Wednesday, February 20, 2013

Armen Alchian, R.I.P.

Another big name economist (whose name and work you should be familiar with) has passed away. Alchian would have been 99 in a few months, and many hoped he would be awarded a Nobel Prize before he died.

Alchian had little direct influence on macroeconomic theory (as taught in school) or macroeconomic policy as practiced in national capitals.

However, the idea that property rights and the institutional arrangements that support them are critical to understanding economic outcomes does go back to Alchian and others. And those insights are indirectly but strongly tied to common macroeconomic positions, like opposition to nationalized single payer healthcare because it diverts attention from efficient provision of healthcare.

In micro, Alchian is best known for the Alchian-Allen theorem. This says that if you have two competing goods, one cheap and one expensive, that adding a fixed cost to both of them will tend to shift demand towards the more expensive product because it’s become relatively cheaper. For example, Wal-Mart will do less well in expensive urban areas, like Manhattan or San Francisco, because the additional fixed cost of land makes makes less difference to an already expensive upscale good.

And … a chunk of this class are usually finance majors. It now appears that Alchian did the first event study, which are now a critical part of financial research. No one knew about this work that he did in the late 1940’s until 50 years later because it was classified.

Here is his obituary in The Wall Street Journal. Here is a short blurb at Marginal Revolution, with, as always, many interesting comments.

FWIW: I only met Alchian once. It was on a cold, wet, night in July, on a harbour cruise of San Francisco Bay. It was put on as part of the Western Economics Association meetings in 1996. My wife and me were bored at the stuffy conversation inside, so we went out on deck. Alchian came out too, and we began to talk. We mentioned that we had our honeymoon in Lake Tahoe, worked in around attendance at the 1993 Western Economics Association meetings, and had thus made much of our honeymoon tax deductible. It turned out that Alchian was one of the founders of the Western Economics Association because he’d worked in Los Angeles since the 1940’s, and it was hard to get snooty northeastern economists to pay attention to his work. So, he was thrilled that his association had helped a young economist stretch his vacation dollars further.

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