Armen A. Alchian's influence on economics.
Armen Alchian's influence has been felt in many areas of economics - from law and economics to industrial organization to macroeconomics to finance to basic economic theory. Few economists have the impact in even one area that Armen has had in many fields. Articles like his 1950 piece "Uncertainty, Evolution, and Economic Theory" were seminal pieces that are still widely cited almost half a century after they were published. Yet, Armen's influence stems not only from his articles, but from the truly dominant position that he held in UCLA's economics department. Few students made it through the program without being deeply affected by his penetrating style.
Armen is certainly no stranger to the Western Economic Association. He served as its president in 1975, published influential work in Economic Inquiry (Alchian , an article that Armen views as his best paper), and was instrumental in helping the annual WEA meetings take their present form.
What follows are six of the nineteen original papers that were presented in his honor at the conference, the roundtable discussion on Armen as a person and his influence, and a piece where Armen offers young scholars five Principles of Professional Advancement. Special thanks go to those who organized the five sessions presenting these papers at the 1994 Western Economic Association Meetings: Louis De Alessi on "Armen Alchian's Theories of Property Rights," Arthur De Vany on the topic of "Armen Alchian's Theories of Evolution," Joseph Kalt on "Armen Alchian's Influence on Public Choice," Jonathan Karpoff on "Armen Alchian's Contributions to Finance and the Theory of the Firm," and Ben Zycher on "Armen Alchian's Influence on Public Policy." Other topic areas were proposed, but failed to materialize solely due to space constraints. Ben Klein also provided some humorous insights into Armen during his luncheon address. Finally, neither the special sessions nor this issue of Economic Inquiry would have taken place without the suggestions and efforts of Rodney Smith. Rod deserves a great deal of thanks.
It is a testament to the importance of Armen's article, "Uncertainty, Evolution, and Economic Theory," that three of these six papers deal extensively with it. The first piece, by Harold Demsetz, sets for itself the ambitious goal of showing that for over forty-five years economists have too easily accepted Armen's claim that many economic phenomena can be explained without reference to rationality. Demsetz rejects Alchian's claim that rationality and natural selection are substitute explanations of behavior by claiming that Alchian implicitly requires rationality elsewhere in the model (e.g., the reaction of creditors to losses they bear). Possibly Armen would respond that natural selection and not rationality is what determines which creditors exist; those that lend to the wrong clients or adopt the wrong rules go out of business. We leave to the reader to judge who is right.
Arthur De Vany's innovative paper pushes the bounds of the evolutionary discussion by showing how evolution helps us learn, and this in turn helps us understand the different conditions different institutions face. As De Vany phrases it, "Every economic organization, contract, firm, or coalition, is the product of and contains information." His paper provides a useful start in explaining why organizations take the forms that they do.
While Alchian's  piece was limited to describing the actions of firms, the general notion that efficient rules or organizations will tend to survive and inefficient ones fail can also apply to political markets. Kobayashi and Ribstein take this tack and analyze whether there is a tendency towards efficiency in the evolution of uniform state laws. They claim that the most "efficient" statutes are the ones to be most widely and quickly adopted. A topical theoretical issue these days is the notion of herding behavior, whether it be in financial or political markets, and Kobayashi and Ribstein provide empirical evidence that state legislators are able to correctly discern why other states adopt the statutes that they do. Simply because one state adopts a statute is not sufficient to cause other states to mimic its behavior. The nature of the statute seems to be more important than whether others have already adopted it.
Alchian's impact on macroeconomics is generally not well understood, for his impact was not just through his published writing but also through conversations he had with individuals such as Karl Brunner and Allan Meltzer. As Jerry Jordan and William Gavin write, however, Alchian's published work made fundamental contributions to explaining money's role in economizing on information costs, the problems of measuring inflation, the credibility of policymakers, and the distinctions between anticipated and unanticipated inflation. Alchian and his coauthors might not always have gotten the credit that they deserved for their insights in these areas, but Jordan and Gavin's piece clearly shows that they anticipated many of the major issues that have arisen in macroeconomics during the last couple of decades.
Benjamin Klein's paper fills a gap in his earlier work with Armen (Klein, Crawford, and Alchian ) by introducing uncertainty into whether hold up problems will occur. In Klein's new paper, the returns to cheating vary with changes in demand and other variables and reputations help prevent holdups for some level of changes in the returns to cheating. The greater are the reputations, the larger the shocks that are necessary before it will pay for a firm to hold up the other party in a contract. Klein then applies his discussion to interesting real world cases involving Fisher Body-General Motors and Alcoa-Essex.
Terry Anderson and Peter Hill describe the motivations behind the creation of the federal park system's "crown jewel" - Yellowstone National Park. While the Northern Pacific Railroad might have preferred to own Yellowstone and thus solve any successive monopoly problems that might arise from it controlling access to the area, Anderson and Hill describe how public ownership of the park was preferable to the checkered ownership that was likely to result under federal homesteading laws. They also describe how, despite official government ownership, the in-principle ownership exercised by the Northern Pacific gave it strong incentives to protect the amenity aspects of Yellowstone from damage by sightseers. Their piece provides an interesting alternative to the public-interest view of the state.
In sum, these papers continue Armen's work in a wide variety of areas. If time is the ultimate test of the value of these ideas, Armen's work has met that test. His work continues to attract interest and provide new insights into how the world works many decades after his pieces were first published.
Alchian, Armen A. "Uncertainty, Evolution, and Economic Theory." Journal of Political Economy, June 1950, 211-21.
-----. "Information Costs, Pricing, and Resource Unemployment." Economic Inquiry, June 1969, 109-28.
Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process." Journal of Law and Economics, October 1978, 297-326.
JOHN R. LOTT, JR., John M. Olin Visiting Law and Economics Fellow, School of Law, University of Chicago. I would like to thank Carolyn Williams for her tremendous help in running the conference.
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|Title Annotation:||Symposium Honoring Armen Alchian: The First 80 Years Are the Hardest|
|Author:||Lott, John R., Jr.|
|Date:||Jul 1, 1996|
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