John McMillan, the Jonathan P. Lovelace Professor of Economics at the Stanford Graduate School of Business, died at his home on the Stanford campus March 13, 2007, 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.”
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.”
In a series of articles in the 1980s and 1990s, McMillan, frequently collaborating with Preston McAfee, 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. 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
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. 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 and served as codirector of the School’s Center for Global Business and the Economy 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.