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Home , Frank Knight, Sherwin Rosen

Chicago Price Theory Volume I

Edited by J. Daniel Hammond

Wake Forest University, USA Steven G. Medema

University of Colorado Denver, USA and John D. Singleton

Duke University, USA

THE INTERNATIONAL LIBRARY OF CRITICAL WRITINGS IN

An Elgar Research Collection Cheltenham, UK • Northampton, MA, USA

Contents

Acknowledgements ix Introduction J. Daniel Hammond, Steven G. Medema and John D. Singleton xiii

PART I TEACHING AND DOING PRICE THEORY AT 1. Arthur I. Bloomfield (1992), 'On the Centenary of 's Birth: A Retrospective View of the Man and His Work', Journal of Economic Literature, XXX (4), December, 2052-85 3 2. (1973), ' as Teacher', American Economic Review, 63 (5), December, 787-810 37 3. George J. Stigler (1973), 'Frank Knight as Teacher', Journal of Political Economy, 81 (3), May-June, 518-20 61 4. David I. Fand (1999), 'Friedman's Price Theory: Economics 300 at the in 1947-1951', in J. Daniel Hammond (ed.), The Legacy of as Teacher, Volume I, Chapter 2, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Ltd, 309-21 64 5. Gary S. Becker (1999), 'Milton Friedman, 1912-', in J. Daniel Hammond (ed.), The Legacy of Milton Friedman as Teacher, Volume I, Chapter 4, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Ltd, 138, 140-146 77 6. (1993), 'A Student's Eye View of ', Journal of Political Economy, 101 (5), October, 784-92 85 7. (1993), 'George J. Stigler: Midcentury Neoclassicalist with a Passion to Quantify', Journal of Political Economy, 101 (5), October, 793-808 94 8. Victor R. Fuchs (1994), 'Nobel Laureate: Gary S. Becker: Ideas About Facts', Journal of Economic Perspectives, 8 (2), Spring, 183-92 110 9. (1993), 'Risks and Rewards: 's Contributions to Economics', Scandinavian Journal of Economics, - 95(1), March, 25-36 120 10. Melvin W. Reder (1982), 'Chicago Economics: Permanence and Change', Journal of Economic Literature, XX (1), March, 1-38 132

PART II METHODOLOGY AND ECONOMIC SYSTEMS 11. Frank H. Knight ([1933] 1951), 'Social Economic Organization', in The Economic Organization, Chapter 1, New York, NY: Augustus M. Kelley, Inc., 3-30 173 vi Chicago Price Theory I

12. Frank H. Knight ([1935] 1951), 'Statics and Dynamics', in The Ethics of and Other Essays, Chapter VI, New York, NY: Augustus M. Kelley, Inc., 161-85 201 13. Jacob Viner (1941), 'Marshall's Economics, in Relation to the Man and to His Times', American Economic Review, XXXI (2), June, 223-35 -226 14. F.A. Hayek (1945), 'The Use of Knowledge in Society', American Economic Review, XXXV (4), September, 519-30 239 15. Milton Friedman (1953), 'The Methodology of Positive Economics', in Essays in Positive Economics, Part 1, Chicago, IL and London, UK: Chicago University Press, 3^13 . 251 16. Gary S. Becker (1976), 'The Economic Approach to Human Behavior', in The Economic Approach to Human Behavior, Chapter 1, Chicago, IL and London, UK: Chicago University Press, 3-14, references 292 17. George J. Stigler and Gary S. Becker (1977), 'De Gustibus Non Est Disputandum', American Economic Review, 67 (2), March, 76-90 305

PART III THE THEORY OF DEMAND AND CONSUMER BEHAVIOUR 18. Alfred Marshall ([1890] 1920), 'Gradations of Consumers' Demand', in Principles of Economics, Book III, Chapter III, London, UK and New York, NY: Macmillan and Co., 92-101 323 19. Frank H. Knight (1921), 'The Theory of Choice and of Exchange', in Risk, Uncertainty, and , Chapter 3, Boston, MA and New York, NY: Houghton Mifflin Company, 51-93 333 20. Jacob Viner (1925), 'The Concept in Theory and its Critics', Journal of Political Economy, 33 (4), August, 369-87 376 21. Jacob Viner (1925), 'The Utility Concept in Value Theory and its Critics: II. The Utility Concept in Welfare Economics', Journal of Political Economy, 33 (6), December, 638-59 395 22. Frank H. Knight (1925), 'Economic Psychology and the Value Problem', Quarterly Journal of Economics, 39 (3), May, 372^109 417 23. (1930), 'Development of the Demand Concept', in The Meaning of Statistical Demand Curves, Chapter 1, Chicago, IL: University of Chicago Press, 1-10, reset 455 24. W. Allen Wallis and Milton Friedman (1942), 'The Empirical Derivation of Indifference Functions', in Oscar Lange, Francis Mclntyre and Theodore O. Yntema (eds), Studies in and : In Memory of Henry Schultz, Chicago, IL: University of Chicago Press, 175-89 460 25. Milton Friedman and L.J. Savage (1948), 'The Utility Analysis of Choices Involving Risk', Journal of Political Economy, LVI (4), August, 279-304 475 26. Milton Friedman (1949), 'The Marshallian Demand Curve', Journal of Political Economy, LVII (6), December, 463-95 501 Chicago Price Theory I vii

27. Milton Friedman and L.J. Savage (1952), 'The Expected-Utility Hypothesis and the Measurability of Utility', Journal of Political Economy, LX (6), December, 463-74 534 28. Armen A. Alchian (1953), 'The Meaning of Utility Measurement', American Economic Review, 43 (1), March, 26-50 546 29. Milton Friedman (1957), 'Consistency of the Permanent Income Hypothesis with Existing Evidence on the Relation between Consumption and Income: Budget Studies', A Theory of the Consumption Function, Chapter IV, Princeton, NJ: Princeton University Press, 38-114 571 30. George J. Stigler (1961), 'The Economics of Information', Journal of Political Economy, LXIX (3), June, 213-25 648 31. (1961), 'Hedonic Price Indexes for Automobiles: An Econometric Analysis of Quality Change', in The Price Statistics of the Federal Government: Review, Appraisal, and Recommendations, Washington, DC: National Bureau of Economic Research, Inc., 173-96 661 32. Gary S. Becker (1962), 'Irrational Behavior and Economic Theory', Journal of Political Economy, LXX (1), February, 1-13 685 33. Lester G. Telser (1962), 'The Demand for Branded as Estimated from Consumer Panel Data', Review of Economics and Statistics, 44 (3), August, 300-324 698 34. Margaret G. Reid (1963), 'Consumer Response to the Relative Price of Store versus Delivered Milk', Journal of Political Economy, 71 (2), April, 180-86 723 35. Gary S. Becker (1965), 'A Theory of the Allocation of Time', Economic Journal, LXXV (299), September, 493-517 730 36. Robert T. Michael and Gary S. Becker (1973), 'On the New Theory of Consumer Behavior', Swedish Journal of Economics, 75 (4), December, 378-96 755 37. Gary S. Becker (1974), 'A Theory of Social Interactions', Journal of Political Economy, 82 (6), November-December, 1063-93 774 38. Sherwin Rosen (1974), 'Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition', Journal of Political Economy, 82 (1), January-February, 34-55 805 39. Gary S. Becker (1976), 'Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology', Journal of Economic Literature, 14 (3), September, 817-26 827 Chicago Price Theory Volume II

Edited by J. Daniel Hammond

Wake Forest University, USA Steven G. Medema

University of Colorado Denver, USA

and John D. Singleton

Duke University, USA

THE INTERNATIONAL LIBRARY OF CRITICAL WRITINGS IN ECONOMICS

An Elgar Research Collection Cheltenham, UK • Northampton, MA, USA

Contents

Acknowledgements ix An introduction by the editors to all three volumes appears in Volume I

PART I PRODUCTION, COSTS AND SUPPLY 1. F.H. Knight (1917), 'The Concept of Normal Price in Value and Distribution', Quarterly Journal of Economics, 32 (1), November, 66-100 3 2. F.H. Knight (1921), 'Cost of Production and Price over Long and Short Periods', Journal of Political Economy, 29 (4), April, 304—35 38 3. J. Maurice Clark (1923), 'Different Costs for Different Purposes: An Illustrative Problem', Studies in the Economics of Overhead Costs, Chapter IX, Chicago, IL: Chicago University Press, 175-203 70 4. Frank H. Knight (1923), 'The Ethics of Competition', Quarterly Journal of Economics, 37 (4), August, 579-624 99 5. Jacob Viner (1925), 'Objective Tests of Competitive Price Applied to the Cement Industry', Journal of Political Economy, 33 (1), February, 107-11 145 6. Frank H. Knight (1925), 'On Decreasing Cost and Comparative Cost', Quarterly Journal of Economics, 39 (2), February, 331-33 150 7. Charles W. Cobb and Paul H. Douglas (1928), 'A Theory of Production', American Economic Review, 18 (1), March, 139-65 153 8. Jacob Viner (1931), 'Cost Curves and Supply Curves', Zeitschrift fur Nationaldkonomie, 3 (1), September, 23-46 180 9. Jacob L. Mosak (1938), 'Interrelations of Production, Price, and Derived Demand', Journal of Political Economy, 46 (6), December, 761-87 204 10. George Stigler (1939), 'Production and Distribution in the Short Run', Journal of Political Economy, 47 (3), June, 305-27 231 11. George J. Stigler (1940), 'A Note on Discontinuous Cost Curves', American Economic Review, 30 (4), December, 832-35 254 12. Paul H. Douglas (1948), 'Are there Laws of Production?', American Economic Review, XXXVIII (1), March, 1—41 258 13. George J. Stigler (1951), 'The Division of Labor is Limited by the Extent of the Market', Journal of Political Economy, LIX (3), June, 185-93 299 14. George J. Stigler (1958), 'The Economies of Scale', Journal of , 1, October, 54—71 308 vi Chicago Price Theory II

15. (1959), 'Costs and Outputs', in (ed.), The Allocation of Economic Resources: Essays in Honor of Barnard Francis Haley, Stanford, CA: Press, 23-40 326 16. Zvi Griliches (1960), 'Hybrid Corn and the Economics of Innovation', Science, 132 (3422), July, 275-80 344 17. Jack Hirshleifer (1962), 'The Firm's Cost Function: A Successful Reconstruction?', Journal of Business, XXXV (3), July, 235-55 350 18. Lester G. Telser (1964), 'Advertising and Competition', Journal of Political Economy, LXXII (6), December, 537-62 371 19. George J. Stigler (1968), 'Price and Non-Price Competition', Journal of Political Economy, 76 (1), January-February, 149-54 397 20. and Sherwin Rosen (1976), 'The Value of a Life: Evidence from the Labor Market', in Nestor E. Terleckyj (ed.), Production and Consumption, New York, NY and London, UK: Columbia University Press, 265-97 403

PART II MONOPOLY AND ANTITRUST 21. Jacob Viner (1922), 'The Prevalence of Dumping in International Trade. I', Journal of Political Economy, 30 (5), October, 655-80 439 22. George J. Stigler (1942), 'The Extent and Bases of Monopoly', American Economic Review, 32 (2), Part 2, June, 1-22 465 23. George J. Stigler (1950), 'Monopoly and by Merger', American Economic Review, 40 (2), May, 23-34 487 24. G. Warren Nutter (1951), 'The Growth of Monopoly, 1899-1939' and 'Appendix B: Basic Data on the Growth of Monopoly 1899— 1939', in The Extent of Enterprise Monopoly in the , 1899-1939: A Quantitative Study of Some Aspects of Monopoly, Chapter III, Chicago, IL: Chicago University Press, 25-43, 112-55, notes 499 25. and Edward H. Levi (1957), 'Law and the Future: Trade Regulation', Northwestern University Law Review, 51, 281-96 567 26. Arnold C. Harberger (1954), 'Monopoly and Resource Allocation', American Economic Review, 44 (2), May, 77-87 583 27. Ward S. Bowman, Jr. (1957), 'Tying Arrangements and the Leverage Problem', Yale Law Journal, 67 (1), November, 19-36 594 28. John S. McGee (1958), 'Predatory Price Cutting: The Standard Oil (N.J.) Case', Journal of Law and Economics, 1, October, 137-69 612 29. M.L. Burstein (1960), 'The Economics of Tie-In Sales', Review of Economics and Statistics, 42 (1), February, 68-73 645 30. Lester G. Telser (1960), 'Why Should Manufacturers Want Fair Trade?', Journal of Law and Economics, 3, October, 86-105 651 31. Robert H. Bork and Ward S. Bowman, Jr. (1965), 'The Crisis in Antitrust', Columbia Law Review, 65 (3), March, 363-76 671 Chicago Price Theory II vii

32. George J. Stigler (1966), 'The Economic Effects of the Antitrust Laws', Journal of Law and Economics, 9, October, 225-58 685 33. Richard A. Posner (1970), 'A Statistical Study of Antitrust Enforcement', Journal of Law and Economics, 13 (2), October, 365^19 719 34. Richard A. Posner (1975), 'The Social Costs of Monopoly and Regulation', Journal of Political Economy, 83 (4), August, 807-27 774 35. Michael Mussa and Sherwin Rosen (1978), 'Monopoly and Product Quality', Journal of Economic Theory, 18 (2), August, 301-17 795

PART ffl AND OLIGOPOLY 36. George J. Stigler (1940), 'Notes on the Theory of Duopoly', Journal of Political Economy, 48 (4), August, 521-41 815 37. Don Patinkin (1947), 'Multiple-Plant Firms, Cartels, and Imperfect Competition', Quarterly Journal of Economics, 61 (2), February, 173-205 836 38. George J. Stigler (1949), 'Monopolistic Competition in Retrospect', in Five Lectures on Economic Problems, Chapter 2, London, UK: London School of Economics and Political Science and Longmans, Green and Co., 12-24 869 39. George J. Stigler (1949), 'A Theory of Delivered Price Systems', American Economic Review, XXXIX (6), December, 1143-59 882 40. George J. Stigler (1964), 'A Theory of Oligopoly', Journal of Political Economy, 72 (1), February, 44-61 899 Chicago Price Theory Volume III

Edited by J. Daniel Hammond

Wake Forest University, USA Steven G. Medema

University of Colorado Denver, USA and John D. Singleton

Duke University, USA

THE INTERNATIONAL LIBRARY OF CRITICAL WRITINGS IN ECONOMICS

An Elgar Research Collection Cheltenham, UK • Northampton, MA, USA Contents

Acknowledgements ix An introduction by the editors to all three volumes appears in Volume I

PART I DISTRIBUTION THEORY 1. Milton Friedman and (1954), 'Incomes in the Professions and in Other Pursuits' and 'Incomes in the Five Professions', in Income from Independent Professional Practice, Chapters 3 and 4, New York, NY: National Bureau of Economic Research Inc., 62-172 3 2. Milton Friedman (1953), 'Choice, Chance, and the Personal Distribution of Income', Journal of Political Economy, LXI (4), August, 277-90 115 3. Melvin W. Reder (1969), 'A Partial Survey of the Theory of Income Size Distribution', in Lee Soltow (ed.), Six Papers on the Size Distribution of Wealth and Income, Studies in Income and Wealth Volume 33, New York, NY and London, UK: Columbia University Press for the National Bureau of Economic Research, 205-53 129

PART II CAPITAL AND PROFIT 4. Frank Hyneman Knight ([1935] 1951), '', in The Ethics of Competition and Other Essays, Chapter X, New York, NY: Augustus M. Kelley Inc., 251-76 181 5. Frank H. Knight (1934), 'Capital, Time, and the ', Economica, 1 (3), August, 257-86 207 6. Frank H. Knight (1944), ' from ', Journal of Political Economy, 52 (1), March, 26-47 237 7. Don Patinkin (1948), 'Price Flexibility and Full Employment', American Economic Review, 38 (4), September, 543-64 259 8. J. Fred Weston (1950), 'A Generalized Uncertainty Theory of Profit', American Economic Review, 40 (1), March, 40—60 281 9. J. Hirshleifer (1965), 'Investment Decision Under Uncertainty: Choice-Theoretic Approaches', Quarterly Journal of Economics, LXXIX (4), November, 509-36 302 vi Chicago Price Theory III

PART III AND THE THEORY OF HUMAN CAPTIAL 10. Erika H. Schoenberg and Paul H. Douglas (1937), 'Studies in the Supply Curve of Labor: The Relation in 1929 Between Average Earnings in American Cities and the Proportions Seeking Employment', Journal of Political Economy, 45 (1), February, 45-79 333 11. M. Bronfenbrenner (1939), 'The Economics of Collective Bargaining', Quarterly Journal of Economics, 53 (4), August, 535-61 368 12. Henry C. Simons (1944), 'Some Reflections on Syndicalism', Journal of Political Economy, LII (1), March, 1-25 395 13. George J. Stigler (1946), 'The Economics of Minimum Wage Legislation', American Economic Review, 36 (3), June, 358-65 420 14. Simon Rottenberg (1956), 'The Baseball Players' Labor Market', Journal of Political Economy, 64 (3), June, 242-58 428 15. Gary S. Becker (1960), 'An Economic Analysis of Fertility', in Demographic and Economic Change in Developed Countries, Princeton, NJ: Princeton University Press, 209—40 445 16. M. Bronfenbrenner (1961), 'Notes on the Elasticity of Derived Demand', Oxford Economic Papers, 13 (3), October, 254-61 All 17. Theodore W. Schultz (1961), 'Investment in Human Capital', American Economic Review, LI (1), March, 1-17 485 18. Armen A. Alchian and Reuben A. Kessel (1962), 'Competition, Monopoly, and the Pursuit of ', in Aspects of Labor Economics, Princeton, NJ: Princeton University Press, 157-83 502 19. Gary S. Becker (1962), 'Investment in Human Capital: A Theoretical Analysis', Journal of Political Economy, 70 (5), October, 9-49 529 20. George J. Stigler (1962), 'Information in the Labor Market', Journal of Political Economy, 70 (5), October, 94—105 570 21. (1966), 'Information Networks in Labor Markets', American Economic Review, 56 (1/2), March, 559-66 582

PART IV PUBLIC ECONOMICS AND WELFARE ANALYSIS 22. F.H. Knight (1924), 'Some Fallacies in the Interpretation of ', Quarterly Journal of Economics, 38 (4), August, 582-606 593 23. M.W. Reder (1942), 'Welfare Economics and ', Quarterly Journal of Economics, 57 (1), November, 153-59 618 24. George J. Stigler (1943), 'The New Welfare Economics', American Economic Review, 33 (2), June, 355-59 625 25. James M. Buchanan (1949), 'The Pure Theory of Government Finance: A Suggested Approach', Journal of Political Economy, 57 (6), December, 496-505 630 Chicago Price Theory III vii

26. Milton Friedman (1952), 'The "Welfare" Effects of an Income Tax and an Excise Tax', Journal of Political Economy, 60 (1), February, 25-33 640 27. Gary S. Becker (1958), 'Competition and Democracy', Journal of Law and Economics, I, October, 105-109 649 28. R.H. Coase (1960), 'The Problem of Social Cost', Journal of Law and Economics, III, October, 1-44 654 29. Arnold C. Harberger (1964), 'The Measurement of Waste', American Economic Review, 54 (3), May, 58-76 698 30. Arnold C. Harberger (1971), 'Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay', Journal of Economic Literature, 9 (3), September, 785-97 717 31. George J. Stigler (1970), 'Director's Law of Public Income Redistribution', Journal of Law and Economics, 13 (1), April, 1-10 730 32. George J. Stigler (1972), 'Economic Competition and Political Competition', , XIII, Fall, 91-106 740

PART V REGULATION 33. George J. Stigler and Claire Friedland (1962), 'What Can Regulators Regulate? The Case of Electricity', Journal of Law and Economics, V, October, 1-16 759 34. George J. Stigler (1971), 'The Theory of Economic Regulation', Bell Journal of Economics and Management Science, 2(1), Spring, 3-21 775 35. Richard A. Posner (1974), 'Theories of Economic Regulation', Bell Journal of Economics and Management Science, 5 (2), Autumn, 335-58 794 36. Sam Peltzman (1976), 'Toward a More General Theory of Regulation', Journal of Law and Economics, 19 (2), August, 211—40 818