User:Yerevantsi/sandbox/Alchian

Armen Alchian

Mark Blaug

such gems as Uncertainty, Evolution and Economic Theory (1950) which suggested a new Darwinian justification for some of the standard assumptions of economic theory; The Meaning and Validity of the Inflation induced Lag of Wages (1960), with R.A. Kessel, which exploded the myth that past inflations had accelerated economic growth by redistributing income in favour of profits; and Information Costs, Pricing and Resource Unemployment (1969), which provides an explanation for Keynesian 'unemployment equilibrium' without invoking Keynes's assumption of rigid wages. Production, Information Costs, and Economic Organization (1972), co-authored by H. Demsetz, is another one of Alchian's immensely influential papers: it is almost the first to take up the suggestion of R.H. Coase that transaction costs are the key to the creation of business firms and to think through the implications of that idea for the employment relationship between labour and management.

Uncertainty, Evolution and Economic Theory, the first of these papers, must number among the five or ten most cited articles of post-war economics. Do businessmen really strive to maximise profits? If they do, certain things follow about pricing policies and the effects of particular taxes on output and price. So we can check on whether they do by investigating the impact of taxes. But such research is difficult and so, alternatively, we may try asking businessmen just what does motivate their activities. But direct inquiries of motives are as difficult and ambiguous in their results as studies of the impact of taxes. What Alchian suggested instead was the study of the 'survival process': the price system itself is a Darwinian mechanism that selects the 'fit' and rejects the 'unfit', where 'fitness' is judged in terms of the ability to make greater profits than your competitors. Not all businessmen maximise profits but those who fail to do so go bankrupt and hence, in time, we observe only profit-maximisers. This argument serves to justify the general assumption of profit maximisation without having to argue each and every counter-example. No wonder then that Alchian's article achieved immediate fame and was repeatedly invoked by Milton Friedman in an even more famous article, 'Essay on the Methodology of Positive Economics' (Essays in Positive Economics, University of Chicago Press, 1953), which argued that the validity of economic theories did not depend on making 'realistic' assumptions about the motivations of economic agents.

---

oil crisis

econlib.org/archives/2013/12/armen_alchian_conversation.html

https://ideas.repec.org/p/nbr/nberwo/9023.html Shipping the Good Apples Out? An Empirical Confirmation of the Alchian-Allen Conjecture

Thomas N. Hubbard Robert H. Topel https://www.chicagobooth.edu/faculty/directory/t/robert-h-topel

modern economic thinking on the productive efficiencies of vertical integration, and professors teach their students about such efficiencies, draws directly from Armen’s famous paper with Ben Klein and Robert Crawford (as well as from Oliver Williamson’s work which was done in parallel around the same time) in the late-1970s.

https://www.journals.uchicago.edu/doi/abs/10.1086/466922 Vertical Integration, Appropriable Rents, and the Competitive Contracting Process Benjamin Klein, Robert G. Crawford, and Armen A. Alchian

Armen’s most-read work, however, is almost certainly his undergraduate textbook University Economics, first published in the early 1960s. it is a tour de force, and unquestionably the most entertaining economics textbook ever written. It teaches economics by way of a series of illustrations of how economic thinking plays out in the real world. It taught millions of students how to think like an economist. It also provides a fairly accurate depiction of Armen as a person – an economist to the core, deeply engaged in the real world, and someone with more important concerns than political correctness.

Kevin Murphy – indeed, both Kevin Murphys – Bob Topel, and David Levine are among the many ex-students that are sources for such stories. Kevin M. Murphy

Sharpe: masters student when I took Armen's course in 1956, First let me say that Armen, along with Fred Weston and Harry Markowitz, I count as my three mentors, and Armen in very, very large part, so I owe a great deal to him. The editor of Economics and Charity called University Economics, “perhaps the most penetrating introductory economics textbook in the English language.” Armen Alchian: truly unusual economist, an innovator, a major contributor, a superb teacher, and one to whom I owe a great, great personal debt.

shorts

https://www.cato.org/sites/cato.org/files/pubs/pdf/pa482.pdf Armen Alchian, Ronald Coase, and Harold Demsetz founded the modern property rights school of economics. They sought not only to delineate the importance of a system of private property rights to the effective functioning of an economy but to identify the circumstances that lead to the assignment and formation of property rights.

https://www.law.gmu.edu/assets/files/publications/working_papers/1404.pdf Armen Alchian had a dramatic impact on law and economics through his scholarship and teaching. While it is said (perhaps incorrectly2 ) that he did not write a lot compared to many of his peers, the quality of his major papers has left many with the opinion that he was one of the great economists of the twentieth century.

The word “capitalism” is emotive and widely misunderstood. Using it in the book’s title causes some problems. The correct meaning of capitalism, as Armen Alchian pointed out, is the ability to capitalize future income streams into their present values by having the right to private property, which allows the exchange of rights and effective claims to profits. https://www.cato.org › how-c...PDF How China Became Capitalist by R Coase

for digest

American; macroeconomic theory, inflation, costs and output, property rights; 
Major Work: "Information Costs, Pricing and Resource Unemployment" (1969). 

In macroeconomics, Alchian was instrumental in identifying the relationship between inflation and wages and clarifying why money is necessary for an efficiently functioning economy. In microeconomics, he clarified the relationship between costs and production. He also countered the argument for property rights. While his body of work was not weighty in size, it was impressive in breadth and depth and it broadened the understanding of economics. 

Armen Albert Alchian was born in Fresno, California, in April 12, 1914. He attended Fresno State College for two years before transferring to Stanford University. He earned a BA from Stanford in 1936. He continued his graduate studies at Stanford, earning his PhD in economics in 1943. Upon graduation, he had a brief tenure at the University of Oregon as an instructor. During World War II, he served as a statistician for the Air Force. Following World War II, he joined the faculty at the University of California, Los Angeles.

Alchian, while often cited for his work in microeconomics, was also responsible for important contributions in macroeconomic theory. Within the study of macro- economic theory, he stands out as a contrarian voice to what were some of the prevailing ideas of his day, particularly on the effects of inflation. Alchian emphasized the importance of detailed historical data when testing economic theories with empirical evidence. The hallmark of an engaged thinker, he would not accept claims without evidence to back them up.

This is most clearly illustrated in the work he did concerning "wage lag" inflation. Wage lag inflation favorably affects firms at the expense of laborers. Many economists believed that labor markets operated differently than other markets. Most of his contemporary economists believed inflation did not have an effect on wages. Wages would not follow as the general price level of goods and services in an economy began to rise. Although these claims were made by economists, it was Alchian who applied empirical historical data and discovered that in reality there was barely any evidence to support the wage lag theory. He was able to establish that labor markets functioned much in the same way as all other markets.

His work on inflation went beyond his study of the wage lag theory. He also developed detailed ideas about the impact of anticipated inflation versus unanticipated inflation. Alchian conducted much of his work on this area of inflation during the late 1950s and early 1960s when price indices were showing little inflation. But in subsequent decades when the U.S. inflation rate began to rise, Alchian's ideas became reality as economists witnessed a transition from a world where people expected and experienced price stability to a world with persistently higher than expected inflation. His work and experiences showed the need to include inflationary expectations when modeling its effects. He did this by showing that if inflation is unanticipated, holders of cash will behave in a certain way and generate a certain set of implications. If on the other hand holders of cash do expect inflation, they will behave differently, generating an entirely different set of expectations.

A second area Alchian was known for exploring is the role of money in an economy, specifically addressing the questions of what is money and why is it used. In a short essay titled "Why Money?," Alchian explored what money is and why it exists. In this essay, Alchian also demonstrated his ability to use plain language to clarify complicated issues and make them accessible to everyone. For Alchian, a thorough understanding of money serves as an important basis for the » understanding of monetary policy. In "Why Money?," he identified three conditions that give rise to the use of a commodity as money. When there is a commodity about which everyone is informed, then everyone will be a specialist in that good and it will be used as money. Alchian also illustrated how what a society con- siders "money" has a low "recognition cost." As such, its quality and characteristics are readily identifiable by everyone. It can be used to facilitate almost every trade and therefore satisfies the characteristics as to what can serve as money.

Even with his important contributions to macroeconomics, his work in micro- economics represents even greater contributions to the field. Two notable areas of his work are developments in understanding the relationship between costs and output in the productions process and the implications of private property.

Prior to his work on costs and output in the production process, it was commonly held that a firm's costs depend only on the output. In his work entitled "Costs and Outputs" (1959), Alchian held that costs are actually determined by several dimensions within a well-defined production process.

In his work, he outlined what these dimensions are and describes how costs respond to those variables when they are allowed to change separately. His work in this field constituted a departure from classical theory of production. In his work on private property, Alchian attempted to clarify important issues surrounding property rights by explaining the structure of property rights, the social consequences that result from a particular structure of property rights, and the way in which a particular structure of property rights comes into being. Alchian submitted that what is owned is not the property itself but the right to use it in a particular socially accepted way. Alchian rejected the critics who say property rights take away from human rights by asserting that property rights are human rights and that a well-defined enforceable system will lead to better outcomes for society.

Armen Alchian's long career and groundbreaking work qualify him as one of the most important economic thinkers of modern times. His insights into both macro- and microeconomic theory have shed light on the subject in way no one previously had. His unique ability to make difficulty concepts accessible to any interested party also set him apart as skilled educator. In 1996, he was named a distinguished fellow of the American Economic Association.

Kay, Neil M. (1995). "Alchian and 'the Alchian thesis'". Journal of Economic Methodology. 2: 281–286. Armen Alchian's article 'Uncertainty, evolution and economic theory' is widely acknowledged as a classic contribution to economics. Its prominence is due in part to Milton Friedman citing it as an influence on his thesis that processes of natural selection produce profit-maximising firms, and this in turn has been widely labelled 'The Alchian-Friedman Argument' or 'The Alchian thesis' in the economic literature.

---

https://science.sciencemag.org/content/130/3375/535 Redistribution of Wealth through Inflation

https://ideas.repec.org/h/elg/eechap/2591_14.html

https://www.sciencedirect.com/science/article/abs/pii/S092911991630030X Armen Alchian: Some organizational thoughts

https://www.sciencedirect.com/science/article/abs/pii/S0929119914001539 Alchian on tenure: Some long awaited empirical evidence

"Armen A. Alchian". Library of Economics and Liberty. Liberty Fund. Archived from the original on 25 December 2019.

Fuller, Edward W. (2019). "Alchian on Keynes". The Review of Austrian Economics. doi:10.1007/s11138-019-00471-y. Armen Alchian’s paper “The Rate of Interest, Fisher’s Rate of Return over Costs and Keynes’ Internal Rate of Return” (1955) is one of the most important articles in the history of financial economics. Alchian shows that John Maynard Keynes’s marginal efficiency of capital is not identical to Irving Fisher’s rate of return over cost. Moreover, he illustrates that Keynes’s marginal efficiency of capital (also known as the internal rate of return) is problematic, because marginal efficiency of capital rankings can contradict net present value rankings. Today, Alchian’s proof is still used to show finance professionals that the net present value is superior to the internal rate of return.

Despite its significance in the history of financial economics, macroeconomists have almost totally neglected Alchian’s paper. Important commentators still incorrectly associate Keynes’s marginal efficiency of capital with Fisher’s rate of return over cost.1

"economist known for groundbreaking research on the employee–employer relationship, the hidden inefficiencies of governmental regulation, and the forces that determine the success of firms"

Alchian cast a long shadow over his field for more than half a century and has helped elevate UCLA's economics department to one of the most respected in the country.

Armen Alchian was a major figure in the economics profession for more than half a century. At UCLA, where he spent his academic career as a faculty member in the department of economics, he was a legend to generations of graduate students, who were required to take the price theory course he taught in the first year of the program.

In a 1962 study of heavily regulated industries, for instance, he found employers less likely to hire well-qualified minorities. With government regulations restraining their incentive to chase profits, he argued, management tends to look for other means of serving their own interests. Rather than choosing employees most qualified to improve the bottom line, managers in heavily regulated industries instead surround themselves with the kind of people they'd most like to associate with, who frequently turn out to be people like themselves.

Following his service, Alchian returned to California to join the faculty of UCLA and the think-tank at the RAND Corporation in nearby Santa Monica. The RAND Corporation (for Research ANd Development) was a Cold War-era institute that grew out of the efforts of World War II.. As the RAND Corporation increased in stature and prominence in the late 1940s and early 1950s, so too did the University of California at Los Angeles. Even before this era, UCLA was uniquely prominent, along with the University of Chicago, for its advocacy of free markets

These more intuitive approaches were not of the highly mathematical and technical nature promulgated by the Massachusetts Institute of Technology or Harvard University. Alchian was one of the greatest practitioners of such practical and intuitive approaches that had immediate applications, rather than the contrived problems and elaborate, and perhaps elegant, analyses that were growing in vogue in the finance and economics disciplines in the late 1950s and the 1960s.

Alchian became a full professor at UCLA in 1958. Under his influence, there emerged a UCLA school of institutional economics and finance, with Alchian as one of the primary mentors. The school cultivated a number of bright graduate students, including Alchian’s thesis advisee, the great mind William F. Sharpe, who subsequently won the Nobel Memorial Prize for his Capital Asset Pricing Model. Sharpe described Alchian as a mentor who “... 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 on a host of fascinating problems.

Actually, Demsetz helped conspire to create the UCLA branch of this new school of thought of corporate finance when Armen Alchian came to visit the University of Chicago for a year. Demsetz and Alchian instantly renewed their academic relationship, and the potential to continue to work with Alchian was influential in one last institutional decision, to return to UCLA in 1971. This was start of a new era at UCLA.

Alchian and Demsetz both contributed to this new institutional approach at UCLA, but also both worked to foment discussion on market implications of the New Institutional Economics at the Hoover Institution, a short 300 miles north of the UCLA campus.

Alchian also prepared a textbook, University Economics, co-authored with William R. Allen, which was issued in six editions, and was adopted by many professors for the instruction of both graduate and undergraduate students The text was even adopted for an intensive summer program at the University of Rochester to teach economics to law professors. His text emphasizes the role and importance of property rights, an approach that is well appreciated in the legal discipline. He repeated this effort for decades and influenced many hundreds of law professors. Alchian himself taught most of these sessions. Through this initiative, Alchian was celebrated as one of the founders of the study of Law and Economics. As these workshops spread also to members of the judiciary, he recruited other great minds. Like Paul Samuelson, Milton Friedman, and Harold Demsetz to the cause. This is one of the most distinguished cadre of workshop professors ever assembled. Collectively, they were most influential in a field charged with regulating and overseeing markets and corporations.

Alchian is regarded as one of the most influential and intuitive theorists to have ever contributed to the field of corporate value. He, working with a number of collaborators, formed our understanding of concepts that are now both widely regarded and broadly accepted. He was the product of a style of scholarship borne out of the challenges of the Great Depression and the Second World War. Scholars immersed in this school of thought used mathematics sparingly as a tool, and kept their focus on the intuition that plays such an important role in framing and addressing real world problems.

For instance, he introduced concepts such as the learning curve, shirking, monitoring, incentive compatibility, and moral hazard which have remained important, or have indeed assumed a greater significance as the world experienced a series of events such as the Enron financial scandal, the Sarbanes–Oxley corporate responsibility statutes, and the Credit Crisis that gave rise to the Global Financial Meltdown. Like Coase, Alchian expressed his ideas through rhetoric and intellectual persuasion rather than mathematical sophistication. As a consequence, his concepts remain both accessible and timeless.

PHOTO https://econjwatch.org/articles/in-memoriam-armen-alchian photo

signature

remembrances

David Hirshleifer: The epitome of a simple yet far-reaching idea is evolution by means of natural selection, and Armen wrote a seminal early work (Alchian, 1950) on applying this concept to economics. He argued that when firms faced uncertainty, it becomes almost impossible for them to solve for an optimal policy as part of a profit maximization problem. Instead, when different firms vary arbitrarily in characteristics and policies, some characteristics promote success more than do others. Thus, natural selection leads to the survival of firms whose policies help increase profits.

Starting in the 1970s, my dad devoted many years to what he called bioeconomics, and in choosing this direction he must have been influenced by Armen’s classic paper and, no doubt, personal discussion as well. dad: Jack Hirshleifer

Steven N.S. Cheung

My doctoral dissertation, The Theory of Share Tenancy, was written under the co-supervision of Armen Alchian and Jack Hirshleifer.

---

Thomas Hazlett: Alchian advanced economic thinking in multiple directions, but his foray into the question of property rights drove him the furthest. While Ronald Coase (1960) is appropriately credited with elevating this concern to centrality in economics, it was Armen Alchian and his UCLA colleague Harold Demsetz who embarked on the fruitful journey to explore their creation and impact.

Their seminal 1972 work, ―Production, Information and Economic Organization,‖ dramatically impacted economic theory, with powerful implications for corporate finance. Coase (1937) had again led the way, offering a generic cost-benefit template to define the boundaries of the for-profit firm. But economists did not seem to know where to take things from there until Alchian & Demsetz explained how pervasive scale economies and factor complementarity unleashed both new opportunities for capital and new challenges for equity owners.

This explained – as did Alchian in another seminal article, co-authored with Ben Klein and Robert Crawford (1978), ―Vertical Integration, Appropriable Rents and the Competitive Contracting Process‖-- why firms in symbiotic relationships – say, a newspaper and its printing company – tended to be either vertically integrated or linked tightly by long-term contracts.

The source of this influence lies in the genuine heuristic passion of Armen Alchian as revealed in perhaps his greatest contribution -- the principles textbook he wrote with UCLA economist William R. Allen, UNIVERSITY ECONOMICS (1964). 7 The book has rarely been assigned in college courses, as its tone was so playful and its questions so challenging as to baffle undergraduates yearning for simplicity. Yet it became a cult classic among a certain slice of the economics literati, and circulated amongst students in Southern California almost as a sort of samizdat in the 1960s and 1970s – when the author of this article read it and was star struck by the wit and logic of its exposition, detouring from an errant academic track to become an economics major. Sure enough, this tome has evolved through market forces.