A Legend in Economics Passes

By Professor Thomas N. Hubbard, Senior Associate Dean, Kellogg School of Management, Northwestern University

Armen Alchian died yesterday.  He was 98.

Many economists of my generation did not know Armen personally.  However, signs of his work are pervasive in the field.  There are many good examples of this in the research and teaching of many faculty at Kellogg, particularly in the Management and Strategy department.

Armen’s work on learning curves in aircraft production (from the late 1940s, though not published until 1963 because it relied on classified data) is credited as the first empirical investigation of learning curves – an important feature of many industries.  We sometimes take for granted the implications of learning curves on firms’ strategies and economic outcomes – for example, the strategy implications were popularized nearly forty years ago by Bruce Henderson and others at the Boston Consulting Group — but much of the large body of research on these issues builds from Armen’s work.  Economists and strategy professors implicitly appeal to Armen’s work on industry evolution – where he emphasizes that competitive outcomes need not depend on the assumption that firms can precisely profit-maximize – when students ask them whether the frameworks we teach depend on such strict assumptions.  And modern economic thinking on the productive efficiencies of vertical integration, and professors teach their students about such efficiencies, draws directly from Armen’s famous paper with Ben Klein and Robert Crawford (as well as from Oliver Williamson’s work which was done in parallel around the same time) in the late-1970s.

Armen’s most-cited paper is his work with Harold Demsetz, published in the American Economic Review in 1972.  This paper may be the most influential paper in the economics of organization, catalyzing the development of the field as we know it.  It is the most-cited paper published in the AER in the past 40 years.  (If one takes away finance and econometrics methods papers, it is the most-cited “economics” paper, period.)  It is truly a spectacular piece.  It is a theory not only of firms’ boundaries, but also the firm’s hierarchical and financial structure.  And it is a theory – like all of Armen’s work – that is grounded in real-world phenomena.  The back half of the paper is devoted toward explaining how the theory explains why various forms of organizations – from corporations to partnerships to employee ownership – are used in different circumstances.  Seminal work in the economics of organization by other great economists such as Bengt Holmstrom, Oliver Hart, Paul Milgrom and others can easily be traced to this paper.

Armen’s most-read work, however, is almost certainly his undergraduate textbook University Economics, first published in the early 1960s.  Ironically, most economists trained during the past thirty years have probably never seen it.  But it is a tour de force, and unquestionably the most entertaining economics textbook ever written.  It teaches economics by way of a series of illustrations of how economic thinking plays out in the real world.  It taught millions of students how to think like an economist.  It also provides a fairly accurate depiction of Armen as a person – an economist to the core, deeply engaged in the real world, and someone with more important concerns than political correctness.

I was lucky to know Armen reasonably well.  When I arrived at the UCLA economics department in 1995 as a rookie assistant professor, Armen was 80.  He was no longer teaching classes, but came into the office every morning (usually after hitting a bucket of golf balls at the local driving range).  Although he did not generally attend seminars, he generally did read the seminar speaker’s paper.  If you were lucky, which I sometimes was, Armen would stop by your office to discuss it.  Even at an advanced age, his economic insights were unique, on point, and valuable.  I found him tough on ideas, but a very generous and gracious man in general.

I regret that I am too young to have known him in his prime, but there are many admiring stories that you can hear from those who had him as a student.  Kevin Murphy – indeed, both Kevin Murphys – Bob Topel, and David Levine are among the many ex-students that are sources for such stories.  His Ph.D. microeconomics class was legendary at UCLA for teaching students how to think like an economist and apply these insights to explaining the real world.  It was also legendary for its toughness.

Armen Alchian never won the Nobel Prize.  However, his influence on the field was at least as large as many economists who are laureates – and this influence can be seen not only in the direct influence of his best-known papers, but also in how we ourselves think like economists and teach others how to do so.  He had a profound effect on the field, and will be greatly missed by those who he and his work have touched.