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Economist John McMillan Dies: "He Could Make Economics Jump Off the Page"

March 15, 2007

STANFORD GRADUATE SCHOOL OF BUSINESS—John McMillan, the Jonathan B. Lovelace Professor of Economics at the Stanford Graduate School of Business, died at his home on the Stanford campus March 13, of complications caused by cancer. He was 56.

"John in many ways epitomized the Stanford Business School," said Robert L. Joss, dean of the School and Philip H. Knight Professor. "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 born in Christchurch, New Zealand, and raised in that country. His lifelong love of mathematics was initially sparked by a remarkable high school teacher, Alan Ramsay, at Christ's College, Canterbury, and he went on to study mathematics and economics at the University of Canterbury, earning an M.Com. in 1973. He began work on his Ph.D. there, moving with his supervisor Richard Manning to the University of New South Wales in Sydney, Australia, and completing his doctorate at UNSW in 1978. His first academic position was at the University of Western Ontario, where he met Preston McAfee, with whom he collaborated extensively for the next 20 years.

In 1987 McMillan moved to the University of California, San Diego, where he was one of five founding faculty members of the brand-new Graduate School of International Relations and Pacific Studies. The founding dean of the school, Peter Gourevitch, remembers McMillan as crucial to the school's founding, not only for his own work but for bridges he built to other units at UCSD and especially for the role he played in mentoring junior faculty members such as Takeo Hoshi, Barry Naughton, and Chris Woodruff.

In a series of articles in the 1980s and 1990s, McMillan, frequently collaborating with McAfee, who is 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 is proper market design, and McMillan was the foremost proponent of the fact that market design matters.

The range of his work on the topic was remarkable. 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 1995 spectrum auctions, which were wildly successful and imitated around the world. 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. Illustrations of the theory, such as the television network competition for broadcast rights to the Olympic Games as a metaphor for both auctions and incentives, provided dramatic examples of the insight and power of game theory applied to business settings.

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.

McMillan came to the Stanford Graduate School of Business in 1999. "John 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's Center for Global Business and the Economy. McMillan wrote prolifically on the broad range of economic, managerial, and political problems that plague transition and developing economies. He was active in Stanford University's Center on Democracy, Development, and the Rule of Law, the Freeman Spogli Institute for International Studies and the Stanford Institute for Economic Policy Research. In the classroom, he developed innovative MBA courses on economic development that used compelling examples to show how theory provides a prism for understanding the complex messiness of the real world and led students into deep involvement both intellectually and practically in the problems of managing in emerging economies.

In 2002 his research and writing culminated in the publication of Reinventing the Bazaar (W.W. Norton). With crisp and evocative prose and a natural instinct for employing simple intuition to break complex ideas into their component pieces, the book simultaneously articulates the power of market forces and the need for markets to be robustly well designed and regulated. Failure to harness market forces results in Soviet-style stagnation, while poorly designed markets lead to spectacular efficiency failures like the early emissions permit market or political failures like the New Zealand spectrum sales. The power of the ideas combined with the simplicity of exposition led to 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 commentator and journalist David Warsh says of McMillan that he "was the most gifted expositor of economics since [Nobel laureate] George Stigler. Give him a couple of paragraphs—on the evolution of folk football into rugby, soccer, and American football; or the various ways to rig an auction; or the reasons China and Vietnam grew so successfully out of their planned economies while Russia did not—and he could make economics jump right off the page and into the mind of his reader."

Grist for McMillan's economic mill was everywhere: In his paper "How to Subvert Democracy: Montesinos in Peru," for example, McMillan (with Pablo Zoido) used the meticulous records kept by Peruvian intelligence chief Vladimiro Montesinos Torres to compile a bribery price list. Newspaper editors cost more to bribe than judges and politicians, but television station owners were most expensive by far. In "Trench Town Rock: The Creation of Jamaica's Music Industry," McMillan 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" (with Peter Lorentzen and 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.

McMillan's students and younger colleagues knew him as a great mentor and colleague, always ready, willing, and able to offer suggestions. Peter Henry, a fellow economist at the Stanford Business School, recalls a typical experience: "I would knock on John's door and ask him if I could tell him about a paper I was working on. John would say, 'Sure, it sounds interesting but I don't really know much about macro.' Forty-five minutes later I'd emerge from his office with a host of new ideas."

McMillan was amply recognized and honored professionally. He was elected a Fellow of the Econometric Society and a Distinguished Fellow of the New Zealand Economics Association, and he won the Harry Johnson Prize, given by the Canadian Economics Association. His brilliant expository skills and enormous economic range led him to be chosen editor of the Journal of Economic Literature, a position he held from 1998 to 2004.

John McMillan was a vibrant individual. McAfee remembers him as "an enthusiastic and resilient traveler. From personally investigating the effects of organized crime on Vietnamese markets to climbing pyramids in Mexico, he relished the experience of different foods, cultures, and lifestyles." Starting in his youth in New Zealand, McMillan was an avid mountain climber and a fan of the country's mountain-climbing pioneer, Sir Edmund Hillary. He relished and led a five-day climb in California's Sierra Nevada each year. He was a rugby player of grace and power. His book editor, Drake McFeely, recalls "a New Zealand footballer who drove a slightly dinged-up little blue Miata and who was at least as comfortable talking about the Grateful Dead as he was discussing market or auction design."

McMillan's last years showed all his courage and grit. His bouts with cancer began in 1998. Since then, 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 sustained him in life and 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.

Checks may be sent to:

Gift in Memory of John McMillan
c/o Sharon Marine
Stanford Graduate School of Business
518 Memorial Way
Stanford, CA 94305

Gifts in memory also may be designated online.

Donations to Oxfam may be made online at: OxfamAmerica.org, Select "What You Can Do", then "Honor Someone", then "In Memory" to make a donation.