I had the great privilege of meeting and studying under UCLA economist Armen Alchian at one of Henry Manne's law and economics courses for law professors. He was a brilliant man, a great teacher, and a very good dinner companion. Sadly, he passed away yesterday.
David Henderson has a wonderful obituary in the WSJ:
What was so important about Alchian's work? There were three aspects. First, he was one of the last economists of his generation to communicate mainly in words and not equations. Second, although economists often use the word "unrigorous" to refer to communication in words rather than math, Alchian was profoundly rigorous, writing clearly and carefully and using basic logic to reach sometimes-startling conclusions. As a result, many of Alchian's papers, even those from the 1950s, are still widely cited.
Third, Alchian is known for his textbook, "University Economics," first published in 1964 and later called "Exchange and Production," coauthored with UCLA colleague William R. Allen. That text 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."
Henderson goes on to explain that his favorite Alchian article is:
My personal favorite of his published papers is “The Economic and Social Impact of Free Tuition” (1968). Alchian pointed out that government aid to higher education is a transfer to the relatively rich. That’s because people who can make it through college, even though they may have a low current income, have a high wealth.
He compared subsidizing college to subsidizing drilling expenses for someone sitting on a large pool of oil. The untapped student’s potential is the analogue of the untapped oil. Alchian argued that lack of current income might be a justification for loans to aspiring college students but not for outright subsidies.
Don Boudreaux choses a different article:
My favorite Alchian article is his 1959 study “Costs and Outputs.” If this article – which, amazingly, Alchian pulled from its forthcoming publication in the American Economic Review in order to put it into a festschrift for Bernard Haley edited by Moses Abramovitz (The Allocation of Economic Resources) – were more widely known and grasped, it would completely upend, and vastly improve, the standard textbook treatment of production costs and cost curves. Among many other benefits of such an Alchianesque improvement would be that economists would no longer be able so easily to confound themselves, while pleasing the antitrust-plaintiffs’ bar, by using familiar costs curves and concepts (e.g., “AVC”) into supposing that so-called ‘predatory pricing’ is a coherent notion.
My favorite Alchian article is one he coauthored with the great Harold Demsetz (also of UCLA), Armen A. Alchian and Harold Demsetz, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972), reprinted in The Economics of Legal Relationships 555 (Henry G. Manne ed. 1975).
In an analysis of how firms deal with agency costs, Alchian and Demsetz offered the useful example of two workers who jointly lift heavy boxes into a truck. The marginal productivity of each worker is very difficult to measure and their joint output cannot be easily separated into individual components. In such situations, obtaining information about a team member’s productivity and appropriately rewarding each team member are very difficult and costly. In the absence of such information, however, the disutility of labor gives each team member an incentive to shirk because the individual’s reward is unlikely to be closely related to conscientiousness.
