Tempus Fugit. The great economists of my preceding generation inevitably exit the stage. Friedrich von Hayek, George Stigler, Milton Friedman, Mancur Olson, William A. Niskanen and James M. Buchanan have already regrouped in a formidable free market paradise. They are now joined by yet another free-market giant, Armen Alchian, one of my favorite economists, and yet another member of the Editorial Advisory Board of The Locke Institute.
Armen Alchian marked his name indelibly in the history of economic thought for three important reasons.
First, he was one of the last economists of his generation to communicate economics primarily in the form of words, and not mathematical equations. Indeed he well-outlived the 1960 warning advanced by Aaron Director, Editor of the Journal of Law and Economics that by the year 2000 there would be no point in an economist submitting an article to any journal of economics in the form of words, because the Editor would not be able to comprehend it!
Second, despite the fact that many economists deploy the word ‘unrigorous’ to refer to communications in words rather than in mathematics – indicating of course, by relying on a word rather than a symbol, that they also are unrigorous in their judgments – Alchian was profoundly rigorous. He wrote with impeccable logic and remarkable clarity to reach startling conclusions.In consequence, many of Alchian’s papers, even those published in the 1950′s – are still widely cited, at least by those who can understand the written word.
Third, Armen Alchian wrote a remarkable 1964 textbook, University Economics, subsequently co-authored (with William R. Allen) under the new title, Exchange and Production that still holds its own for undergraduate programs and even as an introductory text for graduate students. Examinations based on this book are widely used to test the logic-proficiency of economics students. Mathematically-inclined students fail these tests in significantly greater proportions than those less well-endowed in the language of symbols.
Alchian’s first major article, ‘Uncertainty, Evolution and Economic Theory’, was published in 1950. It remains as a founding paper in the theory of the firm. In that paper, Alchian relied on the survivor test to explain why firms really do maximize profits. Those that fail to do so wither and die. Those that maximize profit, even by chance, survive. Simple, but utterly convincing.
Alchian’s most important contributions concerned the economic analysis of property rights. He focused directly on the relationship between rules governing property and the economic outcomes that would follow. Insights ranged from a property-rights theory of the firm (co-authored with Harold Demsetz), to the economics of ticket sales policy for the Rose Bowl (why they are not market-clearing), to the circumstances where ethnic and racial discrimination are more or less likely to occur (more likely in the public sector and in the regulated sector of an economy than under unregulated capitalism). Alchian pointed out that government aid to higher education was a transfer from the relatively poor to the relatively rich, similar in nature to subsidizing drilling expenses for someone sitting on a large pool of untapped oil.
Of course, Alchian’s insights upset many students, and many faculty, whose economics were based more on ideology than on scientific logic. Surely his insights rattled the Swedish socialists who dominate the Committee that determines who should and who should not win the Nobel Prize in Economics. Other free-market greats,such as Hayek, Friedman and Buchanan, overcame such prejudice, not least because their scholarship was so profuse.
What Alchian wrote bore the hallmark of genius. Unfortunately, he wrote less frequently, balancing his time between the golf course and his academic pursuits. And the Nobel Committee ignored Alfred Nobel’s instruction that his prizes should be awarded, not for volume, but for originality. Like all bureaucrats, they are risk-averse; and volume offers a modicum of protection against critics who themselves are time-constrained, and cannot read 600 papers and 30 books within the short-time-span accorded to a Nobel Prize evaluation.
Hat Tip: David R. Henderson, ‘An Economist Who Made Science Less Dismal’The Wall Street Journal, February 20, 2013