Armen A. Alchian, a UCLA economist known for groundbreaking research on the employee–employer relationship, the hidden inefficiencies of governmental regulation, and the forces that determine the success of firms, died today at his home in Los Angeles. Alchian, a professor emeritus of economics at UCLA, was 98.
"I've enjoyed working on problems in economics so much that it didn't seem like work," Alchian said in 2009.
Alchian cast a long shadow over his field for more than half a century and has helped elevate UCLA's economics department to one of the most respected in the country.
Alchian, whose colleagues call him "the Armenian Adam Smith," joined UCLA in 1946 and retired in 1984 but did not close his campus office until 2007. Generations of undergraduates received their introduction to the field from "University Economics," an influential textbook co-authored by Alchian in 1964 that eventually appeared in six editions. His work is characterized by a common-sense approach to economics that puts more emphasis on explaining phenomena in writing than laying them out in complicated equations.
"Armen was much appreciated by generations of graduate students," said John Riley, chair of the UCLA Department of Economics. "His lectures were always provocative and sometimes terrifying. He simply walked into class and asked questions, and not necessarily questions connected to the previous class. The students understood that the goal was to teach them how to think like an economist. But almost no one could think quite as quickly or clearly as Armen. Junior (and not so junior) faculty often faced the same challenges around the lunch table."
Born in Fresno in 1914, and a recipient of both a bachelor's degree and doctorate from Stanford University, Armen Albert Alchian first grabbed widespread attention in 1950 with "Uncertainty, Evolution and Economic Theory," a scholarly article that argued that a kind of evolutionary force determines which firms succeed and which fail in the marketplace — and not necessarily the conscious efforts to maximize profits on the part of business owners or operators.
"The price system itself is a Darwinian mechanism that selects the 'fit' and rejects the 'unfit,' where 'fitness' is judged in terms of the ability to make greater profits than your competitors," the British economist Mark Blaug wrote in a 1985 profile of Alchian. "Not all business men maximize profits but those that fail to do so go bankrupt, so hence, in time we observe only profit-maximizers."
Alchian, who had an 18-year affiliation with the RAND Corp., also is known for work that looked at the hidden costs of regulation. In a 1962 study of heavily regulated industries, for instance, he found employers less likely to hire well-qualified minorities. With government regulations restraining their incentive to chase profits, he argued, management tends to look for other means of serving their own interests. Rather than choosing employees most qualified to improve the bottom line, managers in heavily regulated industries instead surround themselves with the kind of people they'd most like to associate with, who frequently turn out to be people like themselves.
He also wrote a pioneering study on the efficiencies to be gained not just from the number of units produced per year — the so-called economy of scale — but also the total number of units to be produced over all the years production takes place.
"The Alchian approach is broadly empirical and commonsensical, imaginatively utilizing fundamental theoretical concepts and straightforward logic to account for an astonishing variety of market and social phenomena," said William Allen, a UCLA professor emeritus of economics who collaborated frequently with Alchian.
Together with Harold Demsetz, also a professor emeritus of economics at UCLA, Alchian published the influential article "Production, Information Costs, and Economic Organization," which appeared in the December 1972 edition of the American Economic Review, a scholarly journal published by the American Economic Association. Credited with introducing the modern theory of the firm, the article looked at how problems associated with team production, such as shirking while leaving others to do the work, affect the organizational arrangements used by firms.
A breath of fresh air at a time when the prevailing economic wisdom characterized labor costs and productivity as knowable and predictable inputs in pricing and in output decisions, such as how many products to produce, the study was credited with touching off a wave of research on compensation mechanisms. The American Economic Review, in honor of its
own 100th anniversary in February 2011, published a special commemorative edition that recognized the 20 most influential articles it has published so far. "Production, Information Costs, and Economic Organization" was one of them.
In addition to his work as a researcher, Alchian was known for his two-decade involvement in the work of the Law and Economics Center, first located at the University of Rochester, then the University of Miami and Emory University, and now at George Mason University. The center aims to provide insight into economic theory to legal scholars and judges. As one of the first professors involved in the project, Alchian has given courses in economics to hundreds of law professors and members of the federal judiciary, some of whom have gone on to serve on the U.S. Supreme Court.
Selected in 1996 by the American Economic Association as a distinguished fellow, Alchian gave his name to a chair in economic theory at UCLA and was considered a legendary teacher.
"Armen Alchian, a professor of economics, was my role model at UCLA," Nobel laureate William F. Sharpe has written. "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."
Alchian was a fellow of the American Academy of Arts and Sciences, former president of the Western Economic Association and a member of the Mont Pelerin Society, an international organization composed of economists, intellectuals, business leaders and others who favor heavy reliance on markets.
A resident of the Mar Vista area of Los Angeles, Alchian was married for 73 years to Pauline, a former elementary school teacher. They have two children, six grandchildren and three great-grandchildren.
UCLA is California's largest university, with an enrollment of more than 40,000 undergraduate and graduate students. The UCLA College of Letters and Science and the university's 11 professional schools feature renowned faculty and offer 337 degree programs and majors. UCLA is a national and international leader in the breadth and quality of its academic, research, health care, cultural, continuing education and athletic programs. Six alumni and six faculty have been awarded the Nobel Prize.