Stanford Business

MAY 2007


Economist John McMillan Remembered

He Could Make Economics Jump Off the Page


Professor John McMillan, right, with Bangladesh economist Muhammad Yunus, winner of the Nobel Peace Prize, at the inaugural conference of the Business School’s Center for Global Business and the Economy, which McMillan helped found in 2004.
Photo by Steve Castillo

John McMillan, an economist who developed theories about market design and then helped put them to use, died at his home on the Stanford campus in March of complications from cancer. He was 56.

As the Jonathan B. Lovelace Professor of Economics, he “played an absolutely crucial role in the GSB’s effort to increase the international elements of its teaching and research,” said John Roberts, who with McMillan codirected the School Center for Global Business and the Economy. He also wrote lucidly on the economic, managerial, and political problems that plague transition and developing economies.

“John in many ways epitomized the Stanford Business School,” said School Dean Robert Joss. “He was a brilliant scholar; he made important contributions to microeconomic theory, but his special talent was in applying theory to real-world issues and problems. And he was a superb expositor. His book Reinventing the Bazaar: A Natural History of Markets is a wonderful exploration of why markets work or fail, based on deep theory but accessible to a lay audience.”

McMillan was the foremost proponent of the fact that market design matters. In a series of articles in the 1980s and 1990s, he and Preston McAfee, now at the California Institute of Technology, wrote about how governments can minimize the cost of procurement of everything from battleships to french fries and efficiently sell assets like radio spectrum and oil tracts. The key to efficiency, they said, is proper market design. With McAfee he wrote path-breaking theoretical papers, of which two in particular stand out. The first concerns how much collusion can be achieved by bidding rings such as groups of antique dealers bidding at estate sales if they cannot secretly make side payments to one another. The second paper, in the context of government procurement, concerns the problems that arise when aggressive firms bid for contracts where the winning firm’s post-auction performance is of critical importance to the government.

In addition, McMillan put theory to practical use. As consultant to the Federal Communications Commission, he oversaw the implementation of the wildly successful 1995 spectrum auctions. He navigated political landmines in auctioning spectrum in Mexico, which created the world’s first free market in spectrum (for microwave spectrum), as well as raising over US$1 billion in the sales of the cellular spectrum. McMillan’s textbook on game theory, Games, Strategies and Managers (Oxford, 1996), brought modern game theoretic analysis to MBA education.

During the period of transition of formerly socialist economies in East Asia and Eastern Europe, McMillan became fascinated with the question of what made markets work or fail. His colleague at the time, Michael Rothschild, now at the Woodrow Wilson School at Princeton University, recalls that “John often remarked that it was a terrible embarrassment to the economics profession that it seemed to have nothing useful to say about how to create a market economy, although he also observed that having nothing useful to say did not stop economists from offering advice.” McMillan traveled in Vietnam and China, developing both respect for and curiosity about the roots of entrepreneurship in these nominally socialist societies.

The central question concerning these transition economies was whether they should move quickly and directly to free markets—the “big bang” approach—or whether a more gradual transition would be better. McMillan led the group of scholars that argued for gradual transitions. The big bang approach, he argued, would only work if unrealistic assumptions were met about how markets work and grow, and in particular how market participants acted and interacted. While the big bang may have worked well after World War II in Europe, circumstances were different in this case. A big bang creates opportunities for all sorts of rent-seeking behavior, and not necessarily the kind that encourages the growth of a stable market economy. History will judge, if it hasn’t already, the wisdom of this argument.

The book Reinventing the Bazaar, which was excerpted in the May 2002 issue of Stanford Business, received a Notable Book of the Year citation from the New York Times Book Review and caused Samuel Brittan to write in the Financial Times: “At long last I have found a book that I can recommend to the proverbial nephew who desires to find out about economics without wanting to pass an exam or become a practitioner himself.” Economics journalist David Warsh said McMillan “could make economics jump right off the page and into the mind of his reader.”

Grist for McMillan's economic mill was everywhere: He and Pablo Zoido, MA '04, used the meticulous records kept by Peruvian intelligence chief Vladimiro Montesinos Torres to figure out that newspaper editors cost more to bribe than judges and politicians, but television station owners were most expensive by far. (See Stanford Business, August 2004.) In the paper “Trench Town Rock: The Creation of Jamaica’s Music Industry,” he shows how a cluster of small, specialized companies originally located along Orange Street in Kingston permitted Jamaican music to remain at the forefront of world music over three decades of rapid change, while four huge firms otherwise came to dominate recorded music. And in “Death and Development,” written with doctoral student Peter Lorentzen and GSB Professor Romain Wacziarg, he argues that low life expectancy is perhaps the chief enemy of development in Africa. The likelihood of an early death leads to more risky behavior, higher fertility, and less investment in education and skills, enough to account for most of Africa’s tragedy.

Born in Christchurch, New Zealand, McMillan was an avid mountain climber and rugby player. He earned a doctorate from University of New South Wales in Sydney, Australia in 1978 and then joined the faculty of the University of Western Ontario. He later helped found the Graduate School of International Relations and Pacific Studies at the University of California, San Diego before joining the Stanford Business School faculty in 1999.

At Stanford he was active in the Center on Democracy, Development, and the Rule of Law, the Freeman Spogli Institute for International Studies, and the Stanford Institute for Economic Policy Research. He also was editor of the Journal of Economic Literature, a fellow of the Econometric Society and New Zealand Economics Association and winner of the Harry Johnson Prize, given by the Canadian Economics Association.

McMillan’s last years showed all his courage and grit. His bouts with cancer began in 1998. Despite setbacks and recurrences of the disease, he never lost his will to live, his sense of humor, his ability and willingness to mentor students and younger colleagues, or his belief that he would recover. This courage was shared by his wife, Patrice Lord, who survives him now, along with his stepson Tim in California, and in New Zealand his mother Alice, sister Jenny, brother Murray, cousin Phyllis, and their families.

No memorial has been scheduled. In lieu of flowers the family asks that memorial donations be directed to Oxfam or to a fund established in his memory at the Office of Development of the Stanford Graduate School of Business.

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