Armen Alchian 1914 – 2013

The great UCLA micro-economist Armen Alchian has passed away aged 98.

… Professor Alchian was co-founder of the “UCLA tradition” in economics that emphasizes that individual behavior is self-directed and “rational” and that this has many unanticipated consequences. His textbook with William R. Allen, University Economics (now called Exchange and Production), was enormously influential in teaching the principles of economics on both the undergraduate and graduate levels. This was the first American textbook to discuss information, transaction costs, property rights, and a market economy as a discovery process. And unlike most texts, which are excessively bland, Exchange and Production is bitingly ironic, poking fun at political correctness, long before it had a name. It is unique as well in that it incorporated Alchian and Allen’s latest thinking about issues such as property rights and unemployment when most other textbooks are content to regurgitate the state of economic theory of some 20 years ago. The book also contains the classic statement of what has come to be known as the Alchian–Allen theorem. This proposition, colloquially known as “ship the good apples out,” states that when output varies in quality, the lower quality output is consumed nearby while the higher quality output is shipped long distances. The reason is simple: transportation costs vary with the weight and bulk, but not the quality, of that which is transported. The added per-unit amount decreases the relative price of the higher-grade product.

David Henderson here.

Robert Higgs here.

Alex Tabarrok here.

Update: David Hendershon has a magnificent obit at the Wall Street Journal.

Alchian had his largest impact on the economic analysis of property rights. Most of his work in this area can be summed up in one sentence: You tell me the rules and I’ll tell you what outcomes to expect.

In their textbook, for example, Alchian and Allen ask why the organizers of the Rose Bowl refuse to sell tickets to the highest bidders and, instead, give up wealth by underpricing the tickets. Their answer is that the people who make the decision on the prices don’t have property rights in the tickets, so the wealth that is given up by underpricing wouldn’t have accrued to them anyway. But the decision makers can give underpriced tickets to their friends and associates.

Alchian also used the analysis of property rights to explain racial and ethnic discrimination. In a 1962 paper coauthored with the late University of Chicago economist Reuben Kessel, Alchian—himself subject to anti-Armenian discrimination early in his life—pointed out that discrimination was more pervasive in private firms whose profits were regulated by the government. Alchian and Kessel explained that discrimination is costly, not just to those discriminated against, but also to those who discriminate. The discriminators give up the chance to deal with someone with whom they could engage in mutually beneficial exchange.

Therefore, argued Alchian and Kessel, discrimination would be more prevalent in situations where those who discriminate don’t bear much of the cost from doing so. A company whose profits are not regulated would see the cost of discrimination in the form of lower profits. A company whose profits were limited and that was already at the limit would face no cost from discriminating.

Alchian first major article, “Uncertainty, Evolution and Economic Theory,” was published in 1950. It was his response to a controversy about whether companies really do maximize profits. Alchian argued that even though all companies may not maximize profits, those that survive will be ones whose managers, by luck or design, came close to maximizing profits. Therefore, those that we observe will have maximized profits. So, for the long term at least, Alchian argued that economists don’t need to show that all companies try to maximize profits in order to derive the standard conclusions from the profit-maximization assumption.

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3 Responses to Armen Alchian 1914 – 2013

  1. eb

    Exchange and Production was one of my texts when I was at uni; I found it a breath of fresh air.

  2. Skuter

    Alchian is a massive loss to the economics profession and to society more generally.

  3. Pingback: Don’t stand at your window when… : Hey… what did I miss? | Institute of Public Affairs

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