Speculations on Origins and Endings: An Essay on The Essential UCLA School of Economics

• An Essay and Book Review of The Essential UCLA School of Economics, by David R. Henderson and Steven Globerman.1

Yes, all life evolves through a process that begins and ends with random change, but dinosaurs are more than one of many possible jackpots in nature’s slot machine. Dinosaurs did a magnificent job of “understanding” their world—not in the sense of explicit cognition, of course, but in the sense of adaptation as a kind of biological understanding of the environment. And as far as their disappearance, how could such soundly designed animals just… vanish? Was it a natural event leading to abrupt environmental change? Or, more hopefully, did the dinosaurs become birds?

Now this may seem like a snarky start to an essay on a book describing economists who no longer roam the Earth—am I really calling economists like Armen Alchian and Harold Demsetz dinosaurs?

Yes I am.

But in drawing that analogy I emphatically reject the Flintstone version of dinosaurs as cartoonish, plodding, cold-blooded creatures with tiny brains. I also reject the Jurassic Park version of dinosaurs as ruthless killers. Evolution is about adaptation, not progress. Dinosaurs aren’t inferior to modern animals. Dinosaurs were exactly what was needed for the environment they inhabited. Dinosaurs are exactly the right metaphor for examining David R. Henderson and Stephen Globerman’s useful (and well-written, interesting and FREE) new book, The Essential UCLA School of Economics.

From the mid 1960s until at least the 1980s, the UCLA department of economics occupied a unique and important niche in the evolution of economic thought. The UCLA school—led by Armen Alchian, William Allen, Harold Demsetz, George Hilton, Jack Hirshleifer, Benjamin Klein, and others—didn’t just present interesting, provocative research, they advanced a way of thinking about social organization. They showed us what questions are really interesting and how their approach to economics can help find the answers.

The best thing about David Henderson and Steven Globerman’s book (even better than the fact that it’s well-written, interesting, and offered at zero price) is the way it connects research that came out of UCLA to broader ideas. The book is much more than a collection of abstracts from a few dozen books and articles. It is an advocacy for a unifying approach to economics. And ‘advocacy’ is the right word here: both Henderson and Globerman are very much products of the UCLA school, and they very much believe in that worldview.

So what is that unifying theme? Henderson and Globerman come up with a compelling answer but only after, I’m afraid, starting the book on the wrong foot. In the very first paragraph they write “The UCLA school of thinking was a strong free market tradition in late 20th Century economics.” That’s true but it’s not important.

What is important is found later in the introductory chapter where Henderson and Globerman quote from what might well be the manifesto of the UCLA school: Armen Alchian and William Allen’s University Economics. Alchian and Allen introduce their textbook by writing “Ever since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety. Two villains—nature and other people—prevent us from having all we want.”

The UCLA school understood that scarcity and struggle are a constant of human existence, and perhaps this helps us understand their association with free market economics. The thing about the origin story in Genesis is that humans are meant to remember the world before the Fall. The authors of Genesis may have sound theological reasons for giving us that memory, but it leads us to entertain the disastrous fantasies of “utopian socialism.” UCLA economics knew better.

But the UCLA school was more than just a brief for reality. Notice that Alchian and Allen’s quote features two villains: it’s not just a cruel nature, it’s also other people. That’s because they understand that, above all else, we are social animals. Whatever success we have in coping with a harsh and indifferent nature is achieved only by cooperating with other people in order to reap the gains from specialization. To understand our world requires us to understand the habits and institutions that shape the way we cooperate.

This idea, of course, did not originate around the economist’s lunch table at UCLA. Adam Smith understood the social nature of man. Smith’s pin factory is much more than a simple example of the benefits of the division of labor, it’s the start of a conversation about a fundamental human problem. A successive line of brilliant thinkers, such as David Ricardo, John Stuart Mill, and F. A. Hayek, spent their lives reflecting on how we capture the benefits of specialization. It isn’t hard to find the DNA of these earlier economists in the UCLA school.

Henderson and Globerman, though, aren’t much interested in placing UCLA on the proper limb of the economics family tree. They don’t want to tell the origin story; they want to explain the ideas and methodology that defined the UCLA school.

That’s a good thing. Even if you are—like me—someone who’s read a fair amount of what the UCLA economists wrote, you’ll enjoy seeing it all laid out in context. If you’re someone who hasn’t thought much about economics since you were an undergraduate, you’ll find these ideas… well… cool. Take seriously the idea that people respond to incentives—that in Alchian’s memorable claim “tell me the rules and I’ll tell you the outcome”—and you can make sense of a whole lot of behavior that baffles people who don’t take economics seriously.

I wonder, though—and I really don’t know the answer to this—whether there is a generation of millennial-age economists who haven’t heard about the UCLA school? Armen Alchian retired in 1984. Nearly two generations of economists have been trained and reached intellectual maturity since then. Do they know this stuff?

I hope so. Either way, reading or re-reading about this genre of economic thought will teach the current generation something that has never been more important.

It will teach them to be brave.

The UCLA school believed in economics. Reading Henderson and Globerman’s book, you see that the UCLA school thought the proper role of economics was to study how people arrange their relationships so as to capture the gains from specialization. This meant no topic was really off limits. More importantly, they thought economic principles could supply the answer. In 1950, when in Alchian wrote Uncertainty, Evolution and Economic Theory, he might have worried whether he was setting a course very different from the comfortable, conventional view of the time. If so, it seems as if he didn’t care. The title of the very first section of that paper, “Profit Maximization is not a Guide to Action,” is a clear signal that Alchian was going to march—if not to his own drummer—then to a beat very different from the intellectual rhythms of that moment.

Which brings me back to my dinosaur metaphor. Henderson and Globerman don’t write about the UCLA school origin story or the extinction/evolution story but they do give us clues.

Let’s start by speculating on the origins. (And, to be clear, I really am speculating. Henderson and Globerman led me to the question. They didn’t propose an answer.) Why did the UCLA school evolve when and where it did? Here, it is useful to remember that dinosaurs were not the first large, complex animals to walk the earth. They evolved only after a catastrophic event, the breakup of the last supercontinent, Pangea, which led to extraordinary environmental destruction (including global warming on a scale beyond even the wildest dreams of today’s econ-warriors).

Is it reasonable to think that in a similar way the social disasters of the first half of the twentieth century presented the UCLA economists an opportunity to rethink economics? A global depression, two world wars, and the horrors of Stalinist/Maoist Marxism didn’t vanquish the collectivist mentality that characterized “modern” economic thought. But surely it gave a niche for a new kind of economist.

At the risk of over-reaching the metaphor, there’s one other part of the origin story worth thinking about: the role of Los Angeles as a place. In 1950 California wasn’t separated from the intellectual culture of the Northeast in the same way that South America and Africa were separated in the early Cretaceous period, but the divide was massive by today’s standards. Economists in 1950 didn’t blog or tweet; they wrote letters. Journals today are mostly a screening mechanism, a way for the high priests to sanctify a few blessed articles. In 1950, journals were a way to encounter new ideas. Los Angeles was a long way from Boston at a time when phone calls were expensive and air travel was a rare luxury. Could the UCLA school have evolved to become what it was had it been less geographically isolated?

The origin story is interesting, but the UCLA ending story is much more important. We’re told that 66 million years ago a massive asteroid hit the Earth, killing off most dinosaurs. Did some similar intellectual asteroid strike the economics profession and wipe out the UCLA school? I’m certainly not claiming that happened. But if it had, the attack would have come from one of three possible directions: theoretical, empirical, or methodological.

Start with the theoretical foundations laid by the UCLA school. Despite what some may care to believe, these economists weren’t primitive cave men mindlessly espousing free market ideology. They advanced real theories; theories based on logic. The UCLA school may have been criticized for not doing enough math but as far as I can tell, no one has said that their theories were illogical.

But how did the theory stand up to empirical reality? After all, the obvious failures of planned economies should have doomed progressives like Richard Ely. And the stagflation of the 1970s should have embarrassed—and did embarrass—dogmatic Keynesians. Were there any comparable economic events that so obviously proved the UCLA school wrong?

Quite the contrary. Airline and railroad deregulation in the 1970s might have happened without UCLA but the success of those policies is a clear vindication of UCLA economics. The UCLA emphasis on property rights and transaction costs is consistent with success in controlling environmental problems (e.g., cap and trade for sulfur dioxide) and it helps understand failures in housing markets where regulations work to abridge property rights.

Clearly, the UCLA school didn’t vanish because their theories didn’t make logical sense or because their theories were inconsistent with empirical reality. What happened is, I think, now obvious: just about the time the founders of the UCLA school left the scene, economics began to experience a methodological transformation. And as luck would have it, this is an especially good time to press that point, since the 2021 Nobel Prize in Economics went to three economists who led that transformation. The winners of the prize—David Card, Joshua Angrist, and Guido Imbens—fundamentally changed the way empiricists test theories. The post-UCLA generation of economists were fascinated by the new empiricism.

In part, this is a tale as old as time: the next generation seeks status and validation by rejecting the old paradigm—remember Cain invented fratricide because he was upset with his father. But there’s a lot more going on here than simple rebellion. Most economists like to think of themselves as scientists, and they know that means they will be judged by the extent to which their theories are consistent with empirical fact. The new empiricism celebrated by this year’s Nobel Prize gave younger economists a promising new pathway to reclaim the banner of “science.”

I think this all needs to be understood in the broader context of an academic culture that tends to be suspicious of the UCLA school’s “free market ideology.” To repeat, I don’t think ideology is what makes the UCLA school interesting, but it does raise the cost of embracing their ideas. We all like to be liked. The new empiricism gave the post-UCLA generations a way to rebel and conform at the same time. They could reject the previous generation’s methodology and claim affinity with the ethos of their peers.

Now none of this is meant to dismiss the new empiricism as a mere fad. Teenagers in the 1960s fawned over the Beatles in part as a way of creating a tribal identity distinct from their parents. But the Beatles were remarkable, transformative artists. We will certainly discover limits to the new empiricism, but I share the consensus view that they have made a clear and important improvement to the way economists use data.

My speculation about the rise of the new empiricism may be correct, but it still doesn’t mean that the UCLA school lost out in some methodological duel. Remember that natural selection is not a zero sum process. Just because a new genotype proves useful doesn’t mean that earlier genotypes need to go away. Some dinosaurs had feathers before they evolved into modern birds.

Sadly, Alchian, Allen, Demsetz and most of the other founders are no longer with us. And UCLA, while still a fine economics department, may have lost its unique style. But the UCLA DNA is easy enough to spot. And this points to another real contribution of Henderson and Globerman’s book: it is not a simple guided tour through a kind of natural history museum. It’s a field guide to where we are now.

And so I’ll end with some thoughts about where I think we can find the UCLA school today.

To begin, a number of economists today share the UCLA school’s respect for the value of markets as a way of organizing—and thus facilitating—specialization. Label this as an ideology if you want but we all bring priors into our thinking. If you inherit your priors from the UCLA school, you’ll start off on solid empirical and—yes—moral grounds. (I do worry that economists with free market priors are becoming increasingly segregated in specialized “think tanks” that often have only weak ties to established economics departments. But that’s a topic for a different day.)

The other place to look for UCLA in today’s economic ecology is in the way modern economists seem to embrace—and I use this word in the best sense—economic imperialism. The UCLA school didn’t think they were examining narrow, technical economics questions. They thought they were looking at fundamental questions of social organization. That meant nothing was off limits.

If you have a bit of extra time and good access to online journals, go take a random plunge into the last few years of, say, The Journal of Political Economy and the American Economic Review.

Reading the abstracts and flipping through the pages, you’ll see a style very different from that found in the writings of the UCLA economists from the 1960s and 1970s. The theory papers use a lot more math and the empirical papers deploy much more complex—notice I didn’t say sophisticated—econometrics. But you’ll also find a fascinating range of topics. The September 2021 issue of AER, for example, has an article on carbon pricing next to an article on the rhetoric of Father Charles Coughlin. Even more encouraging, many of these articles take seriously the same sorts of things the UCLA school thought important. For example, in April 2021 the JPE published an article by Beher, Glaeser, Ponzetto, and Schliefer titled “Securing Property Rights.” It may not read like something Harold Demsetz would have written 50 years ago, but it is a topic (and title!) of which he surely would have approved.

The physicist Max Planck is credited with saying that science advances one funeral at a time. It’s a clever cliché but applying it to the UCLA school confuses causation with correlation. The group of economists described in Henderson and Globerman’s book have been gone now for a generation. But their funerals didn’t advance our economic understanding. Their remarkable ideas did.

Footnotes

[1] David R. Henderson and Steven Globerman, The Essential UCLA School of Economics. Available online at EssentialScholars.org.