The great economist Armen Alchian turned 98 yesterday. Armen is the father of the UCLA tradition in economics. I had the great honor of having Armen on my dissertation committee and cannot imagine being prouder of my association with him. Armen’s contributions to economics as diverse as they are penetrating. Armen was one of the few economists capable of producing fundamental insights and advancements in macroeconomic and microeconomic theory, quantitative methods, as well as produce pathbreaking work in the economics of property rights and the theory of the firm.
Armen’s classic paper with Harold Demsetz (AER, 1972) coupled with Klein, Crawford and Alchian’s seminal analysis of vertical integration and the holdup problem (JLE, 1978) give him a prominent spot in the theory of the firm literature and transaction cost economics. Those papers rank 12th and 30th, respectively, in Kim et al‘s list of the top economics papers since 1970. Alchian’s other scholarly contributions are remarkable. Consider his collected works in two volumes. Perhaps most well known among them are neither of the two papers discussed above but “Uncertainty, Evolution and Economic Theory” (1950), in which Armen lays out the case for a survival principle to be applied to efficient individual behavior – notwithstanding heuristics and irrational motivations. Armen was ahead of his time in considering (along with the work of Becker and others at the time) rationality as an outcome of market institutions rather than merely an assumption. Alchian’s work on learning and the costs of production was equally pathbreaking (see Reliability of Progress Curves in Airframe Production, 1963).
Armen’s contributions to economics as a teacher were equally remarkable. 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.
Former FTC Chairman Timothy Muris and my GMU colleague characteristically cuts to the heart of matters:
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.
TOTM readers will be familiar with my annual posts calling for a Nobel Prize for Alchian. 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.
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:
- A Biography and another profile hosted at David Levine’s website
- Uncertainty and Economic Evolution: Essays in Honor of Armen A. Alchian (edited by John R. Lott, Jr.)
- A 2000 Liberty Fund interview by Daniel K. Benjamin in the Intellectual Portrait series
- Alchian’s “Property Rights” entry to the Concise Enyclopedia of Economics
- A profile of Alchian in the UCLA Daily Bruin in 2006
- Fred McChesney’s entry on Alchian’s pathbreaking contributions to economic science is available here
- David Henderson’s entry on Alchian in the Concise Enyclopedia of Economics here.
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Also, a bit of self-promotion: I have a post that expounds the significance of Alchian’s 1950 Evolution paper here:
http://austrianomnibus.blogspot.com/2011/03/entrepreneurs-vs-regulators-and-alchian.html
That post should give the readers on here some idea of what Alchian (as I understand him) was really driving at with this paper. That is why I cannot help but smile when Public Choice economists, et al. cite to this paper. It makes me wonder if they even understand the thesis in this paper! Alchian’s 1950 paper destroys everything Public Choice theory stands for — i.e., incentives.
But okay, enough of my rants. I know from experience that these rants do not work in person, so I should not expect them to work any better on the internet, either. I would just urge everyone to closely read Alchian’s 1950 paper. It is only about 12 pages. Read it twice, think about it, and then read it again! It really is a revolutionary paper.
What a great post. I earned my bachelor’s in economics from Washington University, which has a very strong New Institutional Economics presence (North, Benham, Galiani, etc.), and was introduced to Alchian’s work while a student there. The two-volume collected works of Alchian is very good, but it may be a bit much for someone interested in perusing his work as a mere hobby or pastime. So, I would encourage EVERY reader of this post to instead purchase his earlier book “Economic Forces at Work.” That book is a collection of Alchian’s most important papers, and can be read over a weekend.
Alchian really is a great economist. His writing is clear and his thought is extremely powerful. He is just like Demsetz in that respect. His work on the theory of the firm and property rights is probably what he is most famous for, but I think his greatest contributions can be found in his work on Evolutionary Theory and Unemployment.
On Evolution, he argued that incentives do not matter at all. Repeat: Incentives do not matter! Those trained in economics will note that the entire corpus of economic theory rests on the notion of incentives. Alchian did away with this and argued that successful entrepreneurs are successful not because they had the right incentives, but only because they were lucky. That is all. I really do wish more economists would pick up on this point. But no; incentives is still the dominating theme in economics.
On Unemployment, Alchian also showed that every unemployment rate is optimal. Therefore, unemployment is never a problem! This is because there are costs to searching for employment opportunities. Nobody ever takes the first offer or opportunity open to them — instead, they wait to see what else is out there. I could probably get a job working at a cash register at some department store, but why would I? There are probably better opportunities waiting for me. So, it doesn;t make any sense to say that I am “unemployed.” I also wish more economists would think like this.
Anyway, I agree fully with Professor Wright’s suggestion that Alchian be given the Nobel Prize in Economics. The question is: what should he be given the Nobel Prize for? I would say that it should be given for his work in “Evolutionary Theory and the costs associated with unemployment.”
A truly great economist.
Historical Footnote: Armen Alchian participated in the very first Prisoner’s Dilemma game ever played, in 1950 or 1951. As discussed in Poundstone’s book, the game was invented by Flood and Dresher after reading John Nash’s paper. Alchian was visiting Rand for the summer while at UCLA and played the game against a game theorist named John Williams. They played a 100 round game. Poundstone’s report is wonderful because it provides a commentary on what the players were thinking, based on a paper by Flood. Alchian figured the the incentives for mutual defection on Round 1 and Williams figured out the benefits of Tit-for-Tat in Round 2. They end up cooperating most of the time. But, Alchian defects fairly regularly and for an interesting reason. The payoffs in the game were not symmetric and Williams made much more money when they both cooperated. In his running commentary, Alchian reports that Williams will not “share” the benefits of cooperation and he has to “teach Williams to share.” Williams uses TFT to teach Alchian to cooperate. Brad Delong excerpted the section from Poundstone. Its a great teaching vehicle. http://www.j-bradford-delong.net/economists/prisoners_dilemma.html.