of the previous, relatively smooth development.. Markets became nervous about both the trade deficit and the strong currency. As a result of it, capital inflows stopped, interest rates rose, the economy slowed down, tax revenues declined, fiscal balance deteriorated, the state budget expenditures had to be dramatically cut, the economy slowed down even more, capital was pulled out of the country, the currency depreciated, some firms and banks got into troubles, the economy went into a very sluggish growth, etc. The anatomy of crisis was rather simple (and well-known).

There is no doubt that we are slowly moving to the third stage. It will be characterized by consolidation and macroadjustment, by the residual privatization and by institutional maturing. It is the period when the “first generation” reforms are over (with only some remaining “residuals”) and when the “second generation” reforms will be realized. I have a moderate optimism in this respect but I do not believe that the second stage could have been eliminated. I do not believe in the possibility of a smooth and stable transition path in politically and socially difficult, but highly democratic, pluralistic and open societies (and economies) of Central and Eastern Europe. We are not in a “brave new world” of perfect markets and of perfect governments. The current adjustment (or realingement) was necessary but I am not sure that the changes could have been made “voluntary”, that they could have been intentionally “introduced”. The adjustment had to be involuntary and therefore, enforced.

The second generation reforms will be less radical, less visible, less headlines-creating, less ideological, much slower, and much more influenced by lobbyism and rent-seeking, etc. It will be, therefore, connected with a serious danger which did not exist at the beginning: institution-building and regulation processes may be used for the creeping change of the whole system from free society to interventionism and neocorporativism. 

I am sure George Stigler´s name will stay with us and we will learn a lot by re-reading (and new generations of economists by reading) his works. He was realistically skeptical about the science of economics (but called it, proudly, the imperialistic science among social sciences) but I like very much his witty saying that “the economic theory of economists is much better than the economic theory of anyone´s else”, which is not an empty joke. We – and especially we in the first decade of a market economy – live in a world where everyone has strong opinions about economic issues but have never looked into George Stigler´s and similar works. I am sure that without George Stigler, the economic theory of economists would have been less developed than it is now and hope we are all aware of it. If not, this is what I wanted to say in my 1998 George Stigler Memorial Lecture.

Václav Klaus, George Stigler Memorial Lecture, University of Chicago, May 4, 1998.

References:

(1) V. Klaus, Main Obstacles to Rapid Economic Transformation of Eastern Europe, in “A Road to Market Economy”, TOP Agency, Prague 1991.

(2) V. Klaus, Ekonomická věda a ekonomická reforma, GENNEX, Prague 1991.

(3) G. Stigler, The Theory of Prices, New York 1946.

(4) G. Stigler, The Economist and the State, American Economic Review, No. 1, March 1965.

(5) G. Stigler, G. Becker, De Gustibus non Est Disputandum, American Economic Review, No. 1, March 1977.

(6) G. Stigler, Professor Lester and the Marginalists, American Economic Review, No. 1, March 1947.

(7) G. Stigler, The Economics of Information, Journal of Political Economy, No. 3, June 1961.

(8) K. R. Leube, T. G. Moore, The Essence of Stigler, Hoover Institution, Stanford 1986.

(9) V. Klaus, Renaissance: The Rebirth of Liberty in the Heart of Europe, CATO, 1997.