Armen A. Alchian

Many students and others who read economics are disturbed by economists’ assumptions that companies maximize profits. One of their objections is that managers of companies do not know enough to be able to maximize profits. In 1950 Alchian presented a thoughtful response to this objection in his first major article, “Uncertainty, Evolution and Economic Theory.” Alchian argued that even though all companies may not maximize profits, those that survive will be ones whose managers, by luck or by design, came close to maximizing profits. Therefore, those that we observe will have maximized profits. So for the long term at least, argued Alchian, for economists to derive the standard conclusions from the profit-maximization assumption, they do not need to show that all companies try to maximize profits.

While in the U.S. Army Air Forces during World War II, Alchian did some of the early work on the learning curve—the curve that relates unit costs to cumulative output. His article on the learning curve in aircraft production was based on statistical work he did during the war, but it could not be published until 1963 because it was based on classified information.

Alchian is also known for University Economics (now called Exchange and Production), coauthored with William R. Allen, a textbook that is unique in economics. It is much more literary and humorous than any other modern economics textbook that deals with complex issues for an undergraduate audience. Example: “Since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety.” It also welcomes controversy rather than shying away from it, in the process daring the reader to disagree. Take, for example, the book’s discussion of violence:

Before condemning violence (physical force) as a means of social control, note that its threatened or actual use is widely practiced and respected—at least when applied successfully on a national scale. Julius Caesar conquered Gaul and was honored by the Romans; had he simply roughed up the local residents, he would have been damned as a gangster. Alexander the Great, who conquered the Near East, was not regarded by the Greeks as a ruffian, nor was Charlemagne after he conquered Europe. Europeans acquired and divided—and redivided—America by force. Lenin is not regarded in Russia as a subversive. Nor is Spain’s Franco, Cuba’s Castro, Nigeria’s Gowon, Uganda’s Amin, China’s Mao, our George Washington.

Because of its literary quality and complexity, the textbook generally did not work with undergraduate or even M.B.A. classes. But its impact was out of all proportion to its sales. Many graduate students, particularly at the University of California at Los Angeles, where Alchian began teaching in 1946, and at the University of Washington (where Alchian student Steven Cheung taught), learned their basic economics from this book. Some of the University of Washington students went on to write best-selling textbooks that made many of Alchian and Allen’s insights more understandable to an undergraduate audience. Alchian and Allen’s textbook was truly a public good—a good that created large benefits for which its creators could not charge. And while Alchian played the role of selfish cynic in his class, some who studied under him had the feeling that he put so much care and work into his low-selling text—and into his students—because of his concern for humanity.

Other than through his text, Alchian’s largest impact has been in the economics of property rights (he wrote the article on property rights in this encyclopedia). Most of his work in property rights can be summed up in one sentence: You tell me the rules and I’ll tell you what outcomes to expect. In their textbook, for example, Alchian and Allen ask why the organizers of the Rose Bowl refuse to sell tickets to the highest bidders and instead give up wealth by underpricing the tickets. Their answer is that the people who make the decision on ticket prices do not have property rights in the tickets, so the wealth that is given up by underpricing would not have accrued to them anyway. But the decision makers can give underpriced tickets to their friends and associates. Thomas Hazlett, former chief economist at the Federal Communications Commission, used this same line of reasoning to explain why Rep. John Dingell blocked the Federal Communication Commission’s early attempts to auction off the electromagnetic spectrum and instead favored giving it away.

Alchian also used the analysis of property rights to explain the incidence of discrimination. In a paper coauthored with Reuben Kessel, Alchian, who was himself subject to discrimination as an Armenian, and Kessel pointed out that discrimination was more pervasive in private firms whose profits were regulated by the government, and then explained that this is what the analysis of property rights would predict. Discrimination is costly—not just to those discriminated against, but also to those who discriminate. The discriminators give up the chance to deal with someone with whom they could engage in mutually beneficial exchange. Therefore, argued Alchian and Kessel, discrimination would be more prevalent in situations where those who discriminate do not bear much of the cost from doing so. A for-profit company whose profits are not regulated would see the cost of discrimination in its bottom line in the form of lower profits. A company whose profits are limited and that is already at the limit would face no cost from discriminating. Alchian and Kessel used this analysis to explain why regulated utilities discriminated against Jews and why labor unions discriminated against blacks. This analysis explains why Alchian has never trusted government—but has trusted free markets—to reduce discrimination.

Before teaching at UCLA, Alchian was an economist with the RAND Corporation.