Emeritus Professor
Department of Economics
UCLA
Armen Alchian was born on April 12, 1914 in Fresno, California. In 1932 he attended Fresno State College, and transferred to Stanford in 1934. He obtained his B.A. from Stanford in 1936. He continued at Stanford as a graduate student, finishing his Ph.D. dissertation on "The Effects of Changes in the General Wage Structure" in 1943. In 1940-41 he was at the NBER and Harvard, and in 1942 he was an instructor at the University of Oregon. He served in the U.S. Army Air Forces from 1942-46 doing statistical work. He arrived at UCLA in 1946, becoming associated with RAND at the same time. He became a full professor at UCLA in 1958. He as received numerous awards and honors over the years, and became a Distinguished Fellow of the American Economic Association in 1996.
Armen Alchian is known to his students and colleagues and others as the founder of the "UCLA tradition" in economics, a tradition that continues to this day. This tradition emphasizes that individual behavior is self-seeking and "rational" and that this has many unanticipated consequences. It recognizes that "rationality" is the outcome of evolution and learning, and emphasizes the frictions such as uncertainty that act as brakes on individual's ability to make decisions and coordinate with one another.
Above all, Alchian is known for the impact he has had on generations of UCLA graduate students, largely through his first year course in microeconomics. His best known student is William F. Sharpe, who received the Nobel Memorial Prize in Economic Science in 1990 for his work on finance.
Armen is an avid golfer. He is an equally avid computer user; among his other accomplishments he was the first member of the UCLA Economics Department to have a PC in his office, and was an early adopter of such important innovations as email.
Alchian has not been a prolific writer, but has rather contributed articles of major significance. Here is a review of some of his most significant contributions.
Evolution and learning
A constant theme in Alchian's work is the rational self-seeking view of economic man. Armen, however, was far ahead of his time in seeing individual rationality as a consequence rather than as an assumption. This evolutionary point was clearly laid out in 1950: he argued that regardless of the underlying motivations, efficient behaviors survive, and inefficient behavior does not. Learning and uncertainty is a constant theme of Armen's work throughout his career; of particular interest is his empirical work on the learning curve from the early 1960's in which he studies how the output of airframes increases over time with the same level of input.
"Uncertainty, Evolution and Economic Theory," Journal of Political Economy, 58 (1950): 211-221.
"Reliability of Progress Curves in Airframe Production," Econometrica, 31 (1963): 679-693.
Law and econonomics
Alchian is one of the founding fathers of the "law and economics" school, and in particular what has come to be known as the property rights approach. This approach emphasizes the implications of property rights for risk bearing and incentive reasons, and the inefficiencies that can result from common ownership.
"Some Economics of Property Rights," Il Politico, 30 (1965): 816-829.
Transactions costs and the theory of organizations
Alchian's interest in law and economics and property rights led him in a natural way to investigate the operation of the firm and other organizations. In the early 1970's he and Harold Demsetz published a landmark paper on the theory of the firm. This emphasized the way in which the firm can internalize externalities associated with incentive problems. The difficulties of monitoring in the presence of shirking were emphasized, and the article represents the beginning of the modern literature on incentive contracts and moral hazard. Alchian's work on the theory of organizations continued into the late 1970's as his work with Robert Crawford and Benjamin Klein studied the way in which specific investment creates hold up problems that can be solved in part by vertical integration among business units.
"Production, Information costs and Economic Organization," (with Harold Demsetz) American Economic Review, 62 (1972): 777-795."
"Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," (with Robert Crawford and Bejamin Klein), Journal of Law and Economics (1978)
Information costs and resource unemployment
Alchian was also a pioneer of the idea that information costs can lead to resource unemployment, especially of labor. Typical of Armen, his work on the subject was kept "in the drawer" for many years and used largely in his graduate teaching, until colleagues urged him to publish. In addition to the basic idea of unemployed resources searching for more productive uses, Armen emphasized the role of middlemen in the facilitation of resource employment. This paper represents one of beginnings of a large literature on search and employment that continues to this day.
"Information Costs, Pricing and Resource Unemployment," Economic Inquiry, 7 (1969): 109-128.
Money
Alchian has also had a lifetime fascination with the role of money as a facilitator of trade. Closely connected to his work on information costs and resource unemployment, he has emphasized how the use of money in conjunction with middlemen serves to lower the costs of conducting trade.
"Why Money?" Journal of Money, Credit and Banking, 9 (1977): 133-140.
Exchange and Production
Alchian is also widely known as the author (with Wiliam Allen) of the first year undergraduate textbook Exchange and Production which has appeared in numerous editions since 1964. This book, familiar to many generations of undergraduates and graduate students alike, is unique. Unlike most elementary undergraduate 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 the 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.
Exchange and Production, (with William R. Allen), Wadsworth Publishing Company, Belmont California
Armen Alchian's output may be sparse and informal, but it has been among the most influential. Although he was at the Rand Corporation and UCLA for most of his career, Alchian's approach to economics has been closely associated with the "Chicago School". The reason for this judgement rests on his virtuoso use of Neoclassical price theory in some rather complicated corners of economics, thus making him one of the founding father of New Institutional economics.
In his famous 1950 contribution to the "maximization debate" in the theory of the firm, Alchian introduced the "survival" principle of evolution into analyzing market structure: perhaps not all firms consciously maximize profits; but the competitive price mechanism and the market will weed out those who do not. Although at any time we may have non-profit-maximizers, in the long run, as the process of evolution continues, only profit-maximizers will survive. Thus, the assumption of profit-maximization in economic theory, Alchian argued, was a valid generalization even if it did not correspond to fact at any point in time. This argument is clearly more acute than the simpler one offered by Milton Friedman, and served as an important precedent for "evolutionary" economics.
Alchian's critique of Keynes's theory of investment (1955) is a classic in investment theory while his work on unemployment (1969) was one of the first to consider the natural rate of unemployment arising from "job search". His 1972 work with Harold Demsetz on property rights was a generalization of Coase's work. Finally, his famous 1964 textbook with W.R. Allen is an exemplary treatment in the Chicago vein - preserving and extending the Neoclassical market paradigm to handle all sorts of economic problems and describing purported "market failures" not as failures as such but as "market outcomes" in the face of transactions costs and information problems.
Major Works of Armen A. Alchian
"Uncertainty, Evolution and Economic Theory", 1950, JPE
"The Rate of Interest, Fisher's Rate of Return Over Cost and Keynes's Internal Rate of Return", 1955, AER
"Private Property and the Relative Cost of Tenure", 1958, in Bradley, editor, Public Stake in Union Power.
"Costs and Outputs", 1959, in Abramovitz, editor, Allocation of Economic Resources
"Redistribution of Wealth through Inflation", with R. Kessel, 1959, Science.
"The Meaning and Validity of the Inflation-Induced Lag of Wages", with R.A. Kessel, 1960, AER
"Competition Monopoly and the Pursuit of Pecuniary Gain", with R.A.Kessel, 1962, in Aspects of Labor Economics
"The Effects of Inflation", with R.A. Kessel, 1962, JPE.
"Reliability of Progress Curves in Airframe Production", 1963, Econometrica
University Economics, with W.R. Allen, 1964.
Exchange and Production, 1964.
"Some Economics of Property Rights", 1965, Il Politico.
"Economic and Social Impact of Free Tuition", 1968, New Individualist Review.
"Cost", 1968, IESS
"Information Costs, Pricing and Resource Unemployment", 1969, Western EJ
"Corporate Management and Property Rights", 1969, in Manne, editor, Economic Policy and the Regulation of Corporate Securities.
"Production, Information Costs and Economic Organization", with H. Demsetz, 1972, AER
"On a Correct Measure of Inflation", with B. Klein, 1973, JMCB.
"Why Money?", 1977, JMCB
Economic Forces at Work, 1978
"Vertical Integration, Appropriable Rents and the Competitive Contracting Process", with B. Klein and R.G. Crawford, 1978, J Law Econ
