Must-Read: Paul Romer: On George Stigler

Must-Read: Paul Romer sets out his theory of George Stigler. I think Paul is under-generous. Romer drifts toward the position that Stigler chose to do ideology rather than science–that it was important to reject rather than test Chamberlin’s theories because if they were true they would support policies Stigler disliked. I see Stigler as believing that he was doing science: that since we knew that the arc of the universe bends toward freedom, doctrines that if true would support policies that limited freedom could not be correct, and admitting such doctrines for testing would increase the likelihood of error:

Paul Romer: On George Stigler: “The Great Depression was a traumatic experience for both Solow and Stigler…

…They reacted very differently. For Solow, the human cost of mass unemployment was so high that to him, it seemed obvious that the government had to do something to bring unemployment down quickly in the wake of a recession. Stigler saw the many harmful and ineffective things that the government tried during the 1930s (including price floors and official support for cartels) and resolved that the guide to government policy must be ‘do no harm.’ Stigler wanted halt to progress in economic theory because he feared that it would lead to more theories like those of Keynes and Chamberlin (who provided the foundation for Dixit and Stiglitz). For him, there was apparently too much risk that such theories might lend political support for government policies that should not be tried.

Under his division of labor with Milton Friedman, Friedman took on Keynes and Stigler took on Chamberlin. Marshall, they agreed, was safe. They turned Chicago in the last bastion of opposition to the Samuelson [mathematical general-equilibrium] program and thereby prolonged for decades the confusion that Marshall had spawned. For Stigler, the logical implication of ‘do no harm’ was ‘do nothing at all,’ so what good could come from the Samuelson program anyway? Samuelson, like Lucas, must have found it infuriating to have his life’s work dismissed by someone who already knew all the policy answers…

I would also say that Friedman “took on” Keynes in only a small and limited way. The way I put it to my students, Friedman’s argument was:

  • Keynes has identified a real problem, but,
  • as long as the central bank can keep the economy away from the zero lower bound,
  • the problem can be solved by the central bank keeping the money stock stable,
  • because the money stock is a sufficient statistic for forecasting future aggregate demand.
  • Hence all of Keynes’s worries about and proposals for fiscal policy and a somewhat comprehensive socialization of investment are unnecessary and in fact harmful,
  • and Keynes’s belief that they were necessary was the result of his failure to recognize how contractionary monetary policy had been in the Great Depression.

However, at the zero lower bound on interest rates Friedman became a Keynesian:

Even more pertinent is a talk Viner delivered in Minneapolis of February 20, 1933, on “Balanced Deflation, Inflation, or More Depression”….

[I]t would have been sound policy on the part of the federal government deliberately to permit a deficit to accumulate during depression years, to be liquidated in prosperity years…. The outstanding though unintentional achievement of the Hoover Administration in counteracting the depression has in fact been its deficits of the last two years….


I will use the term ‘inflation’ to mean an inrease in the total amount of spendable funds…. It is often said that the federal government and the Federal Reserve system have practiced inflation during this depression and that no beneficial effects resulted from it. What in fact happened was that they made mild motions in the direction of inflation…. At no time… since the beginning of the depression has there been for so long as four months a net increase in the total volume of bank credit…. Assuming for the moment that a deliberate policy of inflation should be adopted, the simplest and least objectionable procedure would be for the federal government to increase its expenditures or decrease its taxes, and to finance the resultant excess of expenditures over tax revenues either by the issue of legal tender greenbacks or by borrowing from the banks…

Friedman was always at least as interested in fighting the Hayeks and the Schumpeters (and the Lucases) who argued that nothing should be done to fight depressions as he was in fighting Keynes…

August 9, 2015

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