Nobel Speculation: Armen Alchian, Harold Demsetz and Benjamin Klein Should Win the Prize in 2011

Josh Wright —  23 September 2011

Its time to dust off (and slightly update) an old post for its annual republication around this time each year.   With the start of the school year comes another fall tradition here at TOTM: Nobel speculation.

More specifically, every fall I yell from the rooftops that some combination of Armen Alchian, Harold Demsetz and Ben Klein should win the award.  In 2006, I argued that the UCLA trio outperformed the more conventional and popular trio of Holmstrom, Hart and Williamson by standard citation measures.  In 2007 I repeated my call for the UCLA trio (hedging my bets by also pulling for GMU colleague Gordon Tullock — another well deserving candidate) and was disappointed again.  2008?  I’m nothing if not consistent.  In October 2008 I wrote:

I’m sticking with the UCLA economists: Alchian, Demsetz and Klein for contributions to the theory of the firm, property rights, and transaction cost economics.  An Alchian and Demsetz prize is probably more likely, but Klein’s contributions with Alchian to the theory of the firm along with his own subsequent extension of that work (see my article on Klein’s contributions to law and economics here) makes the trio especially formidable.

The disappointment was a little bit more salient in 2008, as Thomson Reuters listed Alchian and Demsetz in their list of top 3 possible picks.  What a tease.  Well, its not quite October yet, but I thought I’d get an early start this year and release my 2009 predictions:  Armen Alchian, Harold Demsetz and Ben Klein for contributions to the theory of the firm, property rights and transaction cost economics.

Alchian’s contributions to economics and law and economics are Nobel worthy. Armen’s classic paper with Harold Demsetz (AER, 1972) remains influential in the theory of the firm literature and is listed as the 12th most important paper in economics since 1970 by Kim et al.  Klein, Crawford and Alchian’s seminal analysis of vertical integration and the holdup problem (JLE, 1978) ranks #30 on this list.  With two hits in the top 30 economics papers since 1970, there is no doubt that Armen had impacted the field.  Susan Woodward, a former co-author of Alchian, has authored a wonderful chapter on Alchian’s contributions to law and economics that will appear in the Cohen & Wright Pioneers of Law and Economics volume (there will also be essays on Klein and Demsetz).  As I’ve written previously, Alchian also thrives by other measures of scholarly output.  Cite counts do not begin to do his body of work justice.  Consider, for example, that Armen’s teaching style is the stuff of legend (I say this having the great benefit of having Armen on my dissertation committee, but also sharing as colleagues two Bruin economists that studied under Alchian and knowing many more).  Tales are abound of the careers of economists-in-the-making that Armen influenced in one way or another.  Nobel Laureate William F. Sharpe captures some of this in his autobiographical exposition explaining Alchian’s influence on his own career:

Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything; to always begin an analysis with first principles; to concentrate on essential elements and abstract from secondary ones; and to play devil’s advocate with one’s own ideas. In his classes we were able to watch a first-rate mind work on a host of fascinating problems. I have attempted to emulate his approach to research ever since. When I returned to pursue the PhD degree, I took a field in microeconomics with Armen and he also served as chairman of my dissertation committee.

Alchian has also contributed greatly to the law and economics movement through his involvement in the George Mason University LEC judicial training programs.  In an important antitrust policy speech, former FTC Chairman Timothy Muris and my GMU colleague articulates a sentiment I’ve heard repeatedly from those who went through the program or watched Armen teach:

Armen Alchian was unexcelled in teaching economics to lawyers. He often presented economics socratically – a technique familiar to lawyers. For years Armen was one of the most popular instructors in Henry Manne’s programs for teaching economics to lawyers. In short courses, he taught literally hundreds of federal judges and law professors.

As Armen’s long-time collaborator William Allen put it in his own letter to the Nobel Committee on Armen’s behalf:

Economics is a broad discipline in methodology, as the Committee is fully aware, ranging from detailed historical, institutional, legalistic description to totally abstract, arcane theory. All such approaches, techniques, and emphases are appropriate. But there is much specialization among the members of the fraternity. And, increasingly, the profession has dealt in rigorous, elegant manipulation, even when the work is purportedly empirical—and even when the substantive results hardly warranted such virtuoso flair. Professor Alchian is a splendid technician, and he has contributed significantly and conspicuously to general “theory.” But, in contrast to many, he has always appreciated that the final payoff of Economics is elucidation of the real workings and phenomena of the world. I know of no one at any time who has had a finer sense of how to use economic analytics to explain the world. Sometimes the explanation requires involved, complex analysis, and Professor Alchian does not fear to use the tools which are required; what is uncommon is his lack of fear in using the MINIMUM tools which are required. In large part, his peculiar genius (the word is used advisedly) is to make extraordinarily effective use of elemental, and often elementary, techniques of analysis. And a host of people—many of whom are now in strategic positions in universities, in government, in the legal system, in the world of business and finance—have enormously benefited from the tutelage of Professor Alchian. … I present Armen Alchian as a giant—a giant who, because of his lack of pretension, is easily overlooked by laymen and even by some supposed professionals—who has greatly honored his profession and uniquely contributed to its usefulness. He would grace the distinguished fraternity of Nobel Laureates.

Well said.

Here are some Alchian links for interested readers:

As strong as the case for an Alchian Nobel is, the likelihood of a solo Nobel in the areas of the theory of the firm or property rights is unlikely.  And what better way to share the prize than with two co-authors who have made substantial and significant contributions, but individually and collectively, to economic problems involving the theory of the firm, property rights and transaction cost economics taking a similar methodological approach and bringing distinction to the UCLA School of economics.  I’ve written extensively about Klein’s contributions here.  But the most well known contributions (in addition to Klein, Crawford Alchian (1978) and the important exchange between Coase and Klein concerning asset specificity, vertical integration and contracting) include Klein & Leffler (1981), Priest & Klein (1984), Klein and Murphy (1988) and Klein (1995) and Klein (1996) ranging on topics from the role of reputation in the design and performance of contracts, the seminal model of litigation and settlement, vertical restraints, and the economics of franchising.

Demsetz’s contributions to economics are perhaps the most well known of the trio, including the coining of the phrase “Nirvana Fallacy,” but a cursory list as a refresher for the Nobel Committee:

  • 1967, “Toward a Theory of Property Rights,” American Economic Review.
  • 1968, “Why Regulate Utilities?” Journal of Law and Economics.
  • 1969, “Information and Efficiency: Another Viewpoint,” Journal of Law and Economics.
  • 1972 (with Armen Alchian, “Production, Information Costs and Economic Organization,” American Economic Review.
  • 1973, “Industry Structure, Market Rivalry and Public Policy,” Journal of Law and Economics.
  • 1979, “Accounting for Advertising as a Barrier to Entry,” Journal of Business.
  • 1982. Economic, Legal, and Political Dimensions of Competition.
  • 1988. The Organization of Economic Activity, 2 vols. Blackwell. Reprints most of Demsetz’s better known journal articles published as of date.
  • 1994 (with Alexis Jacquemin). Anti-trust Economics: New Challenges for Competition Policy.
  • 1995. The Economics of the Business Firm: Seven Critical Commentaries.
  • 1997, “The Primacy of Economics: An Explanation of the Comparative Success of Economics in the Social Sciences” (Presidential Address to the Western Economics Association), Economic Inquiry.

And of course, most recently, Professor Demsetz released his newest book, From Economic Man to Economic System on Cambridge University Press.

I know, its early for this stuff.  But its time to break the streak.  Maybe this is the year ….

P.S. Comments about whether the Nobel Prize is a “real” Nobel or not will be immediately deleted for lack of creativity.

10 responses to Nobel Speculation: Armen Alchian, Harold Demsetz and Benjamin Klein Should Win the Prize in 2011



    I agree that Alchian and Demsetz should receive the award. I would strongly disagree that Ben Klein is so deserving.

    I would offer, however, an alternate for the triumvirate: Yoram Barzel. Barzel’s work on property rights has played a significant role in the work on contracting and theory of the firm, as well as in political economy and law and economics more generally. Barzel is not likely to receive the prize solo and, of other potential co-recipients, Demsetz seems the most deserving (and likely) pairing.


      Mike, I believe Armen is probably the most deserving not only of this trio, but others as well. Its very difficult to give an award that includes Armen’s work with Harold on the theory of the firm without including Ben’s work in Klein & Leffler, Klein, Crawford Alchian (1978) and the subsequent self-enforcement framework pieces as well, in my eyes. Your mileage obviously varies. Though I think a very good argument can be made that Williamson’s prize should have been shared with Klein as well. But that is another blog post for another day. Its hard to know what to make of your disagreement above other than that it is intense so I don’t know how to respond. I think 2 of the top 50 papers in economics over the last 50 years plus a literature-creating paper in the law and economics literature (Priest/Klein) are a pretty decent prima facie case. I do agree Alchian & Demsetz are a more likely pairing than any trio. For readers interested in Klein’s contributions to economic theory and to law and economics, see here.

        Jeff Armstrong 6 October 2011 at 9:13 am

        I think Professor Demsetz would agree that Dr. Yoram Barzel’s work on property rights is important. He (Harold Demsetz) once recommended Barzel’s readings in response to my inquiry about the economics of property rights. In my mind, it is sometimes blurry to separate the concept of property rights and transaction costs. Their collective works have gone a long way to clarify these concepts. Three cheers for each one of Armen, Demsetz and Klein, and a fourth cheer for Dr. Barzel!


    I don’t disagree that Alchian and Demsetz would be worthy prize winners.

    Someday, though, I’d like to see Fama and French get the recognition they deserve. I know that the Panic of 2007-08 gave the efficient capital markets hypothesis a bad name, but all things considered, it’s still the most powerful explanation we’ve got for how securities markets work.


      Fama and French should have to share it with Didier Sornette as only taken together do we have anything that reasonably approximates a full theory of capital markets.


    Oh, as to my opinion, I would really like to see someone like Dierdre McCloskey win the Nobel Prize. I learned all of my econoimcs from her Price Theory book, and have really enjoyed reading her books on Rhetoric in Economics and the Ideological Origins of Capitalism. She is a serious thinker and I would like to see all of her contributions recognized by the Nobel Prize committee.


    For my two cents these two folks should be in the running (but probably will not be considered) — Didier Sornette (ETH Zurich) (Econophysics and the prediction of crises and extreme events in complex systems and risk management) Robert Axelrod (University of Michigan) (for his work on Cooperation, Culture, Applied Game Theory (tit for tat, etc.) and Complexity)


    I agree that Armen Alchian and Harold Demsetz deserve Nobel Prizes. Harold Demsetz, in my opinion, is the most forceful expositor of laissez-faire economics. But there is an important distinction between his economics and the economics of the other “transaction cost” school of the UCLA and Chicago traditions. Most economists, such as Oliver Williamson, use transaction costs to study isolated market phenomena, such as specific firm arrangements. That is all well and good. But Harold Demsetz used transaction cost analysis to study the economy generally. So, his work stands for this proposition: *any* perceived market failure or inefficiency is really cost efficienct (i.e. optimal) once we take into account the costs of the proposed measures for remedying it. That is his message. I don’t think most scholars appreciate the implications of this analysis — all of Antitrust, for example, would be beside the point. It would not make sense to punish firms in oligopolistic markets unless we understand the costs associated with the available remedial measures. Anyway, I have posted some thoughts about Demsetz here:

    You could also argue that Armen Alchian used this same sort of analysis in his famous paper on unemployment, which basically argued that unemployment is completely natural (and rational) once we take into account the costs associated with searching for the optimal employment situation. Nobody takes the first job offer they have, and so we *must* take into account search costs. This makes the rate of employment perfectly optimal. There are tons of people who are unemployed. We know they could find work; they just don’t want to work at the jobs that are *readily* available, such as Walmart and grocery stores. So Alchian falls into this “Demsetzian” transaction cost category.

    I have always been puzzled why productive scholars such as the authors of this blog have focused more on Oliver Williamson’s work, which is very good in it own right, and less on the more radical papers by people like Demsetz and Alchian???

    For example, the author of this post failed to cite Harold Demsetz’s most important paper: “The Exchange and Enforcement of Property Rights,” 1964. Also, his most important book is “The Economics of the Business Firm,” particularly for his cogent criticsm of Coase’s Theory of the Firm. Contra Coase, Demsetz actually argues that a lowering of transaction costs actually *increases* the number of firms. I have a review of the book here:

    So, I would argue with the author of this post that Demsetz and Alchian deserve the Nobel Prize, although I would just point out that their research is far richer than a cursory review of their position within the UCLA tradition more generally would suggest. Their work, in other words, is very different from people like Ben Klein and Oliver Williamson.

Trackbacks and Pingbacks:

  1. Nobelprognose | - October 6, 2011

    […] ook eentje waar iedereen nog aan mee kan doen. Een lijstje is er nog niet, wel die van vorig jaar. Deze weblog lobbiet steeds nadrukkelijker voor Alchian/Demsetz/Klein. Zou helemaal niet verkeerd […]

  2. Nobel Speculation: Armen Alchian, Harold Demsetz and Benjamin Klein Should Win the Prize in 2011 | Brucetheeconomist's Blog - September 23, 2011

    […] Nobel Speculation: Armen Alchian, Harold Demsetz and Benjamin Klein Should Win the Prize in 2011 Josh Wright Sat, 24 Sep 2011 04:54:46 GMT Share this:EmailFacebookLike this:LikeBe the first to like this post. This entry was posted in Economics. Bookmark the permalink. ← The Great Macroeconomic Policy Debate – How to restore growth? […]