Tyler Cowen has a new online book out titled “GOAT: Who is the Greatest Economist of All Time, and Why Does it Matter?” While there are potential problems in treating ideas like basketball, the project is a fun, fast read overall. As the author of a newsletter with frequent gifs, I’m all for encouraging light-hearted discussions of economics and economists (in addition to the super serious work that needs to be done).
What does it mean to be the GOAT, according to Tyler?
To qualify as “GOAT the greatest economist of all time,” I expect the following from a candidate. The economist must be original, of great historical import, serve as a creator and carrier of important ideas, have a hand in both theory and empirics, have a hand in both macro and micro, and be “not too wrong” on the substance of issues. Furthermore, the person also must be a pretty good economist! That is, if you sat down with the person and discussed economic issues, you would be in some way impressed.
I won’t spoil Tyler’s answer, but we see from the table of contents that the main contenders are Milton Friedman, F.A. Hayek, J.M. Keynes, John Stuart Mill, Thomas Malthus, and Adam Smith.
Readers of our Economic Forces (heck, readers of the title of this post) newsletter will notice that Armen Alchian, our newsletter’s avatar, is not on the list. Alchian isn’t even on Tyler’s list of “names who deserve greater consideration,” a list that includes Homer. Yes, the poet. I know Homer reads The Economist, but c’mon! No mention of Alchian is a travesty! (It wouldn’t be a GOAT discussion without some hyperbole.)
So here is my case for why Armen Alchian is the GOAT.
Original and Important Ideas
Alchian brought original thinking to the disciplines he touched from the very beginning of his career. In 1950, Alchian published “Uncertainty, Evolution, and Economic Theory.” This paper developed evolutionary arguments long before other economists embraced biology. Alchian’s contribution should have helped us avoid many worthless debates around behavioral economics and rationality, but alas. As Alchian points out, the important part is not that any given person is super-rational and calculates optimal business decisions, but that the profit and loss system weeds out those who choose decisions that lose money.
And that’s not even what Alchian is known for. Alchian carved new ground by focusing economics on property rights, incentives, and information. He is most known for his papers from the 1960s and 1970s on property rights and transaction costs. Besides Ronald Coase, Alchian is the figure at the lead of these important schools of thought.
UCLA economics is a thing because of Alchian. The school stood as a “carrier of important ideas” (one attribute of the GOAT) against the paradigm of the time of Keynes and Paul Samuelson. Transaction-cost economics was a serious return to good economics (a point I will say more about later) that existed in earlier times.
Why do firms exist? That is a question of first-order importance for many fields of microeconomics. Alchian has two papers worth mentioning explicitly.
First, “Production, Information Costs, and Economic Organization,” written with Harold Demsetz. This was chosen as one of the American Economic Review‘s Top 20 articles of the journal’s first 100 years. The fundamental problem that Alchian and Demsetz point to is Hayekian—Alchian, once again, carrying important ideas. Information isn’t free! With team production, paying each worker their marginal product isn’t straightforward. People will specialize in monitoring and metering workers.
In another paper with Benjamin Klein and Robert Crawford, Alchian points out that, once workers and firms have invested in each other, there are rents to haggle over. Haggling is destructive. So workers and firms have incentive to find contractual workarounds. The more investments are specific to a particular trading partner, the more likely we will see contracts tying the two sides more tightly together. One such contract? An integrated firm.
If we do not speak of a large school of property-rights economics today, it is not because the school was proven wrong. Instead, in the areas closest to Alchian’s work—especially the theory of the firm—transaction costs are just part of the standard discussion.
Alchian’s focus on property rights and contracting is why he was also foundational for the development of law & economics as a field. So much so that the International Center for Law & Economics (ICLE), where I work, is dedicated to the legacy of Armen Alchian.
Theory and Empirics
While best known as an economic theorist, Alchian also excelled at empirical work. Even his work on inflation was theoretical and empirical.
Alchian, like Friedman, was a statistician by training. In addition to his academic research, he worked as a consultant for the RAND Corp. It was here that Alchian famously did the first event study in economics, drawing on economic theory. He used public stock-price data to learn top-secret information. He describes the episode as follows:
The year before the H-bomb was successfully created, we in the economics division at RAND were curious as to what the essential metal was — lithium, beryllium, thorium, or some other… For the last six months of the year prior to the successful test of the bomb, I traced the stock prices of those firms. I used no inside information. Lo and behold! One firm’s stock price rose, as best I can recall, from about $2 or $3 per share in August to about $13 per share in December. It was the Lithium Corp of America. In January I wrote and circulated [a memo]. Two days later I was told to withdraw it.
While he did not get credit for this empirical work until much later, the episode shows Alchian’s focus on looking at data to answer questions. Alchian’s 1963 Econometrica paper on progress curves showcased his exceptional skills as an empirical economist. He rigorously analyzes wartime airframe data using advanced (for the time) statistical tests; evaluates predictive accuracy; explores alternatives; and carefully examines practical implications and limitations. The paper exemplifies Alchian’s talents in bridging theory and measurement to advance applied knowledge. While it is not the most cited empirical work today, it is often cited in the learning-by-doing literature, including Nobel Prize winner Ken Arrow’s work in the area. When studying the history of learning by doing, Matthieu Ballandonne compared “the different strategies for modeling learning developed in the 1950s and 1960s, showing the influence of RAND’s and Armen Alchian’s contributions on Arrow’s use of a log-linear equation of learning and its introduction into an economic growth model.”
More than doing deep historical work that people still read today (like Friedman and Anna Jacobson Schwartz’s “A Monetary History”) or developing statistical tools that continue to be used, we can see Alchian’s “hand in empirics” through his expertise in what was jokingly called “UCLA econometrics.” What is UCLA econometrics? According to Nobel Prize winner Merton Miller, “You go to Armen Alchian, and you ask, ‘Armen, is this number about right?’ And Armen says, ‘Yeah, that sounds right.’ So you use that number.” I’d trust Alchian’s sense of empirical work, which is far ahead of someone like Samuelson, Keynes, or Smith. And certainly, it has been more influential and important than Homer’s econometrics.
Macro and Micro
While most known for his work on the theory of the firm and transaction costs (which is heavily micro), Alchian also made important contributions to macroeconomics. Even his transaction-costs work is important for macroeconomic theory. His paper on “Information Costs, Pricing, and Resource Unemployment” made several important contributions to macroeconomic thinking. The paper provided microfoundations for macro unemployment based on costly information and rational behavior by individuals. He models how costly information acquisition affects pricing decisions and unemployment equilibriums and why unanticipated inflation redistributes wealth and disrupts relative prices and employment. This insight anticipated many later macro models.
Two other macro papers are worth mentioning. His paper “Why Money?” anticipated many ideas in modern search models of money. Again, we have a micro explanation of macro phenomena before the microfoundations revolution. Alchian and Ben Klein have a paper, “On the Correct Measure of Inflation,” providing a theoretical foundation for a utility-constant intertemporal price index. They argue that, consistent with intertemporal economic theory, the index should include asset prices, not just current consumption goods. This would make measures of inflation more in line with modern economic models. Again, Alchian integrates micro and macro theory with empirical work.
The one area where Alchian does not match some of the others discussed by Cowen—especially Friedman and Keynes—is in terms of historical impact.
But even here, it is not as if Alchian had no impact, especially within economics as a field. Alchian’s body of work laid the foundations for entire subfields, as we already mentioned. The UCLA tradition he started trained generations of economists who propagated Alchian’s ideas. His fingerprints can be seen across fields like contract theory, law & economics, public choice, and industrial organization. He influenced economic education through his textbooks with Bill Allen. While the quantity of students influenced is not on par with Samuelson, the textbook earned Alchian and Allen a strong fanbase among passionate economic educators, myself included. Few economists can claim such a broad historical impact on economics as a field.
The real reason Alchian deserves the award is that he was simply a good economist. Everyone who knew him says so.
Tyler knocks Smith down a little by asking:
Is there any economics class where you can imagine wanting Smith as your tutor? He might give fascinating feedback and drum up some generative insights, but is there any economic issue he can, in the counterfactual sense, analyze with much accuracy?
Alchian, by contrast, would be a great tutor for any class through his theoretical knowledge and empirical good sense.
Those who learned from Alchian rave about his economic-reasoning skills. His Socratic teaching style forced students to think rigorously about their assumptions and logical chains. Alchian’s classroom was an economics bootcamp, training students’ sharp economic thinking. His critical eye and creativity made him a magnificent economist in his own right. He had so internalized economic reasoning that he could lead classes on the fly in a way few professors today would even dare.
His students—the ones that survived—constantly speak his praise. Nobel Prize winner William Sharpe, who took a graduate course taught by Alchian in 1956, called him a “brilliant mind grappling (usually very successfully) with the most difficult concepts in economics in thoroughly creative and innovative ways.”
Very few, if any, economists can match Alchian’s combination of originality, impact, ideas, contributions, and raw talent. His legacy continues through those he taught and concepts he pioneered. For trailblazing evolutionary thinking, instigating the property rights revolution, developing seminal ideas, impressive empirical work, commanding macro and micro, and teaching economics like no other, Armen Alchian has a rock-solid case as the Greatest Of All Time economist.
It is easy to find high praise for Alchian as an economic thinker, including from people Cowen considers in the GOAT conversation. According to Wikipedia, Anthony J. Culyer quoted Kenneth Arrow as saying Alchian was the “brightest economics student Stanford ever had.” Not bad from Arrow, who I hear was rather smart. Speaking of Nobel Laureates, in 1984, when F.A. Hayek was asked who his favorite economist was, he named two: George Stigler and Armen Alchian. Coase, in the introduction to the first collection of his writings, “Economic Forces at Work” (great title, btw), wrote (HT Geoff Manne):
Alfred Marshall considered that it was an essential task of an economist to demonstrate “the Many in the One, the One in the Many.” No modern economist has been more successful in accomplishing this than Armen Alchian.
This constant connection of many in the one and one in the many is what we try to follow at Economic Forces,with our approach to blending micro and macro. That comes directly from Alchian and what makes him the GOAT.