Arnold Carl Harberger (born July 27, 1924) is an American economist. His approach to the teaching and practice of economics is to emphasize the use of analytical tools that are directly applicable to real-world issues. His influence on academic economics is reflected in part by the widespread use of the term "Harberger triangle" to refer to the standard graphical depiction of the efficiency cost of distortions of competitive equilibrium. His influence on the practice of economic policy is manifested by the high positions attained by his followers in national agencies such as central banks and ministries of finance, and in international agencies such as the World Bank.
Life
Harberger completed his B.A. in economics at Johns Hopkins University, and his M.A. in international relations in 1947 and his Ph.D. in economics in 1950 at the University of Chicago. After teaching at Johns Hopkins, Harberger returned to the University of Chicago to teach full-time from 1953 to 1982, and part-time from 1984 to 1991. Since 1984, he has been a professor at the University of California, Los Angeles, serving as professor emeritus since 2014.
He married Chilean Anita Valjalo in 1958. The two remained together until her death in 2011.
Harberger speaks fluent Spanish. He is known for maintaining close ties with his former students, many of whom have held influential government posts throughout Latin America, especially in Chile. Among his former students are 15 central-bank presidents and about 50 government ministers. He takes pride in the work they have done to advance sound economic policy in many countries over many decades. He has been criticized for giving economic advice to some authoritarian governments in Latin America. In the case of Chile, Harberger's influence on the "free-market" reforms undertaken by the Pinochet regime (after the failure of its initial policies of direct economic control) was solely through former students of his, dubbed the Chicago Boys by commentators, who had agreed to work in that government to address the ongoing economic crisis. The core of those reforms has been continued by a succession of democratically elected governments in Chile since the end of the Pinochet government in 1990.
His former student Ricardo Ffrench-Davis has praised Harberger for being free of ideological prejudice, which according to Ffrench-Davis was not the case of Harberger's colleague Milton Friedman.
Work
Harberger's Ph.D. thesis, written under Lloyd Metzler as committee chair and Kenneth Arrow and Franco Modigliani as advisers, was on international macroeconomic theory, but his academic reputation is primarily based on his work on the economics of taxation, welfare economics, and benefit-cost analysis.
The Welfare Cost of Monopoly
Harberger's first contribution to applied welfare economics estimated that the efficiency loss from monopoly—or, more precisely, from prices exceeding marginal cost—in US manufacturing was unlikely to exceed 0.1% of GDP. In making this estimate, Harberger assumed that the extent of market power of the firms in an industry is reflected in the degree of above-normal profits in that industry. The efficiency loss from monopoly arises from the fact that high-profit industries produce too little output, and low-profit industries produce too much output. The net welfare cost is the sum of the gains that would be obtained if output were reallocated in such a way as to bring the rate of profit in each industry to the economy-wide average. To do this requires an estimate of the elasticity of demand for the output of each industry in his sample. He argued that a value of -1 for this elasticity was on the high end of plausible values, because each industry consisted of more than one firm. (The elasticity of demand facing a particular firm is inversely related to its market share. Harberger's assumption clearly implies that individual firms face elasticities far greater than -1, and is thereby fully consistent with the theory of pricing by firms with a degree of market power.) For Harberger's assumed value of demand elasticities, the cost of the resources that would be required to achieve the efficient change in an industry's rate of production is equal to the calculated excess profits in that industry.
Using the formula developed by Harold Hotelling, Harberger measured the efficiency loss from noncompetitive pricing in each industry as the excess of the implied willingness to pay by consumers for each increment to output over the estimated cost of that increment. His conclusion was that monopoly power was not pervasive in the U.S. economy, so that the manufacturing sector could be treated as nearly competitive.