Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957

Published by EH.NET (September 2006)

?

J. Daniel Hammond and Claire H. Hammond, editors, Making Chicago Price Theory: Friedman-Stigler Correspondence, 1945-1957. London: Routledge, 2006. xvii + 165 pp. $120 (hardcover), ISBN: 0-415-70078-7.

Reviewed for EH.NET by Craig Freedman, Department of Economics, Macquarie University.

Economic Billets Doux — A Review of the Friedman-Stigler Correspondence

?

“Indifferent! Oh no — I never conceived you could become indifferent. Letters are no matters of indifference; they are generally a very positive curse.”

?

“You are speaking of letters of business; mine are letters of friendship.”

“I have often thought them the worst of the two,” replied he, coolly. “Business you know, may bring money, but friendship hardly ever does.” (Jane Austen, Emma)

Reading this volume generates reflections which are more substantial than a mere nostalgic yearning for times past. Technology has condemned to the museum archives a means of personal and business communication which had outlasted the centuries. Letters not only were for most of history the only way accurately to convey thought, emotion and information over long distances, but a method that was remarkably cheap as well. In the nineties, the rise of e-mail has largely put paid to those fondly received missives. Today, I would be hard pressed to recall the last time I received an overseas letter, although in the late eighties and early nineties such occurrences were routine. What makes this more than just a yearning for familiar ways is that technology changes not only communication channels but the very content of that medium. The style, structure and thought behind a handwritten (and perhaps even a typed) letter is definably different from the modest e-mail which is more of an off the cuff note. Moreover, e-mail is ephemeral. Few people print out and store them as they might preserve letters. So the sad news when we read this wonderful collection is that future generations will turn to the equivalent of the Stigler or Friedman archive and find a bare cupboard instead of a treasure trove of material. Future biographers and historians of thought will come to mourn this loss. What is to be done? Nothing, except to enjoy those opportunities that we still have at hand.

Claire and Daniel Hammond (both at Wake Forest University) have performed a real service in making so many of the key exchanges between Milton Friedman and George Stigler available to the interested reader. Many economists today simply take for granted the wonders these two men performed in the post-war period. They set out to overturn the then prevailing orthodoxy and (for better or worse) largely succeeded. When economists today refer so blithely to the Chicago School, they are implicitly referring to the work, effort and campaign of these two long-time friends and colleagues. (Even today, Milton Friedman still mourns the loss of his remarkable compatriot.) Though most economists, let alone the general public, will associate Friedman with the Chicago School counter-revolution to overthrow the teaching of Keynes and other heretics, it is perhaps Stigler who had in his more quiet way the greater influence (at least academically). In any case, their spheres of operation were largely separable with Stigler focusing almost exclusively on microeconomic matters. What the two did have in common, besides their fierce dedication to market principles, was the ability to sell economic ideas in a rhetorical way that had a significant impact.[1] What the letters themselves show, besides a mutual affection and respect, are the ways in which the ideas that formed the core of the Chicago School developed and the role which the two had in cross pollinating each other’s work. (This despite the fact that the only joint work they ever formally endeavored was a paid for pamphlet brought out shortly after World War Two (Roofs or Ceilings) which examined ceilings on rental prices.)

By a stroke of luck, the two were forced apart in the immediate post-war period, except for a brief year together in Minnesota (1945). Like some modern day couple forced to pursue widely separated careers, Milton Friedman went off to Chicago (1946) and Stigler to Columbia (1947) after a brief stop at Brown (1946). As a result, these two close colleagues and friends would spend the years between 1946 and 1958 largely apart except for periodic visits. Their loss was our gain.[2] This enforced separation is the reason that we now have this fascinating correspondence which reflects the way in which the two attempted to transform economics. In particular, we can discern their attempts to reshape economic methodology, as well as their changing views on such issues as equality and income distribution. As we read these letters, the outline of what would form the bedrock of the Chicago School, a distinctive take on price theory, becomes progressively clearer.

Friedman’s counter-revolution against the prevailing dominance of post-war Keynesian theory is well known by most economists. Less appreciated is Stigler’s role in defending traditional price theory against heretical challenges. At least in part through his efforts, Stigler maintained what would later be accepted as the micro-foundations of economics, defending Marshallian partial equilibrium analysis (or at least the Friedman-Stigler version) against the seemingly invincible tide of Walrasian general equilibrium theory. What both of these lynchpins of the Chicago school held in common was an unshakeable belief in the efficiency of markets. They especially viewed this form of economic structure as a bulwark of individual choice and liberty against the omni-pervasive depredations of the chronic economic planners.

There are notoriously few minor omissions or curious lacunae in this volume that I can point out, and only if strongly pressed. In the very useful introduction to this series of letters the Hammonds wonder why there is no mention made of Friedman’s pioneering work on monetary theory. Friedman’s quantity theory of money was, after all, at the heart of his counter-revolution. However, this is much like being puzzled by the lack of any direct references to the Napoleonic wars in Jane Austen’s novels. The solution is simple. This bit of geo-politics failed to fall within the attention of Ms Austen’s interests in writing her novels. She was not about to drag it into the picture by virtue of its sheer topicality. In a similar manner, George Stigler displayed only minimal interest in macroeconomic matters and claimed to possess no particular insights in this area. Instead he tended to defer to Milton Friedman’s expertise (though Stigler does provide useful comments on Friedman’s seminal work dealing with the Consumption Theory).

There is also a strange lapse in what otherwise amounts to a comprehensive set of endnotes attached to these letters. Two items transmitted by Stigler to Friedman would later appear in an idiosyncratic collection entitled The Intellectual and the Market Place and Other Essays by George Stigler (‘Stigler’s Law’ and ‘On Scientific Writing’). True, the publication date (1963) puts it outside the boundaries set by the editors. But it is still a useful bit of information to provide to interested readers.

Lastly, the Hammonds claim that the close bond between George Stigler and Milton Friedman only commenced with their mutual employment by the Statistical Research Group during the war (1943-1945). It can be easily argued that they were already close from their days as graduate students in Chicago. Though, it does seem clear that Stigler was initially closer to Allen Wallis.[3] (It was, in fact, Wallis as director of the Statistical Research Group that reunited the two.) This issue is, however, more a question of nuance and interpretation than any clear disagreement.

The very low level of my nitpicking is perhaps the best indication of my admiration for what the two editors have achieved in selecting these letters for publication. It is a work that can be enjoyed on several levels. It displays economists in their most human mode. Here we see two relatively young academics advancing their careers, discussing economics, worrying about their families, gossiping and making withering remarks about colleagues and competitors. “It may merely be prejudice, but I’m inclined to write him [Samuelson] off as an economist.” (Stigler to Friedman, p.97) “Of the many speakers only one was terrible — shallow and pretentious, Joe Schumpeter.” (Stigler to Friedman, p.96)

Let me add a minor final note which may only display a creeping onset of curmudgeonly attitude rather than anything resembling good judgment on my part. The publisher, Routledge, seems determined to prove that you can’t tell a book by its cover. In fact, you can’t determine anything about a Routledge book by its cover. The firm seems unshakeable in its belief that the more the cover is dull and indistinguishable, the more scholarly is the work. Potential readers of excellent volumes, like the one under review, are actively discouraged from opening the work rather than enticed. It would be kind to think that Routledge is taking some principled, if obscure, stand by its choices in artwork. But, the more likely explanation is that it is simply succumbing to the rather lazy option of not trying. By doing so, Routledge fails to do justice to the volumes it publishes.

References:

Stigler, George Joseph (1963) The Intellectual and the Market Place and Other Essays by George Stigler. Glencoe, IL: Free Press.

Stigler, George Joseph (1988) Memoirs of an Unregulated Economist. New York: Basic Books.

Notes:

1. “I’ve come to the conclusion that no economic theory is important unless one’s contemporaries are persuaded to adopt it. If it meets this test it is important; if it does not, it is unimportant – no matter how correct or profound it may be.” (George Stigler to Milton Friedman, March 1950, p. 112)

2. “… there is no one anywhere I would rather have as a colleague than you.” (George Stigler to Milton Friedman, October 19, 1954, p.133)

3. I base my alternative view on the recollections of Rose and Milton Friedman as well as Paul Samuelson who knew them while enrolled as an undergraduate at Chicago. Additional insights on this matter may be gained in Stigler’s own autobiography (1988).

Craig Freedman is Associate Professor of Economics, Macquarie University, Sydney, Australia and also the Director of the Centre for Japanese Economic Studies. His articles on George Stigler and the Chicago School have appeared in the Cambridge Journal of Economics, Journal of Economic Issues, Journal of Post-Keynesian Economics, Journal of the History of Economic Thought and History of Economics Review. In addition he has edited a number of volumes on the Japanese Economy.