The road to the economic crisis of the past decade was paved with the slippery stones of deregulation. Recent research on the Chicago school of economics (henceforth the Chicago school) has demonstrated that its members provided key intellectual inspiration for the policy shift towards deregulation that was beginning as early as the 1970s and 1980s.Footnote 1 First coined in the 1950s, the term “Chicago school” is habitually used to refer to prominent scholars associated with the Law School and the Department of Economics at the University of Chicago from the 1920s onwards. Among these scholars are Frank H. Knight, Jacob Viner, Henry C. Simons, Aaron Director, Milton Friedman, George Stigler, Gary Becker, Richard Posner and Robert Bork. While there have been attempts to frame the Chicago school around many different features, including methodological inclinations and institutional practices, the common trait among this otherwise diverse group of scholars is often identified to be the advocacy of a market economy and limited government.Footnote 2
Yet recent scholarship on what is often regarded as the most important school of economic thought in postwar America has corrected a number of widespread misunderstandings of its origins and development.Footnote 3 Among other things, it has demonstrated that there was no Chicago school in the current sense of the word before the late 1940s, and that the label was self-consciously created by a group of its leading members, including Milton Friedman, George Stigler and Aaron Director. Research has further revealed that the work of these scholars was distinct from that of an earlier generation at Chicago, which included Frank Knight, Jacob Viner and Henry Simons. Most importantly, the later generation launched a shift in how to think about the appropriate role of the state in the economy. Whereas Knight, Viner and Simons had favoured particular forms of economic regulation, Friedman, Stigler and Director began more decidedly to embrace deregulation.
Scholars have further illustrated that the Chicago school aimed not only to eliminate regulation, but also to control it by developing a set of economic guides for regulators. It was thus through a multifaceted body of deregulation ideas that the Chicago school came to exert a major influence on postwar American social science and public policy, as well as inspiring academic and political change in other countries, such as Chile and Great Britain. Finally, research has shown that the Chicago school was not a purely American invention, but formed part of a larger transnational institutional project related to the so-called Mont Pèlerin Society—an association devoted to the renewal of liberal ideology and founded by the Austrian-born economist Friedrich von Hayek in 1947. It was also as members of this association that Chicago school scholars made key contributions to the global reshaping and diffusion of free-market thought after 1945.Footnote 4
This article aims to shed new light on the Chicago school's ideas of deregulation, focusing in particular on the shift to a more hard-line stance towards the issue in the postwar period. My analysis partly builds upon the writings of scholars such as Robert Van Horn and Philip Mirowski, who have demonstrated how the changing views on regulation among Chicago school scholars were accompanied by a more positive vision of the workings of free markets, including a more benign view of business monopoly.Footnote 5
However, the present investigation goes beyond existing research by analysing in more detail how Chicago school scholars legitimized their stance on deregulation. In so doing, it addresses a hitherto unexplored theme in research on the Chicago school, namely the function of the figure of the consumer in the writings on regulation authored by its members (here broadly understood as scholars associated with the Law School and the Department of Economics at Chicago) from the 1930s to the 1980s.Footnote 6 This last decade was the period during which their understanding of deregulation narrowed and solidified.Footnote 7
The article makes three arguments concerning the figure of the consumer and the Chicago school. The first is that Chicago school scholars consistently constructed and legitimized their calls for deregulation (as well as for modes of regulation) by referring to what they described as specific consumer interests and habits in the marketplace. More specifically, the analysis shows how writings on deregulation emanating from the Chicago school from the 1930s onwards repeatedly claimed to offer market solutions that protected and benefited the consumer, as well as relying on certain assumptions and arguments concerning consumer behaviour and needs in the market.
The second argument is that the Chicago school's turn towards deregulation in the postwar period was made possible by a new figure of the “efficient consumer,” a figure that is positioned at the centre of ideational structures established by the later school in the 1970s and 1980s. Emerging as early as the 1950s, the figure of the efficient consumer was central to and allowed for a new understanding of the marketplace, one that uncoupled ideals of economic efficiency, utility and growth from the promotion of democracy and moral behaviour. As Chicago school scholars launched this new ideal of the consumer, they also elevated the figure into the key actor in the marketplace, and mobilized it in discussions of efficiency in other societal contexts such as the public sector. Altogether, these moves served to energize and expand the deregulation discourse. As such, the efficient consumer came to function as a key dimension in—as well as a driver of—a large, complex and multidimensional shift in thinking about political economy. This shift derived from the Chicago school.
The third argument is that this shift in thinking about political economy was embedded in a wider change of focus, from choice to welfare, that was unfolding within the Chicago school in the postwar period. Early Chicago school scholars described consumers as individual agents, capable of ensuring democracy and freedom in modern society by expressing their free choices in the market. At the same time, they conceptualized consumers as vulnerable and susceptible beings who had to be protected from market forces by the state. This conception was compatible with a definition of consumer citizenship that entailed notions of social–political rights and participation. In contrast, later Chicago school scholars depicted consumers as rational economic agents who were best protected by their own diligence and by the efficiency of the market. Moreover, they portrayed consumers as a coherent, homogeneous and predictable mass, acting on a deregulated market and serving merely as a tool of narrow consumer welfare, understood as economic efficiency and aggregate wealth. Altogether, these changes devolved agency in the market from the individual to the firm, and dethroned consumer choice as the core principle of the deregulating ideas deriving from Chicago.
The figure of the efficient consumer, I argue—and the ways in which it diverged from earlier consumer ideals—can best be understood as an outgrowth of intellectual developments taking place within the Chicago school from the 1930s to the 1980s. More explicitly, dividing the analysis into three periods (1930s–1940s, 1950s–1970s, and 1970s–1980s), the study explores and compares the work of the above-mentioned Chicago school scholars, all of whom thematized the concept of the consumer within a broader language of regulation that addressed the economic organization of society. Against the background of the better-known story of the school from the 1920s to the 1950s, I particularly aim at disaggregating the contributions by figures such as Milton Friedman, George Stigler and Robert Bork, in order to unfold the shifting views on deregulation, from choice to welfare, outlined by Chicago school scholars in the 1960s and 1970s.Footnote 8
PROTECTING AND EDUCATING THE CONSUMER, 1930s–1940s
It was in the interwar years that the concept of the consumer was pushed to the centre of public and political discourse in the United States. In this process, previously separate discourses of the consumer, for example within social politics and economic thought, were combined. This created a more universal category of the consumer, a figure now imbued with a plurality of societal practices and virtues. Elevating the actor into a political and economic key figure of modern society, most politicians, scholars and intellectuals described the consumer as an agent, capable of ensuring and enhancing economic growth and political democracy. More specifically, they portrayed consumer choice and rights, as well as the act of consumption, as features that were necessary to boost the American economy and to strengthen the country's democracy against the threats of fascism and communism.Footnote 9
However, the issue of how consumers could best contribute to economic growth and democratic development within society was strongly contested. The disagreement to a great extent concerned the question whether consumers tend to thrive within free markets or to benefit from a regulatory framework aimed at protecting the consumer from market forces. The issue of regulation and the nature and capability of consumers were thus deeply contested and related to heated debates on how modern society and its economic, political and social institutions should be ordered.
Regulation and consumers had been central issues in American political debate since the late nineteenth century, when government consumer protection had been enacted in reaction to what were perceived as monopolistic tendencies in American business. It was thus owing to fears that monopolies had made price control, the concentration of wealth, and diminished individual initiative into defining characteristics of America's market economy that Congress in 1890 had passed the Sherman Antitrust Act. By limiting and preventing the formation of cartels and monopolies, the Act aimed to improve the conditions of competition in order to provide consumers with real choices and fair prices in the marketplace. The early twentieth century saw further consumer protection measures, such as the Pure Food and Drug Act and the Meat Inspection Act, both of 1906 and both passed to set minimum standards for the safety and quality of goods, and the Federal Trade Commission Act of 1914, which sought to promote consumer protection and eliminate anticompetitive practices. Moreover, from the 1890s onwards, a number of consumer leagues had emerged, seeking to strengthen the social–political rights and responsibilities of consumers in American society.Footnote 10
By the 1930s, the ongoing discussions concerning regulation and consumers were linked to the broader debate over social, political and economic reforms associated with what became known as the New Deal. In this debate, at least three different consumer figures were launched, namely the “citizen consumer,” the “purchaser consumer” and the “sovereign consumer.”Footnote 11
Steeped in the American traditions of consumer activism and government consumer protection regulation, the citizen consumer was launched by New Deal reformers as a vision that would secure the rights of individual consumers in the face of unsafe products, unfair pricing and misleading advertising. The citizen consumer invoked a vision of the new American democracy as based on the popular mobilization of consumers in cooperatives and movements, with consumers also represented in federal advisory boards and agencies and supported by a state-regulated welfare economy.
Portraying the citizen consumer as part of a collective concept embodying shared ethical and political rights and responsibilities, New Deal reformers relied on a notion of the individual consumer as vulnerable, susceptible and in need of protection from a malfunctioning marketplace and manipulative advertising. This notion was not found in the ideal of the purchaser consumer, which arose alongside the citizen consumer during the New Deal. Purchaser consumers were viewed as contributing to society by exercising purchasing power rather than political activism and self-assertion. Moreover, this ideal was linked to the conviction that what mattered most was consumers’ purchasing power, not their right to be protected in the marketplace or heard in government chambers. Still, the purchaser consumer was informed by an increasingly dominant Keynesian logic, the argument being that private investment and self-regulation could not alone remedy America's economy: these instruments had to be aided and restrained by government spending aimed at fueling aggregate demand.
The purchaser consumer diverged in these respects from the third consumer ideal that emerged during the New Deal, that of the sovereign consumer. This ideal was launched from the realm of marketing by free-market thinkers who spoke of “consumer sovereignty” as a way of arguing that all economic processes were ultimately directed towards satisfying consumer demand. The market was compared to the democratic mode of government, e.g. by stating that the market “is a democracy where every penny gives a right to vote.”Footnote 12 Here consumers were portrayed as sovereign agents, whose dynamic rule in the market ensured not only economic efficiency, wealth and entrepreneurship, but also such values as democracy, freedom and individuality. Moreover, these thinkers voiced great concern over the regulatory visions of programmes like the New Deal, arguing that it diluted the economic and democratic potential of the free market.
The debate over the regulatory visions of the New Deal was joined also by representatives of the discipline of economics, which in the interwar period was characterized by pluralism with respect to methodology and research interests, theoretical and ideological assumptions, and, accordingly, policy advice.Footnote 13 This pluralism was also evident at the Department of Economics at the University of Chicago, whose many scholars during the 1920s and 1930s included Frank H. Knight, Jacob Viner and Henry C. Simons, usually considered the founding fathers of the Chicago school. Knight, Viner and Simons all favoured market-based solutions to the issue of economic order, but were also critical of entirely unregulated markets. Moreover, as they bridged several scholarly traditions—and pursued diverse themes, approaches and theories—these three scholars were to a great extent exponents of the interwar pluralism within economics.Footnote 14
I focus here on Henry C. Simons's 1934 essay “A Positive Program for Laissez-Faire,” which the chief architects of the Chicago school all read and appreciated, but ultimately rejected. It was the first text emanating from the Department of Economics at Chicago that thematized the concept of the consumer within a broader language of regulation, directly addressing the economic organization of society.Footnote 15 The essay sought to provide a theoretical explanation of the Depression and proposed that large sectors of the US economy should be reorganized in order to preserve both political liberty and the dynamics of competition. In so doing, Simons warned against New Deal visions of economic regulation, but also argued that it would be necessary to implement a set of policies to preserve laissez-faire.
In his view on laissez-faire, Simons was in line with many of those liberal economists and intellectuals who in the 1930s had mobilized with the aim of creating a new political order based on individual freedom and the free-market economy, and who continued later in this pursuit within the Mont Pèlerin Society. Deeply suspicious of nineteenth-century laissez-faire, these liberals associated unregulated capitalism with two problems.
First, recent developments had shown that capitalism not only brought about prosperity and freedom, but also generated inequality and widespread poverty. As a consequence, these liberals endorsed various degrees of governmental economic regulation and wealth redistribution. However, they had no intention of embarking on a system of socialist planning, as they held a free-market system to be vital for a just society.
Second, the liberal thinkers in question had come to believe that markets did not emerge naturally, but must be created and maintained, since history had shown that unregulated markets invariably led to the rise of monopolies and the misuse not only of human but also of environmental resources. In other words, they were convinced that strong systemic frames were needed to secure the workings of the price mechanism and the market's ability to promote growth, freedom and justice. These liberals thus called upon the state to create and maintain the free market. The key question was how to define the state's positive functions: how extensive should they be, and should they focus mainly on creating an effective market or on mitigating its negative consequences?Footnote 16
In Simons's “A Positive Program for Laissez-Faire,” the scope for state action within the economy appeared unquestionable and extensive, both in respect to creating an effective market and in providing social welfare. More concretely, Simons recommended numerous initiatives, including public-works projects, progressive taxation and social insurance, as well as forceful competition policies (also known as antitrust law). In his view, laissez-faire was defunct first of all because it had given rise to a monopolist structure within US business that undermined basic democratic virtues relating to free competition, political liberty and social equality in terms of power and income: “Thus, the great enemy of democracy is monopoly, in all its forms: gigantic corporations, trade associations and other agencies for price control, trade-unions—or in general, organization and concentration of power within functional classes.”Footnote 17
Simons's proposal to restructure the US economy by breaking up and limiting the size of giant corporations (and other economic interest groups) was in large part launched to improve the consumer's position within society. Indeed, much of his critique of large corporations concerned their power to “exploit . . . consumers” through fixed prices and market control.Footnote 18 In line with this, Simons portrayed consumers in modern society as deeply heterogeneous and vulnerable. Unlike producers, he wrote, “People as consumers are unorganized and inarticulate” and prone to be harmed by monopolism.Footnote 19
Simons not only detected a problem in how the monopolistic market structure allegedly forced consumers to overpay for goods and reduced their choices in the marketplace; he also worried that the enormous sums spent by corporations on advertising would manipulate vulnerable and susceptible consumers into buying things they neither wanted nor needed: “Profits may be obtained either by producing what consumers want or by making consumers want what one is actually producing. The possibility of profitably utilizing resources to manipulate demand is, perhaps, the greatest source of diseconomy under the existing system.”Footnote 20
Consequently, in order to establish a market order that protected, promoted and responded to the free choice of consumers, Simons called for a substantial reconstruction of the American economy. Above all, he argued for strong antitrust policies that would position the Federal Trade Commission as “perhaps the most powerful of our governmental agencies,” and he proposed limits upon what he called “the squandering of our resources in advertising and selling activities.”Footnote 21
Moreover, Simons encouraged improving the societal position, welfare and rights of consumers through extensive private and public institutional mobilization. In addition to advocating that labour unions should promote “consumer co-operation with respect to both commodities and the various forms of social insurance,” he described the world's first consumer rights and protection organization, Consumers’ Research, Inc. (founded in 1929), as “an almost revolutionary development” and expressed hope “that such undertakings may flourish.”Footnote 22 Along with the “substantial development of consumer cooperatives for collective research and consumer education,” he also urged the labeling of goods “on the basis of Bureau of Standards specification, so that consumers may know (and insist on knowing) which brands of goods meet requirements for government purchase.”Footnote 23 Altogether, these initiatives were intended to arm consumers with information that would offset the attempts made by business to manipulate demand.
In summary, Simons aimed to establish a market economy based on free prices and competition and directed towards satisfying consumer choice. However, he argued that markets and consumers were vulnerable and susceptible beings that must be respectively regulated and protected. The state was assigned a substantial role in this context. By breaking up monopolies, restricting advertisement activity and ensuring a range of social welfare activities, the state was to guarantee free and fair competition as well as basic economic, political and social consumer rights. Moreover, Simons viewed consumers as forming part of a collective, based on shared societal interests and responsibilities, which ought to be advanced and protected by both private and public institutions. As such, “A Positive Program for Laissez-Faire” combined features from the figures of the sovereign and the citizen consumer, even if its visions of government spending and social policies were not as ample as those of the New Deal reformers.
As it turned out, it was the citizen consumer who became central to the socially embedded, managed capitalism and substantial regulatory framework that were the outcome of the New Deal programmes enacted between 1933 and 1938.
Still, the main positions outlined in “A Positive Program for Laissez-Faire” were to a large extent shared by Chicago school scholars in the 1930s and 1940s. Most importantly, in their critique of laissez-faire, Jacob Viner and the younger students at the Department of Economics—Aaron Director, Milton Friedman and George Stigler—all criticized concentrations of business power during this period.Footnote 24 Simons's mentor, the always critical and often contrarian Frank Knight, was to some extent an exception. Although he recognized monopoly as both a “major mechanical weakness” and “a real evil in many cases,” he did not consider it to be a force that undermined political freedom. Moreover, he held that “most monopolies are in fact temporary.”Footnote 25
However, Knight often pointed to a range of other features of unregulated capitalism that he considered problematic. This was the case in his famous essay of 1923, “The Ethics of Competition,” which served as a vital source of inspiration for Simons. Here, Knight rejected the idea that individuals were able to act with perfect rationality in the marketplace, arguing that cultural factors played a large role in determining individual needs. “In fact,” he wrote, “human activity is largely impulsive, a relatively unthinking and undetermined response to stimulus and suggestion.”Footnote 26
Echoing Knight's concern about consumer susceptibility and Viner's opposition to the concentration of power in business monopolies, Simons's essay made a deep impression on the younger generation of Chicago school scholars such as Friedman and Stigler. With reference to the visions first outlined by Simons in the essay, Aaron Director later wrote that Simons was by the early 1940s “slowly establishing himself as the head of a ‘school’” at the University of Chicago.Footnote 27
THE RATIONAL AND UNPROTECTED CONSUMER, 1950s–1970s
Between the 1950s and the 1970s, Chicago school scholars came to fundamentally reinterpret key themes and concerns outlined in Simons's essay, including his concerns about monopolies and consumers.
As part of a larger attempt to develop free-market doctrines, this reinterpretation grew in reaction to the ways in which regulation was being theorized and practised in postwar America. It unfolded against the background of the profound transformation of the discipline of economics that was taking place in the 1950s and 1960s, and it was also shaped by new political contexts such as the Cold War.
The postwar American political economy was characterized by reinforcement of the socially embedded managed capitalism and regulatory framework created in the 1930s. More specifically, in the 1950s and 1960s this regulatory framework developed into a comprehensive system of independent federal commissions and agencies that oversaw the nation's crucial infrastructure industries and set price, quality and quantity standards, thus determining which firms could enter or leave a market, what goods and services could be offered, and how those goods and services were to be sold. These institutions, together with other industry-specific and economy-wide agencies, amounted to a far-reaching regulatory system that imposed conditions on market transactions between producers and consumers and between firms and workers.Footnote 28
The scope of the American regulatory system peaked in the 1960s and early 1970s, aided by consumer advocates such as Ralph Nader, who became famous for demanding aggressive state intervention to protect Americans from unsafe consumer products.Footnote 29
Like the New Deal reformers, consumer advocates such as Ralph Nader and the supporters of the regulatory framework conceptualized a highly vulnerable and susceptible consumer, trapped within a malfunctioning, manipulative and repressive capitalist system. A similar consumer figure was portrayed in the flood of literature on consumption appearing in the postwar period. This heavily criticized the contemporary purchaser-consumerist culture for being individualistic, socially divisive and wasteful, and claimed that consumer choice was in fact deeply manipulated by the power of advertising. Some of the best-known contributions came from social critics such as journalist Vance Packard and economist John Kenneth Galbraith, both of whom sounded an alarm bell at postwar consumption culture and politics in their books The Hidden Persuaders (1957) and The Affluent Society (1958). Both argued that certain actors in the market (consumer research and advertising) were attempting to manipulate consumer desires and needs; Galbraith also contended that the new demands created by advertising were leading to exuberance in private production and to consumption that was pushing out public spending and investment. The result, according to Galbraith, would be private affluence and public poverty. Along with government protection for the consumer, he therefore called for comprehensive economic regulation and redistribution.Footnote 30
While Galbraith represented mainstream views of markets and consumers in the political realm, he found himself increasingly at odds with the views of many of his colleagues in the economics departments of American universities, departments that in the 1950s and 1960s had undergone a profound transformation. In a nutshell, neoclassicism had emerged as the dominant framework characterizing the discipline of economics, replacing the plurality of approaches that had characterized the interwar years.Footnote 31 Three changes were vital in this transformation from pluralism to neoclassicism. First, the economics discipline came to be informed by the notion that objectivity could be vested in a distinct set of mathematical and statistical methods—a notion which, furthermore, cast the economist in the role of the non-ideological, scientific observer capable of offering value-free advice on economic policy. Second, the discipline came to be informed by a focus on the utility-maximizing economic agent. Many economists thus worked with an idealized figure of the economic agent, who would act with full information and complete rationality in order to maximize individual utility in a market of perfect competition.Footnote 32 Third, while the most highly mathematical economists during the 1950s and 1960s were in favour of economic planning, many mainstream economists had by the 1980s developed a critical attitude towards the market. At the same time, they now argued for the primacy of economic efficiency as the guiding value, as well as for the possibility of separating economic values from other concerns.
Such scholars from the Chicago school as Milton Friedman and George Stigler were key figures in the transformation of the American economics discipline from interwar pluralism to postwar neoclassicism. They also played a vital role in changing the Mont Pèlerin Society in the 1950s and 1960s. Originally a heterogeneous group of intellectuals, philosophers and economists studying the relations between market and state from many different angles and embracing various visions of liberal society, under their leadership the Mont Pèlerin Society became an association of mainly free-market-oriented economists.Footnote 33
During the 1950s—after their introduction to new strands of free-market thought at Chicago and in the Mont Pèlerin Society—both Milton Friedman and George Stigler began to embrace deregulation.Footnote 34 In so doing, they elevated the consumer to the key actor of the marketplace, introducing the figure of the consumer into new societal contexts and thus energizing and expanding the deregulation discourse associated with the Chicago school. They also turned key assumptions of Simons's laissez-faire paper upside down, including the idea that markets and consumers must be created and protected by the state. More specifically, they expressed a high degree of trust in the efficiency and self-protective mechanisms of markets and of consumers, whom they saw as sovereign, rational and utility-maximizing agents. Moreover, they expressed deep scepticism towards governmental regulation, claiming that business monopoly was no real problem for a competitive economy. These arguments were launched in direct opposition to the views on regulation and consumers associated with figures such as John Kenneth Galbraith and Ralph Nader.Footnote 35
It was above all in his writings as a public intellectual that Friedman mobilized the consumer. Most important here were his books Capitalism and Freedom and Free to Choose, published respectively in 1962 and 1980 (co-authored with his wife, Rose Friedman, Free to Choose summarized in popular fashion the arguments for deregulation that Milton Friedman had promoted since the early 1960s.)Footnote 36 Aiming to convince both decision makers and the public of the virtues of a free-market economy, these books portrayed consumers as the key drivers of capitalism and of liberal democracy, in line with the figure of the sovereign consumer launched in the interwar period. One example is found in a passage in the opening chapter of Capitalism and Freedom. This describes the market as an open, competitive and democratic order, which reflects people's preferences because consumers can choose to accept and reject its offerings:
The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on. And the market does this impersonally and without centralized authority. Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.Footnote 37
Arguing that consumers’ freedom to choose was fully protected by market efficiency, Friedman saw no need to constrain this freedom through paternalistic state regulation. Instead, he proposed letting consumers constrain the state by subjecting the public sector to their demands. The logic was as follows: if consumers were allowed to decide for what purposes funds should be spent, the public sector would be infused with competition and would be forced to produce new and better goods. The result would be a more efficient, more productive and more innovative system. Most famously, Friedman sought to introduce a system of vouchers for school education in order to enable parents to choose freely between public and private schools, thus forcing the schools to compete for students: “Here, as in other fields, competitive enterprise is likely to be far more efficient in meeting consumer demand than either nationalized enterprises or enterprises run to serve other purposes.”Footnote 38
In line with this, Friedman portrayed government intervention in the economy as ineffective, inferior to the dynamics of consumer choice on the free market. As well as being inefficient, he claimed, state intervention paved the way for a system in which power- and profit-seeking bureaucrats and vested interests might dominate and suppress individuals economically as well as politically. Indeed, once in control of the system, these forces would use it as a means to their own ends, heedless or ignorant of the costs of such actions for other members of society. “Regulation of the railroads to protect the consumer,” Friedman exemplified in Capitalism and Freedom, “quickly became an instrument whereby the railroads could protect themselves from the competition of newly emerging rivals—at the expense, of course, of the consumer.”Footnote 39
In the chapter “Who Protects the Consumer?” in Free to Choose, Friedman took his critique of the regulatory system a step further: he argued that regulation had dangerous, even criminal, side effects. The context was a discussion of the “burst of moral righteousness” that had led to the prohibition of alcohol at the end of the First World War. Prohibition, Friedman explained, gave rise to illegal bars, in which “the older gangsters of the day sat . . . planning the exploits that made them so notorious; murder, extortion, hijacking, bootlegging,” and which forced “otherwise law-obedient citizens” to break the law to get a drink. Regulation, he concluded, “suppress[es] many of the disciplinary forces of the market that ordinarily protects the consumer from shoddy, adulterated, and dangerous products. It did corrupt the minions of the law and create a decadent moral climate. It did not stop the consumption of alcohol.”Footnote 40
Evidently Friedman did not see consumers as agents always making the right choices for themselves. But he expressed sympathy for their choices, and argued that they generally act wisely on the basis of the available information and are quick to learn from their mistakes. And while he linked a system of state regulation to economic stagnation, political suppression and exploitation, he viewed an economy in which the many and changing wants of consumers continuously force producers to invent new and better things as a free, efficient, entrepreneurial and, as such, rational system.
Friedman's critique of regulation in Capitalism and Freedom and Free to Choose involved long discussions of monopoly. In contrast to his views in the 1930s and 1940s, he now stated that the extent of monopoly was not a serious problem for the American economy. More specifically, he argued that the importance of monopolies had been greatly overestimated because competition rendered them minor and transitory. Debating the issue of monopoly in Capitalism and Freedom, he emphatically stated, “as I have studied economic activities in the United States, I have become increasingly impressed with how wide is the range of problems and industries for which it is appropriate to treat the economy as if it were competitive.”Footnote 41
In Free to Choose, Friedman therefore summarized his view of the relation between regulation, markets and consumers as follows: “on the whole market competition, when it is permitted to work, protects the consumer better than do the alternative government mechanisms that have been increasingly superimposed on the market.”Footnote 42
The political context of the Cold War was key to Friedman's portrayal of the consumer as the agent of capitalism and democracy. More specifically, his portrayal was predicated on a world view infused with Cold War dualisms and embedded in a dichotomist, linear and irreversible notion of historical development as an existential struggle between the opposed forces of socialism and free-market liberalism, leading either to decay and destruction or to a perfect world.Footnote 43 In this world view, the discourse of choice was linked to the struggle for democratic over totalitarian values; the consumer emerged as the paradigmatic actor who was to be given priority over other actors in the marketplace.Footnote 44 This discourse included a reconfiguration of the worker into a consumer, and was silent on issues like the right-to-work laws, because of a focus on consumption rights that seemed palatable in light of the economic and political contest of the age with the Eastern Bloc. The Cold War context thus meant that contemporary economic debates came to be about much more than just theoretical discussion; they gave birth to a bold, hardened, narrower understanding of liberal democracy, which revolved around the idea of consumer choice.
Cold War dualisms were also found in Stigler's take on the consumer, which had many overlaps with Friedman's. This can be seen in Stigler's work on deregulation from the 1950s onwards, collected in The Citizen and the State: Essays on Regulation in 1975.Footnote 45 The essays in this collection each express a firm belief in the efficiency and self-protective mechanisms of markets and consumers, as well as deep scepticism towards governmental regulation. Stigler's opposition to regulatory consumer protection is forcefully stated in the essay “Can Regulatory Agencies Protect the Consumer?”, which he first presented in a debate with Manuel Cohen, former member of the US Securities and Exchange Commission, at the American Enterprise Institute in 1971. Opening his talk with the comment “I somehow associate the word protection with the mafia,” Stigler's answer to the question posed by his essay title was a clear “no.”Footnote 46 He concluded the published version of his talk by stating that “public regulation weakens the defenses the consumer has in the market and often imposes new burdens upon him, without conferring corresponding protections.”Footnote 47
Yet there were also crucial differences in Stigler and Friedman's visions of the consumer and languages of deregulation. Most importantly, the two had very different ideas about consumer behaviour, the relationship between capitalism and democracy, how regulation could be achieved, and who should be enrolled for the purpose.
Stigler's views on consumer behaviour were rooted in a strong belief in the utility-maximizing nature of individuals.Footnote 48 In his work on deregulation, this belief unfolded as a rational-choice theory, holding that those who stand to profit from regulation would always desire regulation. Applying his theory to analyse the concrete dynamics at play in regulatory processes, in the essay “The Theory of Economic Regulation” Stigler coined the notion of “regulatory capture”—a term that describes the process by which regulatory agencies would eventually come to be dominated by the very industries they were charged with regulating, thus acting against the public interest.Footnote 49
Consequently, in contrast to Friedman, Stigler believed that all attempts to persuade consumers and politicians of the value of deregulation would be in vain as they were interested only in maximizing their own utility (which might, Stigler argued, at times be achieved by regulation). Stigler's work instead addressed the business community and scholars in other fields of social science. Advising business representatives on how to achieve deregulation, he suggested that the focus should be on achieving changes in legal thought and practice rather than in public and political opinion. To his fellow scholars, he presented the idea of the utility-maximizing consumer as a unified framework that could be applied to human behaviour in many, if not all, parts of society.Footnote 50
Stigler had, as we will see below, a huge impact on the way deregulation was theorized in and beyond the economics discipline from the 1960s onwards. Friedman, on the other hand, was important above all for the popular revival of free-market thought in postwar America. Friedman's call for deregulation also treated utility-maximizing self-interest as a driving force of human behaviour, but less stringently than Stigler's.Footnote 51
Aiming to build a reasoned consensus in the population at large, Friedman sought to convince people that their own values are best met through the realization of the policies he promoted. He thus described the market as a progressive order fostering such virtues as self-reliance, responsibility and commitment, and ensuring the best possible outcome for society's uneducated, poor and average individuals. Likewise, Friedman sided with consumers against an “elite” that he depicted as paternalistic and repressive. “[W]hat the critics really complain about,” he said in a 1973 interview with Playboy, “[is] that under capitalism, consumers get what they want rather than what the critics think they should want.”Footnote 52 More generally, he portrayed consumers as agents of inherent good, whose rule over the market ensured economic efficiency, growth and entrepreneurship, as well as ethical values such as freedom, choice and individuality.
The philosophical opening essays of Stigler's Citizens and the State also link capitalism to consumer choice and individual freedom. But these issues are not addressed in the book's empirical studies, which explore the effects of regulation with a focus on “The Criteria of Market Efficiency,” referring to levels of prices and investment.Footnote 53 While these levels determine what consumers have to pay for their goods and the variety of choice on the market, Stigler generally portrayed deregulation as desirable in his case studies on the ground that it creates growth and lower prices, rather than because it protects and disseminates ethical dimensions of consumer choice in society.
More specifically, nowhere did Stigler express sympathy for consumer choice, or belief in the market's potential to generate virtuous behaviour, as Friedman did. In fact, he expected individuals always to maximize their own utility, working from the assumption that they generate more efficiency and wealth as consumers in the market than as agents entering and capturing regulatory systems for individual utility. For this reason, Stigler used a new figure of the efficient consumer to shape and justify his call for deregulation. In other words, Stigler treated consumers as tools to bring about economic efficiency rather than as vehicles for enhancing freedom or democracy. Consumers were portrayed as a homogeneous, mechanical and predictable mass, rather than a heterogeneous group of individuals with divergent qualities and preferences.
But how did Stigler justify the pursuit of efficiency as an aim wholly separate from ethics? And what were the deeper philosophical, methodological or ideological underpinnings of this pursuit? To begin with, Stigler's project relied on the redefinition of economics—and of welfare economics—which had been launched in the 1932 essay “An Essay on the Nature and Significance of Economic Science” by the British free-market economist Lionel Robbins.Footnote 54 In that essay, in the face of a plurality of coexisting definitions of economics, Robbins simply defined the subject of economics as dealing with the relationship between ends and scarce means. This definition involved a strict analytical focus, first, on how individuals’ preferences play out in their choices between scarce means, and second, on outlining the principles that most effectively govern the allocation of scarce means between competing ends. The definition also saw distributional issues as falling beyond the category of economic analysis. Challenging standard positions within welfare economics, Robbins argued that it was scientifically impossible to arrive at interpersonal comparisons of individual preferences and utility that could form the basis of overall social welfare distribution. His separation of ethical and distributional concerns from the science of economics consolidated within Anglo-American economics a new and narrower definition of utility, adapted from Continental economists such as Vilfred Pareto and inextricably linked to individuals and their choices as well as notions of economic efficiency.
Robbins's reformulation of economics came to be generally accepted in the context of the “new welfare economics” of the 1930s and 1940s (and in the economics discipline more generally in the 1960s). Stigler followed this movement in his 1942 textbook The Theory of Competitive Price.Footnote 55 In his work, applying the scarcity-based definition of economics outlined in Robbins's essay, Stigler was thus armed with a set of philosophical and methodological premises that allowed him to place distributional concerns outside the realms of the economics discipline, and accordingly to operate with a narrow definition of consumer utility that was bound up with the scientific search for economic efficiency.
Ideological motives presumably also played a crucial role in Stigler's separation of ethics—and particularly of democratic concerns—from economic analyses. These motives concern what has been described as Stigler's fundamental doubt about the workings of democracy.Footnote 56 This doubt involved the belief that decisions to expand government regulation were a product of the poor instincts possessed by the vast majority of people. Accordingly, Stigler argued that government policy should be immunized from the public and that the conduct of politics should be entrusted to the elites whose instincts for higher standards he wished to promote. His argument about the mass of people making the wrong choices applied also to the “marketplace of ideas.” For example, Stigler opposed student choice in realm of higher education, arguing that it would lead to the production of the wrong kind of knowledge. Instead, he wanted the marketplace of ideas to be governed by elites, most notably business representatives, whose task it was to curtail and limit consumers’ choices.Footnote 57 In general, Stigler nurtured a deeply negative view of democratic processes involving ordinary people, and this view unquestionably motivated his disregard for democratic concerns in economic analysis.
Altogether, Friedman and Stigler departed radically from the views of Henry C. Simons. They exhibited a very strong degree of trust in the efficiency and the self-protective, rational dynamics of markets and consumers; they deemed the existence of monopolies to be compatible with competition; and they opposed any type of legal and public institution devoted to consumer protection.Footnote 58 Tellingly, Stigler later joked that Simons “was the man who said that the Federal Trade Commission should be the most important agency in government, a phrase that surely should be on no one's tombstone.” Friedman, in turn, reported how, rereading Simons's text, he “had been astounded . . . to think that I thought at the time that it was strongly pro free market in orientation!”Footnote 59
However, Friedman and Stigler also outlined divergent concepts of the consumer, and they utilized these for different purposes. As had Simons, Friedman linked capitalism inextricably to consumer choice, as well as expressing concern about the well-being of the poor and a wish for broad-based prosperity. But he broke with Simons by arguing that free markets are capable of ensuring free choice, as well as basic political, social and economic consumer rights in modern society, and by taking a more critical stance towards government intervention. And even if he believed that the public could be convinced to support and vote for free markets, Friedman was persistently sceptical about democratic politics in situations in which the resulting policies might displace market prerogatives. In other words, he was inclined to grant choice in the marketplace primacy over choice in the political sphere.Footnote 60
Stigler's views on consumers and markets differed from Friedman's in that his call to liberate consumers in the market was shaped by economic argument rather than ethical ideals. More precisely, he drew on a new idea of the efficient consumer, together with a new language of deregulation that entirely decoupled capitalism from issues of freedom and democracy. His rational-choice analysis saw consumers as a homogeneous mass of efficiency-maximizers rather than unique individuals. This view was antithetical to the notion of free individual agency, as it curtailed free consumer choice in all matters political and economic. In this sense, Stigler's work foreshadowed a way of conceptualizing the consumer and of legitimizing deregulation that was to become a trademark of the Chicago school. Friedman, on the other hand, invested the demands for deregulation advocated from Chicago with a certain popular aura and appeal.
CONSUMER WELFARE IN ANTITRUST LAW, 1970s–1980s
In the 1970s and 1980s, the features that had characterized George Stigler's work became prominent in the writings on deregulation emanating from the Chicago school. They also influenced the ways in which deregulation began to be theorized and practised more generally in America in this period. Four developments were important for the alignment that took place between the Chicago school and mainstream views on deregulation.
The first was the waning of the regulation movement and of the institutional framework that had dominated the American political economy in the postwar period, concurrently with the rise to ascendancy in the 1970s of the movement whose agenda was to roll back the state. This deregulation movement involved business groups, free-market think tanks and conservative politicians, and it was connected to the academic work and institutional activities of Chicago school scholars such as George Stigler. But it also included consumer advocates and New Left intellectuals, who now likewise argued that it was necessary to scale back supposedly inefficient and repressive federal agencies, to restrain allegedly self-interested corporate powers, and to restore economic efficiency by deregulating the market and liberating the consumer. As this unusual coalition gained momentum, the views on deregulation of members of the Chicago school became more accepted, if not mainstream, in American public debate during the late 1970s and early 1980s.Footnote 61
The second development was the decline of the figure of the citizen consumer and the rise in its stead of the “combined consumer/citizen/taxpayer/voter whose greatest concern is, ‘Am I getting my money's worth?’.”Footnote 62 The increased tendency of American consumer language to appeal to individual economic self-interest coincided with a new tendency among left-wing politicians and intellectuals across Europe and the United States to view the dynamics of the market, including mass consumption, in a more positive light.Footnote 63 Rather than worrying about the deleterious effects of consumption or about consumer vulnerability, they began to emphasize individual consumers’ capacity for rationality and autonomy, as well as to emphasize elements of pleasure, playfulness and symbolic exchange as the essence of a vibrant and potentially liberating and individualizing consumer culture. The changed position towards consumer culture on the left made the argument launched by scholars such as Milton Friedman that consumers would see lower prices and more product choice if markets were deregulated seem less bellicose.Footnote 64
The third key development in this context was the breakdown of Keynesianism in the 1970s. The inability of Keynesian theory to explain stagflation (the combination of stagnation and inflation) led to bewilderment not only among Keynesian economists, but also among policy makers, for whom the Chicago school's theories favouring deregulation now appeared as a possible solution to current economic problems. In this situation, Chicago school scholars sought to make their voices heard in various ways. While Friedman addressed the public and sought to advise politicians, Stigler addressed the business community and his fellow scholars. Stigler's success in disseminating his theories of deregulation and the utility-maximizing consumer to his audience made him one of the most important Chicago school scholars of the deregulation movement.Footnote 65
This brings us to the fourth important development in the process of alignment between the Chicago school and mainstream views of deregulation, namely the reinforcement of neoclassical doctrines in the US economics discipline and the colonization of other social-science disciplines through a widened application of the idea of utility maximization in the 1970s and 1980s.Footnote 66
Chicago school scholars such as George Stigler spearheaded these academic developments.Footnote 67 Most famous became the contribution of economist Gary Becker, who began to apply rational-choice theory to explain human behaviour within areas that had traditionally belonged to the discipline of sociology, such as racial discrimination, criminality, family organization and drug addiction. A merger was also taking place between law and economics, one that aimed to refocus the discipline of law according to neoclassical economic doctrines. One outcome of this fusion was a reshaping of antitrust thought, brought about by Chicago legal scholars such as Robert Bork and Richard Posner and culminating in the late 1970s.
Assumptions about consumer behaviour and needs in the marketplace were central to this colonization of other disciplines by neoclassical economic thought. While Becker offered a “new theory of consumer behavior,”Footnote 68 Bork and Posner continued a tradition reaching back to the 1930s of thematizing the concept of the consumer within a language of regulation addressing the economic organization of society. In doing so, they constructed a pro-market and largely anti-interventionist vision of antitrust that had overlaps with Friedman's and Stigler's work on regulation, but which was more directly inspired by the efforts launched by Aaron Director in the 1950s to rethink the field of antitrust from the perspective of neoclassical notions of economic efficiency.
Aaron Director was one of the first members of the Chicago school to embrace the neoclassical paradigm, and an extremely influential figure at Chicago in the postwar period.Footnote 69 It is well documented how, in various academic settings, he convinced a number of economists and legal scholars of the validity and usability of his economic theories.Footnote 70 Director played a particularly important role in fusing the fields of law and economics at Chicago in the 1950s and 1960s. Already in 1933, he and Simons had offered courses in economics at the Law School, where Simons was employed from 1939 until his death in 1946. Like many of the scholars who mobilized to renew free-market liberalism in the 1930s and 1940s, Simons and Director were convinced that instituting a well-functioning legal system and regulatory apparatus was the key to the creation of liberal societies based on market economy and individual freedom.
However, in Chicago, the fusion of law and economics was first effected in the postwar period. A decisive step in this direction was taken in 1946, when Director began teaching classes on microeconomic price theory and antitrust at the Law School with legal scholar Edward Levi. Director also led the Chicago Antitrust Project (1953–7), which gathered a number of students, researchers and visiting scholars with the task of exploring areas of antitrust law from an economics perspective. Additionally, he set up the nation's first law and economics programme at the Law School. Finally, in 1958 he founded the Journal of Law and Economics, which he co-edited with Chicago school economist Ronald Coase.Footnote 71
One outcome of this merger of law and economics at the University of Chicago was a distinctive economic approach to legal thought, and especially to the analysis of monopolies and antitrust, building on arguments that Director had developed in his seminar on antitrust with Edward Levi. In the seminar, Director claimed (as had Friedman and Stigler from the 1950s onwards) that monopolies were often products of natural developments and, as competition rendered them minor and transitory, were not a real problem for the American economy. Moreover, he questioned the dominant legal thought and practice with respect to antitrust at the time, which held that the presence of many competitors in the market would ensure fair competition and efficiency.Footnote 72
According to Director, who was a firm believer in the positive forces of competition and adhered to the neoclassical idea of efficiency as the key value of economic activity, monopolistic practices were often more efficient than markets of ten or more competing producers in terms of measured output, low prices and the creation of societal wealth. Against this background, he recommended a relaxed attitude towards monopolies and large corporations, allowing markets to be dominated by only a few firms, and he launched a language of cost and efficiency in the field of antitrust that placed economic concerns above ethical notions of democracy, participation and choice.Footnote 73
Director's ideas served as a great source of inspiration to many of the law students who took his seminar. Among these was legal scholar (and later Supreme Court nominee) Robert Bork, who would later describe his meeting with Director as a “religious conversion.”Footnote 74 Together with Richard Posner, who became a professor at the Law School at Chicago in 1969 (and served as chief judge of the US Court of Appeals for the Seventh Circuit from 1993 until 2000),Footnote 75 Bork eventually developed a more unified and sustained critique of antitrust law, revolving around a new concept with a strong rhetorical and analytical power: that of “consumer welfare.”Footnote 76
The concept of consumer welfare was popularized with the publication of Bork's enormously influential book The Antitrust Paradox in 1978. This synthesized the work in the field that he and Posner had developed since the 1960s. In a much-quoted sentence in the introduction of the book, Bork famously stated, “the only legitimate goal of antitrust is the maximization of consumer welfare.”Footnote 77
By positioning consumer welfare as the guiding principle of antitrust analysis, Bork continued the tradition of portraying consumer needs and benefits as the key object of regulation. But his use of the concept was arguably confusing, since what he saw as consumer welfare was in fact total welfare, which is the same as economic efficiency. More exactly, with consumer welfare, Bork aimed at a model of practising antitrust law that focused on distinguishing between efficient and inefficient markets. In other words, this model sought to maximize efficiency and aggregate wealth in society—or what Bork spoke of, alluding to Adam Smith, as “the wealth of the nation.”Footnote 78
In line with this, while positioning consumer needs as the object of regulation, The Antitrust Paradox referred neither to choice nor to broad-based prosperity as desired outcomes of deregulation, as Milton Friedman's work had done. Bork's aim was not a system in which consumers might choose freely between different goods in the market, or influence what kinds of product were available in the first place. In the same vein, he did not portray consumers as oppressed individuals who, if only allowed freely to express their choices in a competitive market based on the price mechanism, would emerge as democratic reformers and champions of freedom, working for the benefit of all members of society. On the contrary, like George Stigler but more forcefully, he separated the spheres of capitalism and democracy entirely. In line with the scarcity-based definition of economics first outlined by Lionel Robbins, he thus emphasized that antitrust as consumer welfare “has nothing to say about the ways in which prosperity is distributed or used . . . and no sumptuary or ethical component.”Footnote 79
The roles assigned by The Antitrust Paradox to antitrust law and consumers in the economic organization of society were narrow and limited. The role of antitrust law was exclusively to “preserve, improve, and reinstate the powerful economic mechanisms that compel businesses to respond to consumers.” The role of consumers was “to define by their expression of wants in the marketplace what things they regard as wealth.”Footnote 80 While these standards allowed few and powerful firms to dominate the market (given that they provided lawful products and increased aggregate wealth), they limited and instrumentalized consumer action to that of reacting to price signals in the market, thus maximizing the value of the goods produced and securing efficiency and growth.Footnote 81
As Stigler had seen them, but in clearer fashion, consumers in The Antitrust Paradox were described as tools for bringing about economic efficiency, as an abstract, uniform and mechanical mass that constituted merely one among several digits making up the marketplace. Likewise, The Antitrust Paradox stated more unambiguously than The Citizen and the State that it aimed to create a market in which the mass of consumers would rule with the sole purpose of creating efficiency, without regard to what others saw as basic economic, social and political rights of individual consumers.Footnote 82
In line with this, the twin concepts of consumer and efficiency informing Bork's analytical framework were firmly grounded in neoclassical price theory. He thus described in a narrow sense consumers as agents, whose actions are “primarily directed toward the maximization of profit,” and he enlarged this perspective to describe all economic behaviour in society as either “primarily efficiency creating, primarily output restricting, or neutral in its consumer welfare impact.”Footnote 83 Against this background, Bork argued that antitrust law should support only those actions that do not restrict efficiency.
Bork's reliance on neoclassical reasoning in The Antitrust Paradox was deeply inspired by his encounters with Chicago school economists. “Much of what is said here” he stated in the preface, “derives from the work of Aaron Director.”Footnote 84 However, his work stands out for using the inspiration drawn from Director to centre antitrust law on one standard. In addition to portraying consumer welfare as being desirable due to its positive effects on the economy, Bork argued that it “makes the law efficient in achieving its goals, renders the law internally consistent, and makes for ease of judicial administration.”Footnote 85 In other words, consumer welfare, understood as efficient markets, provided a single measure to antitrust law. This measure, it should be added, became extremely influential not only within academia, but also in legal practice, as the US Supreme Court referred to and applied it in its rulings from the 1980s onwards.Footnote 86
More generally, by the 1980s the expansion of regulatory bodies had come to a halt, and Congress had begun to pass legislation introducing deregulation in many sectors of the American economy. This broad dismantling of the postwar consensus in respect of regulation theory and practice was influenced by the deregulation movement mentioned earlier, which gained momentum in American politics during the 1970s, aided by the work and activities of Chicago school scholars. While their deregulation agenda was extended into new areas of economic and social life in the 1990s, they did not subject their theoretical and ideological programme to major change after the late 1970s.
CONCLUDING REMARKS
As witnessed in The Antitrust Paradox, the revolving point of the most recent work on deregulation authored by Chicago school scholars was a new consumer ideal that was used to shape and justify their call for deregulation. This ideal diverged from the citizen consumer (it did not refer to a social definition of citizenship with notions of rights and participation), the purchaser consumer (it was devoid of Keynesian ideas of aiding and restraining the economy), and the sovereign consumer (it did not portray consumers as sovereign agents of the economy). Most importantly, in line with the work of Chicago economists such as George Stigler, The Antitrust Paradox decoupled the links between capitalism and democracy informing these consumer ideals (i.e. the idea of the consumer as an agent capable of enhancing capitalism and democracy). In so doing, the book ultimately dethroned consumer choice as the guiding principle of the market economy—a principle that had informed consumer concepts and deregulation language at Chicago from Henry C. Simons to Milton Friedman.
Transposing neoclassical ideas of individuals as utility-maximizing agents operating in well-functioning markets (as outlined by George Stigler) into the area of antitrust (as outlined by Aaron Director), The Antitrust Paradox cemented the ideal of an efficient consumer, operating in a bound market in which agency, initiative and freedom are handed over to very few and powerful firms. This efficient consumer was not an individual with social, political and economic rights, but part of a mechanical, abstract mass. Moreover, the role of this consumer was economized, instrumentalized and limited to the action of buying the available goods on the market at the cheapest price available in order to secure efficiency and growth. These features were at the core of the vital shift from choice to welfare that took place in the writings on deregulation authored by Chicago school scholars from the 1930s to the 1980s.
