The Intellectual and the Marketplace (George J. Stigler)

The Intellectual and the Marketplace, is a collection of essays by Nobel Prize-winning economist George Stigler, pertaining to education and economics, some spoofs, most humorous, all eminently readable. This is a review of the specific essay ‘The Intellectual and the Marketplace’, the last in the book. 

The Intellectual and the Marketplace is an essay in which Stigler attempts to defend ‘the market’ against what he perceived in 1962 as hostility from the intellectual class. In fact he states that the intellectual has always been hostile to the ‘vulgar men and base motives’ of the market, from ancient Greece philosophers to his present day. His aim, he states, is not to argue for the beauty of the market, but rather, whether negative attitudes toward it are socially useful. Firstly, the highbrow tastes of most intellectuals are satisfied by the market’s productive capacity. Secondly, intellectuals themselves are a luxury, insofar as a society is able to support individuals whose productive capacity is spent on rumination rather than producing anything to the tangible benefit of people, in a hunter-gatherer sense. The increased proportion of intellectuals in American society relative to past societies owes more to Ford than to Ford’s various foundations in aid of intellectual advancement. 

Stigler’s central argument is that the organisational principles of intellectual life and business life are more similar than intellectuals care to admit. Both are voluntary in participation, and both are meritocracies in their very nature. The cream can rise to the top by nature of competition that naturally eschews both fraud and coercion. In intellectual life bad ideas last about as long as bad businesses, as those who need good ideas and good products look elsewhere, regardless of any limited monopoly power in possession of the seller. Stigler argues that both are democratic by nature of the competition, and argues that both business and intellectual life were earlier is opposing discrimination on racial grounds than were politicians.

Despite this, Stigler sees the profit motive as being frowned upon by so many intellectuals, and contends that this is misplaced. The criticism that the marketplace leads to us to buy useless and vain consumer goods, is tantamount to blaming the market for people’s tastes; this he says, ‘is like blaming the waiter for obesity’. Moreover, making advertising the bogeyman in consumer society is misplaced, since the car company tells consumers not to drink whilst driving, and the bourbon company tells consumers not to drive whilst drinking. Thus advertising is so often contradictory and so often ineffective that it is a convenient scapegoat rather than a true cause. This line of argument is clearly a critique of the ideas found in Robert Galbraith’s The Affluent Society. It is characteristic of Stigler’s mischievousness when he says “I am dissatisfied with a population whose love for interesting music is so narrow that every symphony orchestra requires subsidy. I consider it shocking that more Americans have read The Affluent Society than The Wealth Of Nations." Here he turns Galbraith’s subjective criticism of the specific wants of consumerist society against him. 

The language associated with the market is to its detriment argues Stigler - words like ‘egotism, greed and dog-eat-dog’ undermine the merits of self interest, which in itself is no bad thing. No one sees ‘self-interest’ as anything but good when it involves stepping off a train track to avoid an oncoming train, or avoiding the use of electrical goods near a full bathtub. Conversely, politicians never say ‘I am running for office because I can earn more here than elsewhere’, yet such considerations obviously come into play. The point being that what is a description of behaviour in the market is ascribed a sort of sinister or dishonourable tag. And despite this, most of the gains in the marketplace are passed on to society as a whole. The per capita wealth of American society had been doubling every 25 years up until 1962 according to Stigler, unlike a poker game where the outcome is always zero sum. 

Stigler says that the pursuit of profit itself has become a source of guilt for the market, despite its obvious outcomes. This is more true today than ever, where large profits of market leading firms are criticised, even in the face of ever greater services provided and taken advantage of by those with the loudest voices. The intellectual’s disdain for profit is, according to Stigler, a function of a fundamental failure to understand the logic of the market mechanism, and how inextricably linked profit and growth are. The intentions of an actor in any situation, whilst interesting are not necessarily the determinant of good or bad outcomes. Any assessment of the enormous failure of charitable organisations in the developing world demonstrates this. 

There are three main charges against the market that sit outside of fundamental misunderstanding, says Stigler. First, that the market fails to provide for someone who’s talents create things for which there is no market demand, but might otherwise be desirable. True he states, the market fails to provide a lot of things - it doesn’t even provide babies with which to continue the species - so society needs more than just markets. This is not an argument against markets. Secondly, there are cumulative tendencies within markets to concentrate wealth, leading to massive inequality. Stigler simply says this isn’t empirically true. In 2020, most would disagree, as inequality has grown significantly since then. Third, that inheritance creates distortions and unfairness that the market cannot rectify. Here again denies he the true impact of inheritance, but also makes the important point that barring someone from handing down their earned wealth is a significant restriction on freedom, and that intangible inheritances muddy the water far more than first appears. It may have been better to omit this argument from the essay, given it’s nuance and importance, one gets the impression reading both this and the inequality argument that the author is writing for an audience already in possession of a Chicago-school conservative worldview.

Beyond a well-argued point in (partial) refutation of Robert Galbraith and other’s anti-consumerist stances, there are two interesting ideas that can be inferred from Stigler’s famous essay. 

The first, is an inadvertent argument for the Universal Basic Income. Stigler argues that there is a trade off between freedom and benevolence, “for I can seldom do positive good to another person without limiting him. I can, it is true, simply give him money, but even in this extreme case where I seem to place no bonds on him, he inevitably faces the question of what conduct on his part will lead me to give money to him again.” The idea of a trade off between any intervention in a person’s economic life and their freedom is a long-held doctrine of Chicago free-market libertarians of the Milton Friedman and George Stigler variety. A similar criticism of market intervention comes from the Austrians school of economists (led by F.A. Hayek), who contend that intervention in markets distorts prices and therefore production decisions, and government corrections lead inevitably to further intervention and eventually to restrictions of freedom. Unconditional, regular cash payments to all citizens solve both of these critiques. Perhaps the unaffordability of UBI explains why it received less serious attention before (along with the backing of many conservative and libertarian views by those interested in the maintenance of the economic status quo); this is less excusable today.

The second interesting argument one can extract from The Intellectual and the Marketplace, is the link between new ideas and economic growth in the more direct, causal sense. One could view economic growth as originating from three ‘causes’. First, growth stemming from a country catching up technologically with more advanced nations (as in the case of China and India today). Second, how to best use existing resources to their maximum, be it the elimination of unemployment or the more efficient use of natural resources relative to other nations. Thirdly growth comes from new ideas and innovations, which make us able to utilise what we have in ever more powerful ways.

I would argue that 99% of the study of economics concerns itself with the second cause, whilst the third has by far the biggest impact over any length of time. Why would this be the case? Because new ideas cannot be modelled, or even reliably predicted, whilst economists can measure output, unemployment, inflation and so on all day long. The link between the intellectual and the marketplace in terms of innovation, is that of truth. Whether and to what degree a new idea is going to benefit the world can be shown starkly by the market - by its success or failure. And the fact that this is never binary, but rather a process of tweaks and trials and errors, of constant iteration, is reflected in the evolution of ideas, particularly in a Popperian sense. To give the most obvious example, Isaac Newton’s laws of physics were shown to be exactly correct millions of times in the 19th century, used in all sorts of technology. The small prediction errors detected in some interstellar predictions seemed immaterial. Then Einstein’s theory of relativity offered an explanation that performed better under the test of it’s predictive power, and was shown to be a better (but never final) explanation. It is in the testability of ideas that the science and the market have common ground. 

This form of knowledge generation is nothing if not creative, nor are scientific geniuses anything but creative thinkers. The testability of ideas in the intellectual world is perfectly analogous to that in the market - no one gets to decide the truth of an idea when it can be tested, the ‘truth’ is objective. This link between the intellectual and the marketplace, as a mechanism for promoting objective merit, may be the best explanation for the lasting success of capitalism over and above all other systems.