Armen Alchian: You tell me the rules and I’ll tell you what outcomes to expect

One of my favorite economists died earlier this week, Armen Alchian of the UCLA school of economics.   If you don’t feel like reading any further, there is a Wall Street Journal obituary that probably says whatever I say, only better.  But, since he’s had such a pronounced impact on how I think and what I teach, I’ll add my piece to the dialog anyway.

For those of you who have taken Orgs/Theory of the Firm with me, Alchian, of course, is influential with his piece on team production (Alchian and Demsetz — the grocer article), as well as his work on asset specificity (Klein, Crawford, and Alchian).  These have, of course, been cited thousands of times because they are foundational to how economists think about firms. And his review with Susan Woodward of Oliver Williamson’s vision of transaction cost economics, “The Firm Is Dead; Long Live the Firm,” will undoubtedly leave you smarter for having read it.

Alchian is also renowned for his work that helped to spawn “evolutionary” economics, writing at about the same time as Schumpeter, it turns out.  The paper “Uncertainty, evolution, and economic theory” is also a classic that has also been cited thousands of times, and has shaped how economists think about the dynamics of market competition.

I also cover the Alchian and Allen conjecture during the first week of Econ 300, so the teeming masses of students taking that this Spring should look out for that.  Speaking of Allen, here he is discussing UCLA economics and the liberal arts, cited right here at LU Econ Blog.

If you are interested in reading something touching about Alchian, I suggest this piece by Fred McChesney, which contains this cool story from Alchian himself:

The year before the H-bomb was successfully created [in the 1950s], we in the economics division at RAND were curious as to what the essential metal was—lithium, beryllium, thorium, or some other. The engineers and physicists wouldn’t tell us economists, quite properly, given the security restrictions. So I told them I would find out. I read the U.S. Department of Commerce Year Book to see which firms made which of the possible ingredients. 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 prices 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 within RAND a memorandum titled “The Stock Market Speaks.” Two days later I was told to withdraw it. The bomb was tested successfully in February, and thereafter the stock price stabilized.

An awesome precursor to the event study!

For a forceful statement on the economics of property rights, check out Alchian’s piece here that ends with a bang:

Private property rights do not conflict with human rights. They are human rights. Private property rights are the rights of humans to use specified goods and to exchange them. Any restraint on private property rights shifts the balance of power from impersonal attributes toward personal attributes and toward behavior that political authorities approve. That is a fundamental reason for preference of a system of strong private property rights: private property rights protect individual liberty.

Finally, here is our recent guest, Doug Allen, talking about Alchian’s influence.