The Economist as Mythmaker - Stigler's Kinky Transformation

By Freedman, Craig | Journal of Economic Issues, March 1995 | Go to article overview

The Economist as Mythmaker - Stigler's Kinky Transformation


Freedman, Craig, Journal of Economic Issues


period in the development of economic theory. A fine introduction to some of the debates of this period (1920s and 1930s) can be found in his book of the same name [1967]. For Stigler, this period might be more aptly labelled Years of Wrong Turnings - Which It Took Me and My Colleagues Even More Decades to Correct.

20. The Economics of Imperfect Competition [Robinson 1933] is a work which, though often identified with monopolistic competition, has quite a different agenda. This work grew out of Sraffa's 1926 paper, which took issue with the logic of Pigou's comparative static approach as exemplified in his Economics of Welfare [1920]. Robinson's work presented what was in effect a substantial supplement to Pigou's work by adopting the theoretical [John Stuart Mill was] perhaps the fairest economist who ever lived: he treated other people's theories at least as respectfully as his own, a mistake no other economist has repeated.

Stigler 1987.

Economists can so dislike the conclusions of an article, or what they perceive to be the conclusions, that they comb through the article with the sole hope of refuting its logic. If these ungentle readers are determined enough, they generally succeed. If need be, they take an intentionally obtuse position, refusing to admit anything that is not pointed out in lavish detail. They focus on minor points in the hope that more major issues will fall by the wayside. My aim in this paper is to present an instance of this approach and its consequences. Misinterpretation is not harmless. By shifting the terms of debate, a critic can refocus discussion away from the author's intention. My purpose in this article is to show how this process can occur as well as why it might.

The Journal of Political Economy published "The Kinky Oligopoly Demand Curve and Rigid Prices" in 1947. Its author, George Stigler, was then an aspiring young economist with a growing reputation as a conservative price theorist. The article itself attempted to refute an earlier piece by Paul Sweezy [1939]. For not the first time, commentary supplanted the original. Stigler's mythic version of the kinked demand curve grew to define the profession's thinking on the matter. Sweezy's intentions were largely lost and ultimately not discussed.

Sweezy, writing in an era when discussion of nonstandard pricing behavior enjoyed a rising vogue, offered a simple explanatory model of oligopolistic industries.(1) He observed that standard demand curves (continuous and everywhere differentiable) inappropriately described oligopolies since such curves ignored any interaction between competing firms. Oligopolistic firms could not simply ignore their rivals' reaction to price changes. To capture this, Sweezy makes the heuristic assumption that reactions tend to be different depending on whether prices are raised or lowered. This produces the well-known kink in the demand curve. As a result, oligopolistic markets are likely to be quantity adjusted for relatively small changes in demand or in variable costs.

Eight years later, Stigler's article [1947b] launched an empirical challenge to Sweezy's theoretical model. Ostensibly, his aim was to demonstrate that traditional models of perfect competition and monopoly are better able to account for variations in actual prices. But in carrying out this stated purpose, Stigler misrepresented Sweezy. To understand how and why, we must rescue Sweezy's article from the now standard lenses generously supplied by Stigler.

George Stigler transformed Sweezy's broader concerns with distributional issues into a narrow empirical hypothesis concerning price rigidity. This transformation was only one maneuver in a much wider ranging conflict. Stigler was waging a rearguard action against a persistant challenge to traditional price theory. The challenge attempted to develop a body of microeconomics consistent with the newly developed macroeconomics stemming from the work of Keynes [1960]. …

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