Posts Tagged 'William R. Allen'

Susan Woodward Remembers Armen Alchian

Susan Woodward, a former colleague and co-author of the late great Armen Alchian, was kind enough to share with me an article of hers forthcoming in a special issue of the Journal of Corporate Finance dedicated to Alchian’s memory. I thank Susan and Harold Mulherin, co-editor of the Journal of Corporate Finance for allowing me to post this wonderful tribute to Alchian.

Memories of Armen

Susan Woodward

Sand Hill Econometrics

Armen Alchian approached economics with constructive eccentricity. An aspect became apparent long ago when I taught intermediate price theory, a two-quarter course. Jack Hirshleifer’s new text (Hirshleifer (1976)) was just out and his approach was the foundation of my own training, so that was an obvious choice. But also, Alchian and Allen’s University Economics (Alchian and Allen (1964)) had been usefully separated into parts, of which Exchange and Production: Competition, Coordination, and Control (Alchian and Allen (1977)), the “price theory” part, available in paperback. I used both books.

Somewhere in the second quarter we got to the topic of rent. Rent is such a difficult topic because it’s a word in everyone’s vocabulary but to which economists give a special, second meaning. To prepare a discussion, I looked up “rent” in the index of both texts. In Hirshleifer (1976), it appeared for the first time on some page like 417. In Alchian & Allen (1977), it appeared, say, on page 99, and page 102, and page 188, and pages 87-88, 336-338, and 364-365. It was peppered all through the book.

Hirshleifer approached price theory as geometry. Lay out the axioms, prove the theorems. And never introduce a new idea, especially one like “rent” that collides with standard usage, without a solid foundation. The Alchian approach is more exploratory. “Oh, here’s an idea. Let’s walk around the idea and see what it looks like from all sides. Let’s tip it over and see what’s under it and what kind of noise it makes. Let’s light a fire under it and just see what happens. Drop it ten stories.” The books were complements, not substitutes.

While this textbook story illustrates one aspect of Armen’s thinking, the big epiphanies came working on our joint papers. Unusual for students at UCLA in that era, I didn’t have Armen as a teacher. My first year, Armen was away, and Jack Hirshleifer taught the entire first year price theory. Entranced by the finance segment of that year, the lure of finance in business school was irresistible. But fortune did not abandon me.

I came back to UCLA to teach at the dawn of personal computers. Oh they were feeble! There was a little room on the eighth floor of Bunche Hall where there were three little Compaq computers—the ones with really tiny green-on-black screens. Portable, sort of, but not like a purse. Armen and I were regulars in this word processing cave. Armen would get bored and start a conversation by asking some profound question. I’d flounder a bit and tell him I didn’t know and go back to work. But one day he asked why corporations limit liability. Whew, something to say. It is not a risk story, but about facilitating transferable shares. Limit liability, then shareholders and contracting creditors can price possible recovery, and the wealth and resources of individual shareholder are then irrelevant. When liability tries to reach beyond the firm’s assets to those of individual shareholders, shareholder wealth matters to value, and this creates reasons for inhibiting share transfers. You can limit liability and still address concern about tort creditors by having the firm carrying insurance for torts.

Armen asked “How did you figure this out?” I said, “I don’t know.” “Have you written it down?” “No, it doesn’t seem important enough, it would only be two pages.” “Oh, no, of course it is!” He was right. What I wrote at Armen’s insistence, Woodward (1985), is now in two books of readings on the modern corporation, still in print, still on reading lists, and yes it was more than two pages. The paper by Bargeron and Lehn (2015) in this volume provides empirical confirmation about the impact of limited liability on share transferability. After our conversations about limited liability, Armen never again called me “Joanne,” as in the actress, Joanne Woodward, wife of Paul Newman.

This led to many more discussions about the organization of firms. I was dismayed by the seeming mysticism of “teamwork” as discussed in the old Alchian & Demsetz paper. Does it not all boil down to moral hazard and hold-up, both aspects of information costs, and the potential for the residual claimant to manage these? Armen came to agree and that this, too, was worth writing up. So we started writing. I scribbled down my thoughts. Armen read them and said, “Well, this is right, but it will make Harold (Demsetz) mad. We can’t say it that way. We’ll say it another way.” Armen saw it as his job to bring Harold around.

As we started working on this paper (Alchian and Woodward (1987)), I asked Armen, “What journal should we be thinking of?” Armen said “Oh, don’t worry about that, something will come along”. It went to Rolf Richter’s journal because Armen admired Rolf’s efforts to promote economic analysis of institutions. There are accounts of Armen pulling accepted papers from journals in order to put them into books of readings in honor of his friends, and these stories are true. No journal impressed Armen very much. He thought that if something was good, people would find it and read it.

Soon after the first paper was circulating, Orley Ashenfelter asked Armen to write a book review of Oliver Williamson’s The Economic Institutions of Capitalism (such a brilliant title!). I got enlisted for that project too (Alchian and Woodward (1988)). Armen began writing, but I went back to reread Institutions of Capitalism. Armen gave me what he had written, and I was baffled. “Armen, this stuff isn’t in Williamson.” He asked, “Well, did he get it wrong?” I said, “No, it’s not that he got it wrong. These issues just aren’t there at all. You attribute these ideas to him, but they really come from our other paper.” And he said “Oh, well, don’t worry about that. Some historian will sort it out later. It’s a good place to promote these ideas, and they’ll get the right story eventually.” So, dear reader, now you know.

This from someone who spent his life discussing the efficiencies of private property and property rights—to basically give ideas away in order to promote them? It was a good lesson. I was just starting my ten years in the federal government. In academia, thinkers try to establish property rights in ideas. “This is mine. I thought of this. You must cite me.” In government this is not a winning strategy. Instead, you need plant an idea, then convince others that it’s their idea so they will help you.

And it was sometimes Armen’s strategy in the academic world too. Only someone who was very confident would do this. Or someone who just cared more about promoting ideas he thought were right than he cared about getting credit for them. Or someone who did not have so much respect for the refereeing process. He was so cavalier!

Armen had no use for formal models that did not teach us to look somewhere new in the known world, nor had he any patience for findings that relied on fancy econometrics. What was Armen’s idea of econometrics? Merton Miller told me. We were chatting about limited liability. Merton asked about evidence. Well, all public firms with transferable shares now have limited liability. But in private, closely-held firms, loans nearly always explicitly specify which of the owner’s personal assets are pledged against bank loans. “How do you know?” “From conversations with bankers.” Merton said said, “Ah, this sounds like UCLA econometrics! You go to Armen Alchian and you ask, ‘Armen, is this number about right?’ And Armen says, ‘Yeah, that sounds right.’ So you use that number.”

Why is Armen loved so much? It’s not just his contributions to our understanding because many great thinkers are hardly loved at all. Several things stand out. As noted above, Armen’s sense of what is important is very appealing. Ideas are important. Ideas are more important than being important. Don’t fuss over the small stuff or the small-minded stuff, just work on the ideas and get them right. Armen worked at inhibiting inefficient behavior, but never in an obvious way. He would be the first to agree that not all competition is efficient, and in particular that status competition is inefficient. Lunches and dinners with Armen never included conversations about who was getting tenure where or why various papers got in or did not get in to certain journals. He thought it just did not matter very much or deserve much attention.

Armen was intensely curious about the world and interested in things outside of himself. He was one of the least self-indulgent people that I have ever met. It cheered everybody up. Everyone was in a better mood for the often silly questions that Armen would ask about everything, such as, “Why do they use decorations in the sushi bar and not anywhere else? Is there some optimality story here?” Armen recognized his own limitations and was not afraid of them.

Armen’s views on inefficient behavior came out in an interesting way when we were working on the Williamson book review. What does the word “fair” mean? In the early 1970’s at UCLA, no one was very comfortable with “fair”. Many would even have said ‘fair’ has no meaning in economics. But then we got to pondering the car repair person in the desert (remember Los Angeles is next to a big desert), who is in a position to hold up unlucky motorists whose vehicles break down in a remote place. Why would the mechanic not hold up the motorist and charge a high price? The mechanic has the power. Information about occasional holdups would provoke inefficient avoidance of travel or taking ridiculous precautions. But from the individual perspective, why wouldn’t the mechanic engage in opportunistic behavior, on the spot? “Well,” Armen said, “probably he doesn’t do it because he was raised right.” Armen knew what “fair” meant, and was willing to take a stand on it being efficient.

For all his reputation as a conservative, Armen was very interested in Earl Thompson’s ideas about socially efficient institutions, and the useful constraints that collective action could and does impose on us. (see, for example, Thompson (1968, 1974).) He had more patience for Earl that any of Earl’s other senior colleagues except possibly Jim Buchanan. Earl could go on all evening and longer about the welfare cost of the status rat race, of militarism and how to discourage it, the brilliance of agricultural subsidies, how no one should listen to corrupt elites, and Armen would smile and nod and ponder.

Armen was a happy teacher. As others attest in this issue, he brought great energy, engagement, and generosity to the classroom. He might have been dressed for golf, but he gave students his complete attention. He especially enjoyed teaching the judges in Henry Manne’s Economics & Law program. One former pupil sought him out and at dinner, brought up the Apple v. Microsoft copyright dispute. He wanted to discuss the merits of the issues. Armen said oh no, simply get the thing over with ASAP. Armen said that he was a shareholder in both companies, and consequently did not care who won, but cared very much about what resources were squandered on the battle. Though the economics of this perspective was not novel (it was aired in Texaco v Pennzoil few years earlier), Armen provided in that conversation a view that neither side had an interest in promoting in court. The reaction was: Oh! Those who followed this case might have been puzzled at the subsequent proceeding in this dispute, but those who heard the conversation at dinner were not.

And Armen was a warm and sentimental person. When I moved to Washington, I left my roller skates in the extra bedroom where I slept when I visited Armen and Pauline. These were old-fashioned skates with two wheels in the front and two in the back, Riedell boots and kryptonite wheels, bought at Rip City Skates on Santa Monica Boulevard, (which is still there in 2015! I just looked it up, the proprietor knows all the empty swimming pools within 75 miles). I would take my skates down to the beach and skate from Santa Monica to Venice and back, then go buy some cinnamon rolls at the Pioneer bakery, and bring them back to Mar Vista and Armen and Pauline and I would eat them. Armen loved this ritual. Is she back yet? When I married Bob Hall and moved back to California, Armen did not want me to take the skates away. So I didn’t.

And here is a story Armen loved: Ron Batchelder was a student at UCLA who is also a great tennis player, a professional tennis player who had to be lured out of tennis and into economics, and who has written some fine economic history and more. He played tennis with Armen regularly for many years. On one occasion before dinner Armen said to Ron, “I played really well today.” Ron said, “Yes, you did; you played quite well today.” And Armen said, “But you know what? When I play better, you play better.” And Ron smiled and shrugged his shoulders. I said, “Ron, is it true?” He shrugged again and said, “Well, a long time ago, I learned to play the customer’s game.” And of course Armen just loved that line. He re-told that story many times.

Armen’s enthusiasm for that story is a reflection of his enthusiasm for life. It was a rare enthusiasm, an extraordinary enthusiasm. We all give him credit for it and we should, because it was an act of choice; it was an act of will, a gift to us all. Armen would have never said so, though, because he was raised right.

References

Alchian, Armen A., William R. Allen, 1964. University Economics. Wadsworth Publishing Company, Belmont, CA.

Alchian, Armen A., William R. Allen, 1977 Exchange and Production: Competition, Coordination, and Control. Wadsworth Publishing Company, Belmont, CA., 2nd edition.

Alchian, Armen A., Woodward, Susan, 1987. “Reflections on the theory of the firm.” Journal of Institutional and Theoretical Economics. 143, 110-136.

Alchian, Armen A., Woodward, Susan, 1988. “The firm is dead: Long live the firm: A review of Oliver E. Williamson’s The Economic Institutions of Capitalism.” Journal of Economic Literature. 26, 65-79.

Bargeron, Leonce, Lehn, Kenneth, 2015. “Limited liability and share transferability: An analysis of California firms, 1920-1940.” Journal of Corporate Finance, this volume.

Hirshleifer, Jack, 1976. Price Theory and Applications. Prentice hall, Englewood Cliffs, NJ.

Thompson, Earl A., 1968. “The perfectly competitive production of public goods.” Review of Economics and Statistics. 50, 1-12.

Thompson, Earl A., 1974. “Taxation and national defense.” Journal of Political Economy. 82, 755-782.

Woodward, Susan E., 1985. “Limited liability in the theory of the firm.” Journal of Institutional and Theorectical Economics. 141, 601-611.

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Armen Alchian, The Economists’ Economist

The first time that I ever heard of Armen Alchian was when I took introductory economics at UCLA as a freshman, and his book (co-authored with his colleague William R. Allen who was probably responsible for the macro and international chapters) University Economics (the greatest economics textbook ever written) was the required text. I had only just started to get interested in economics, and was still more interested in political philosophy than in economics, but I found myself captivated by what I was reading in Alchian’s textbook, even though I didn’t find the professor teaching the course very exciting. And after 10 weeks (the University of California had switched to a quarter system) of introductory micro, I changed my major to economics. So there is no doubt that I became an economist because the textbook that I was taught from was written by Alchian.

In my four years as an undergraduate at UCLA, I took three classes from Axel Leijonhufvud, two from Ben Klein, two from Bill Allen, and one each from Robert Rooney, Nicos Devletoglou, James Buchanan, Jack Hirshleifer, George Murphy, and Jean Balbach. But Alchian, who in those days was not teaching undergrads, was a looming presence. It became obvious that Alchian was the central figure in the department, the leader and the role model that everyone else looked up to. I would see him occasionally on campus, but was too shy or too much in awe of him to introduce myself to him. One incident that I particularly recall is when, in my junior year, F. A. Hayek visited UCLA in the fall and winter quarters (in the department of philosophy!) teaching an undergraduate course in the philosophy of the social sciences and a graduate seminar on the first draft of Law, Legislation and Liberty. I took Hayek’s course on the philosophy of the social sciences, and audited his graduate seminar, and I occasionally used to visit his office to ask him some questions. I once asked his advice about which graduate programs he would suggest that I apply to. He mentioned two schools, Chicago, of course, and Princeton where his friends Fritz Machlup and Jacob Viner were still teaching, before asking, “but why would you think of going to graduate school anywhere else than UCLA? You will get the best training in economics in the world from Alchian, Hirshleifer and Leijonhufvud.” And so it was, I applied to, and was accepted at, Chicago, but stayed at UCLA.

As a first year graduate student, I took the (three-quarter) microeconomics sequence from Jack Hirshleifer (who in the scholarly hierarachy at UCLA ranked only slightly below Alchian) and the two-quarter macroeconomics sequence from Leijonhufvud. Hirshleifer taught a great course. He was totally prepared, very organized and his lectures were always clear and easy to follow. To do well, you had to sit back listen, review the lecture notes, read through the reading assignments, and do the homework problems. For me at least, with the benefit of four years of UCLA undergraduate training, it was a breeze.

Great as Hirshleifer was as a teacher, I still felt that I was missing out by not having been taught by Alchian. Perhaps Alchian felt that the students who took the microeconomics sequence from Hirshleifer should get some training from him as well, so the next year he taught a graduate seminar in topics in price theory, to give us an opportunity to learn from him how to do economics. You could also see how Alchian operated if you went to a workshop or lecture by a visiting scholar, when Alchian would start to ask questions. He would smile, put his head on his forehead, and say something like, “I just don’t understand that,” and force whoever it was to try to explain the logic by which he had arrived at some conclusion. And Alchian would just keep smiling, explain what the problem was with the answer he got, and ask more questions. Alchian didn’t shout or rant or rave, but if Alchian was questioning you, you were not in a very comfortable position.

So I was more than a bit apprehensive going into Alchian’s seminar. There were all kinds of stories told by graduate students about how tough Alchian could be on his students if they weren’t able to respond adequately when subjected to his questioning in the Socratic style. But the seminar could not have been more enjoyable. There was give and take, but I don’t remember seeing any blood spilled. Perhaps by the time I got to his seminar, Alchian, then about 57, had mellowed a bit, or, maybe, because we had all gone through the graduate microeconomics sequence, he felt that we didn’t require such an intense learning environment. At any rate, the seminar, which met twice a week for an hour and a quarter for 10 weeks, usually involved Alchian picking a story from the newspaper and asking us how to analyze the economics underlying the story. Armed with nothing but a chalkboard and piece of chalk, Alchian would lead us relatively painlessly from confusion to clarity, from obscurity to enlightenment. The key concepts with which to approach any problem were to understand the choices available to those involved, to define the relevant costs, and to understand the constraints under which choices are made, the constraints being determined largely by the delimitation of the property rights under which the resources can be used or exchanged, or, to be more precise, the property rights to use those resources can be exchanged.

Ultimately, the lesson that I learned from Alchian is that, at its best, economic theory is a tool for solving actual real problems, and the nature of the problem ought to dictate the way in which the theory (verbal, numerical, graphical, higher mathematical) is deployed, not the other way around. The goal is not to reach any particular conclusion, but to apply the tools in the best and most authentic way that they can be applied. Alchian did not wear his politics on his sleeve, though it wasn’t too hard to figure out that he was politically conservative with libertarian tendencies. But you never got the feeling that his politics dictated his economic analysis. In many respects, Alchian’s closest disciple was Earl Thompson, who studied under Alchian as an undergraduate, and then, after playing minor-league baseball for a couple of years, going to Harvard for graduate school, eventually coming back to UCLA as an assistant professor where he remained for his entire career. Earl, discarding his youthful libertarianism early on, developed many completely original, often eccentric, theories about the optimality of all kinds of government interventions – even protectionism – opposed by most economists, but Alchian took them all in stride. Mere policy disagreements never affected their close personal bond, and Alchian wrote the forward to Earl’s book with Charles Hickson, Ideology and the Evolution of Vital Economics Institutions. If Alchian was friendly with and an admirer of Milton Friedman, he just as friendly with, and just as admiring of, Paul Samuelson and Kenneth Arrow, with whom he collaborated on several projects in the 1950s when they consulted for the Rand Corporation. Alchian cared less about the policy conclusion than he did about the quality of the underlying economic analysis.

As I have pointed out on several prior occasions, it is simply scandalous that Alchian was not awarded the Noble Prize. His published output was not as voluminous as that of some other luminaries, but there is a remarkably high proportion of classics among his publications. So many important ideas came from him, especially thinking about economic competition as an evolutionary process, the distinction between the functional relationship between cost and volume of output and cost and rate of output, the effect of incomplete information on economic action, the economics of property rights, the effects of inflation on economic activity. (Two volumes of his Collected Works, a must for anyone really serious about economics, contain a number of previously unpublished or hard to find papers, and are available here.) Perhaps in the future I will discuss some of my favorites among his articles.

Although Alchian did not win the Nobel Prize, in 1990 the Nobel Prize was awarded to Harry Markowitz, Merton Miller, and William F. Sharpe for their work on financial economics. Sharp, went to UCLA, writing his Ph.D. dissertation on securities prices under Alchian, and worked at the Rand Corporation in the 1950s and 1960s with Markowitz.  Here’s what Sharpe wrote about Alchian:

Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything; to always begin an analysis with first principles; to concentrate on essential elements and abstract from secondary ones; and to play devil’s advocate with one’s own ideas. In his classes we were able to watch a first-rate mind work on a host of fascinating problems. I have attempted to emulate his approach to research ever since.

And if you go to the Amazon page for University Economics and look at the comments you will see a comment from none other than Harry Markowitz:

I am about to order this book. I have just read its quite favorable reviews, and I am not a bit surprised at their being impressed by Armen Alchian’s writings. I was a colleague of Armen’s, at the Rand Corporation “think tank,” during the 1950s, and hold no economist in higher regard. When I sat down at my keyboard just now it was to find out what happened to Armen’s works. One Google response was someone saying that Armen should get a Nobel Prize. I concur. My own Nobel Prize in Economics was awarded in 1990 along with the prize for Wm. Sharpe. I see in Wikipedia that Armen “influenced” Bill, and that Armen is still alive and is 96 years old. I’ll see if I can contact him, but first I’ll buy this book.

I will always remember Alchian’s air of amused, philosophical detachment, occasionally bemused (though, perhaps only apparently so, as he tried to guide his students and colleagues with question to figure out a point that he already grasped), always curious, always eager for the intellectual challenge of discovery and problem solving. Has there ever been a greater teacher of economics than Alchian? Perhaps, but I don’t know who. I close with one more quotation, this one from Axel Leijonhufvud written about Alchian 25 years ago.  It still rings true.

[Alchian’s] unique brand of price theory is what gave UCLA Economics its own intellectual profile and achieved for us international recognition as an independent school of some importance—as a group of scholars who did not always take their leads from MIT, Chicago or wherever. When I came here (in 1964) the Department had Armen’s intellectual stamp on it (and he remained the obvious leader until just a couple of years ago ….). Even people outside Armen’s fields, like myself, learned to do Armen’s brand of economic analysis and a strong esprit de corps among both faculty and graduate students sprang from the consciousness that this ‘New Institutional Economics’ was one of the waves of the future and that we, at UCLA, were surfing it way ahead of the rest. But Armen’s true importance to the UCLA school did not stem just from the new ideas he taught or the outwardly recognized “brandname” that he created for us. For many of his young colleagues he embodied qualities of mind and character that seemed the more important to seek to emulate the more closely you got to know him.


About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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