Alchian Research Articles

Alchian and Menger on Money

Carl Menger and Armen Alchian told stories of the emergence of money as a spontaneous order involving two types of costs—costs of recognizing attributes of goods and costs of finding willing exchange partners. Menger assumed that the first are zero and the second are positive. Alchian assumed the opposite. In the real world both types of costs are positive, so a truly satisfactory story of the emergence of money as a spontaneous order has yet to be written. This is another example of the complementarity of work done by some Austrian and some neoclassical economists.

ARMEN ALCHIAN'S CONTRIBUTION TO MACROECONOMICS

Armen Alchian's contributions to macroeconomics forged important paths that are still crucial to the understanding of monetary theory and monetary policy. We outline Alchian's examination of the fundamental role of money in society and his work (with Benjamin Klein) on the measurement of inflation. We also detail how, in research with Reuben Kessel, Alchian brought insight into the problems that followed the erratic inflation policies of the 1960s and 1970s, explained the effects of anticipated and unanticipated inflation on the real economy, and described the difficulty of identifying the effects of monetary shocks in macroeconomic data.

APPROPRIABLE RENTS FROM YELLOWSTONE PARK: A CASE OF INCOMPLETE CONTRACTING

The history of Yellowstone Park is best understood in the context of the theory of the firm as developed by Armen Alchian. In the late nineteenth century, the Northern Pacific Railroad recognized the potential amenity rents from Yellowstone and captured them by vertically integrating its monopoly on transportation to the region with the supply of tourist facilities in the park. This gave the railroad de facto ownership of the park that lasted until automobiles were allowed to enter in 1915. Thereafter the tragedy of the commons ensued and rents were dissipated instead of maximized.

ARMEN A. ALCHIAN'S INFLUENCE ON ECONOMICS

Editor's Note: I wish to thank Special Symposium Editor John Lott for his dedicated, vigorous and hard work in setting up the symposium and then in shepherding the manuscripts through the referee and editing process. I also wish to thank Coeditor Rodney Smith, Claremont McKenna College, for serving as our liaison with the special editor. Along with Editorial Coordinator Carolyn Williams, Professors Lott and Smith put together one of the very best one‐day subconferences ever held at a WEA convention. This celebration of the career and influence of Armen Alchian of UCLA, an important and special senior member of our profession, was a wonderful academic experience for all participants, and I trust the insights included in this volume will advance and enrich our thinking about economics as Professor Alchian has throughout his distinguished career.Frank C. Wykoff, Editor

DO RATE AND VOLUME MATTER? TRANSACTION COST LIMITS TO ECONOMIES OF SCALE

We revisit economies of scale starting with Adam Smith and continuing through Armen Alchian. In spite of detail and depth of analysis, the application of economies of scale is still confused. As Robinson points out, large scale processes can be jobbed out. The Coasian limits of the problem are explored.

Property Rights and Technological Innovation

The economist Armen Alchian said once that ever since the fiasco in the Garden of Eden, we have been living in a world in which what we want exceeds what is available. The desire for more satisfaction is a predictable behavioral implication of the fact of scarcity. In fact, it might have helped mankind to survive against competition from other forms of life. Man's desire for more utility gives rise to two interdependent issues that each and every society has to face: (i) how to increase the value of the community's wealth, and (ii) how to allocate the increment in wealth. We generalize those issues as the demand for economic development.

Alchian and ‘the Alchian thesis’

Armen Alchian's article ‘Uncertainty, evolution and economic theory’ is widely acknowledged as a classic contribution to economics. Its prominence is due in part to Milton Friedman citing it as an influence on his thesis that processes of natural selection produce profit-maximising firms, and this in turn has been widely labelled ‘The Alchian-Friedman Argument’ or ‘The Alchian thesis’ in the economic literature. In fact, ‘The Alchian thesis’ - that natural selection produces profit-maximising firms - is one to which Alchian did not subscribe. It was instead a doctrine which he carefully and clearly rejected. This paper provides a necessary corrective to the widespread misrepresentation of Alchian's views. It is suggested that the major reason for the misrepresentation is that Friedman's interpretation of Alchian views have been accepted at face value without proper attention being given to what Alchian actually said.

MILTON FRIEDMAN, STARTING HIS NINTH DECADE

Some six years ago, Milton Friedman delivered his presidential address to our Association in this same place, the San Francisco Hyatt Regency Hotel. From its humble start some seventy years ago, the Western Economics Association has grown and prospered. Milton is one of many individuals including Armen Alchian, William Allen, Karl Brunner, and many others who were responsible for the success of the Association. When I learned that Milton would be participating in our seventieth annual meetings, I proposed to Eldon Dvorak that a session should be organized to celebrate Milton Friedman's eightieth birthday which actually takes place on July 31, 1992. I asked three individuals to speak: Tom Sargent who is Milton's colleague at the Hoover Institution, Stanford University, Allan Meltzer, a noted monetary economist in his own right, who followed Milton as the President of WEA, and Anna Schwartz who has collaborated with Milton on several books and was a colleague at the National Bureau for many years. All enthusiastically agreed to join in this celebration, and Jerry Jordan took time from his new position as President of the Cleveland Federal Reserve Bank to chair the session. The papers prepared by these participants at the session held on July 11, 1992 were combined with additional papers dealing with Friedman's contributions to economic science. Milton Friedman received an A.B. degree from Rutgers College in 1932 where he was a student of Arthur F. Burns. He enrolled at the University of Chicago along with Homer Jones, George Stigler, and W. Allan Wallis who came to study under Frank Knight. There he met and later married Rose Director. I understand that letters concerning the care and cultivation of roses were routed to Rose when she was an employee of the U.S. Department of Agriculture. In addition to his work in Washington, D.C. and with the Statistical Research Group at Columbia University during World War II, Friedman held teaching positions at the University of Minnesota and the University of Chicago, 1946-77. In the first twenty years of his professional life, Friedman mainly produced the scholarly papers which established his reputation as an economic theorist. The sixth decade of his life saw the publication of Capitalism and Freedom, |1963~. Honors and awards followed, the Nobel Prize in 1976, the Presidential Medal of Freedom in 1988. In introducing Milton Friedman's Nobel Lecture (December, 1976), Prof. Eric Lundberg emphasized his contributions in monetary economics. I reproduce excerpts from Prof. Lundberg's speech. Friedman's name is primarily associated with the renaissance of the idea of the importance of money,... This marked emphasis on the role of money should be seen in light of how economists--often successors to Keynes--over a long period of time almost totally neglected money and monetary policy in the analysis of the course of business cycles and inflation.... Friedman was the first to show that the prevalent assumption of a 'simple' trade-off between unemployment and the rate of inflation only held temporarily as a transient phenomenon... At the beginning of the 1950s, Friedman was the pioneer in proposals for a new order for the international currency system based on free exchange rates.... Friedman was one of the first to perceive--and to explain--that the Bretton Woods system with relatively fixed exchange rates must sooner or later break down.... One of Friedman's most important contributions is his reshaping of consumption theory with the help of the hypothesis about 'permanent income' in place of current annual income.... Professor Milton Friedman is awarded the 1976 Nobel Memorial Prize in Economics for his contributions to consumption analysis, to monetary history and theory including his observations of the perplexity of stabilization policies. |Nobel Lectures Economic Sciences 1969-1980, pp. 259-261~ The breadth and depth of Friedman's intellectual capacities and curiosity go well beyond the reasons identified by Professor Lundberg. …

An Explanation for Public Provision of Schooling: The Importance of Indoctrination

* This article was completed while I was a National Fellow at the Hoover Institution and represents the unpublished theory and cross-country empirical sections from my 1984 University of California, Los Angeles, dissertation. Armen Alchian, Harold Demsetz, Gertrud Fremling, David Friedman, Robert Hansen, Ben Klein, Ed Lazear, Russell Roberts, Finis Welch, E. G. West, an unusually helpful anonymous referee from this Journal, and the participants in seminars at Auburn University, the University of California at Los Angeles and at Davis, California State University at Hayward and Northridge, the Hoover Institution, George Mason University, the University of Houston, Southern Methodist University, the U.S. Department of Education, Texas A&M University, and the 1987 Public Choice meetings in Tucson, Arizona, provided valuable discussions. I would like to thank Maury Pearl for very helpful research assistance. Any remaining errors are, of course, my responsibility.

Vertical Integration as Organizational Ownership: The Fisher Body-General Motors Relationship Revisited

I have always considered my work with Armen Alchian and Robert Crawford (1978) on vertical integration to represent an extension of Coase's classic article on The Nature of the Firm. By focusing on the potential that is created when firm-specific investments are made by transactors, or what we called the appropriation of quasi-rents, I believed we had elucidated one aspect of the Coasian concept of transaction costs associated with market exchange. We hypothesized that an increase in firm-specific investments, by increasing the market transaction costs associated with a hold-up, increased the likelihood of vertical integration. This relationship between firm-specific investments, market transaction costs, and vertical integration was illustrated by examining the contractual difficulties that existed when General Motors purchased automobile bodies from Fisher Body and the corresponding benefits that were created when the parties vertically integrated. It is clear from Coase's lectures that he considers our analysis not to represent an extension of his earlier work, but rather to be an alternative, incorrect explanation for vertical integration (1988: lecture 3). Coase recognizes that an increase in the quasi-rents yielded by firm-specific investments creates a hold-up potential. However, he argues that there is no reason to believe that this situation is more likely to lead to vertical integration than to a long-term contract. Although long-term contracts are imperfect, oppor-

Codetermination and the Modern Theory of the Firm: A Property-Rights Analysis

During the postwar period, state-sponsored codetermination programs have become increasingly important and, by now, are firmly established in most countries of Western Europe. Conventional wisdom suggests that this growth of reform legislation is part of a broad social movement designed to advance industrial democracy and enlarge the power of labor to influence corporate policy. Certainly, there is no doubt that significant institutional change has taken place. But since reorganization has been motivated more by political considerations than by any fundamental rethinking of the theory of the firm, questions still exist concerning the effects the new system may have on economic behavior. There are, in fact, serious doubts about the efficiency of mandatory codetermination. Various writers have suggested that the type of codetermination legislation found in Europe may force firms to adopt organizational structure that would not be selected voluntarily by wealthWhen workers finance firm-specific investments, they supply one part of the total capital stock needed by the firm for production. It is arguable, then, that worker-investors should be regarded as equity holders and be granted control and income rights in the enterprise. This article seeks to explain the property-rights structure that such a firm must possess to be efficient, and to determine the conditions under which this organizational form is likely to emerge under a voluntary contracting process. Compared to a legally mandated codetermined firm of the European type, the voluntary variant shows clear superiority; specifically, it tends to promote productivity-enhancing incentives, relatively lower transaction costs, and a more rational allocation of risk. * Special thanks go to Armen Alchian, who has provided encouragement, advice, and key ideas concerning the nature of the firm. The article was written during my residence at the Center for the Study of the New Institutional Economics, University of the Saarland, West Germany, 1985. Financial assistance was received from the Deutsche Forschungsgemeinschaft and is gratefully acknowledged.

The Transactions Cost Approach to Vertical Integration: An Empirical Examination

The transactions cost approach developed by Coase and Williamson provides a coherent framework for investigating determinants of vertical integration in different industries. Empirical implications are developed and then tested using a cross section of firm level data pooled over different time periods. The results tend to confirm hypotheses regarding internal costs of management, small numbers bargaining problems and notion of firm as suited to adaptive sequential decision making under conditions of uncertainty. IT rHILE there exists an extensive literature on VY theoretical rationales for vertical integration, surprisingly little is known about importance of different theories.' The empirical literature includes two types of studies. Case studies test applicability of a particular theory to a single firm or industry (e.g., Armour and Teece (1980), Perry (1980) or Monteverde and Teece (1982a)). They are susceptible to bias in their choice of industry and generality of their results cannot be established. Another category of studies examines a broad base of industries to determine relationship between vertical integration and such variables as industry concentration, average firm size and sales growth (e.g., Adelman (1955), Gort (1962) and Tucker and Wilder (1977)). The link between these studies and theories of vertical integration is generally left unclear.2 This study will adopt strategy of investigating a broad base of industries, but, unlike earlier studies of this type, will test empirical implications following from transactions cost approach.3 This approach as developed by Coase (1937) and Williamson (1975, 1979) provides a coherent framework for investigating determinants of vertical integration over different industries. Furthermore, Williamson has persuasively argued that transactions cost considerations underlie such prominent reasons for vertical integration as elimination of monopoly distortions, technical complementarities, supply reliability and economies in acquisition of information. The transactions cost approach is summarized and implications are developed in first section of this paper. The implications are tested using firm level data pooled over time. The empirical model is presented in second section and results are presented in third section. The model incorporates variables not included in previous studies of vertical integration, such as measures of market risk and organizational structure. The results tend to confirm hypotheses regarding internal costs of management, small numbers bargaining problems and notion of firm as an institution suited to adaptive sequential decision making. A summary of results and conclusions are contained in final section. I. The Transactions Cost Approach Arrow (1969) has defined transactions costs as the cost of organizing economic system. In attempting to translate this idea into a framework for explaining organization of economic activity, Williamson and others have focused on role of opportunism and limited capability of individuals in processing information. The choice of institutional alternative depends on minimizing costs which arise in presence of transaction-specific investments and uncertainty. While a wide variety of institutional alternatives exist, a simple dichotomy is adopted here for sake of tractability. Following Coase, transactions are classified according to whether they take place in firm or across markets. Market alternatives become hazardous in recurring exchanges involving transaction-specific capital and efficient information processing. The firm then provides a Received for publication November 21, 1983. Revision accepted for publication December 3, 1984. *Rutgers University. This paper is based on my dissertation. I would like to thank my committee, Armen Alchian, Harold Demsetz, David Mayers, Fred Weston and my chairman, Benjamin Klein, for their helpful comments. Recent versions of paper also benefited from comments made by K. Chung, D. Carlton, D. Kaserman and anonymous referees. I would also like to thank participants of Transactions Cost Workshop at University of Pennsylvania. The usual disclaimer applies. 1 Recent summaries of theoretical literature on vertical integration are in Warren-Boulton (1978) and Kaserman (1978). See Levy (1981, 1984) for discussion of this problem. 3Earlier studies by Armour and Teece (1980) and Monteverde and Teece (1982(a, b)) have successfully employed transactions cost approach to examine vertical integration in particular industries. This study differs in that it adopts transactions cost approach to test implications across industries.

The origin of predictable behavior : Ronald A. Heiner, Department of Economics, Brigham Young University, Provo, Utah 84602, U.S.A.

Despite vigorous counterargument by its proponents, optimization theory has been persistently attacked an acceptable explanation of behavior. In one form or another, these attacks repeat the oldest critique of economics; namely, the ability of agents to maximize successfully. Over the years, this critique has taken various forms which include information processing limitations in computing optima from known preference or utility information, unreliable probability information about complex environmental contingencies, and the absence of a well-defined set of alternatives or consequences, especially in an evolving world that may produce situations that never before existed. These complaints are not new to economics. Indeed, they have been present during the very intellectual sifting process that produced neoclassical optimization and general equilibrium theory. Thus, we are to further elaborate this critique of conventional theory, the basic issue is whether there is anything new that is worthy of attention by someone well versed in standard tools and concepts. Are we simply advancing more refined or cleverly argued versions of older critiques, or extensions of them to areas not previously emphasized? Such arguments would still represent an attack on the basic rationality postulate of economics (that agents are able to maximize), but without providing a clear alternative to traditional optimization theory. However plausible these arguments might be, ultimately they must be set aside by someone desiring a theoretical understanding of behavior, unless they lead to another modeling structure whose analytical ability can be explored and compared with existing optimization theory. Another argument focuses on the desire to understand the real dynamic processes that actually generate observed behavior. In contrast, optimization is thought of a surrogate theory based on false assumptions about agents' capacity to maximize. Thus, it can be defended only in terms of empirical testability, without really illuminating the underlying processes determining behavior. Nevertheless, even this view was fully accepted, it is unlikely by itself to cause a major shift away from conventional thinking. The reason is that evolutionary processes have long ago been interpreted one of the key mechanisms tending to produce optimizing behavior; or conversely, optimizing models will predict the behavior patterns that will survive in an evolutionary process tending to select relatively superior performance.' The latter interpretation is in fact one of the dominant justifications for standard models against the criticism of unrealistic assumptions (i.e., the surviving agents of a selection process will behave as if they are able to maximize).2 *Department of Economics, Brigham Young University, Provo, UT 84602. I am indebted to Axel Leijonhufvud for constant encouragement about applications to economics, and for numerous stylistic suggestions. Harold Miller helped familiarize me with a broad range of issues across the sociobiological, psychological, and behavioral science literatures. James Buchanan provided stimulating discussion about conceptual issues. I have also benefited from the advice and criticism of Armen Alchian, Ron Batchelder, Bruce Brown, Robert Clower, Daniel Friedman, Jack Hirshleifer, Kai Jeanski, Randy Johnson, Edward Leamer, Stephen Littlechild, John McCall, James McDonald, Richard Nelson, Gerald O'Driscoll, Dennis Packard, Clayne Pope, Lionello Punzo, Ezio Tarantelli, and Sidney Winter. Needless to say, these colleagues are not responsible for inadequacy in the conceptual framework or scope of ideas presented. 'See in particular Armen Alchian's well-known 1950 paper, and also Sidney Winter, 1964, 1971; Jack Hirshleifer, 1977; Richard Nelson and Winter, 1974. 2A still used reference on the as if point of view is Milton Friedman's 1953 paper. Some recent journal illustrations are Benjamin Klein and Keith Leffler, 1981, p. 634; Richard Posner, 1980, p. 5; Hirshleifer, 1977, p. 50; Nelson, 1981, p. 1059. The ultimate extension of this view is to claim not that agents are able to maximize (select most preferred actions), but rather that any ob-

Rights and Production Functions: An Application to Labor-Managed Firms and Codetermination

It is traditional in the theory of the to define the production opportunity set available to the in terms of its boundary-the maximum attainable set of output quantities for various input quantities, given the state of technology and knowledge. This boundary is the production function of the firm. One of our purposes here is to point up the dependence of suchproduction functions on the structure of property rights and contracting rights within which the exists. We redefine the production function in order to recognize the dependence of output on the structure of property and contracting rights. That We redefine the production function to incorporate its dependence on the structure of property and contracting rights within which the exists. The problems surrounding the role of labor in the for a variety of rights str-uctures are analyzed recognizing this dependence. These structures include (1) the firm system (in which common stock claims are legally prohibited), (2) the codetermination and industrial democracy movements (in which the law requires management participation by labor), (3) cooperatives and professional partnerships (i.e., quasi-labormanaged firms which arise out of voluntary contracting), and (4) the capitalist corporation. We criticize the claim that labor-managed firms are efficient. Presented at the Conference on the Effects of Labor Participation in the Management of Business Firms in the Western World, Dallas, February 1977, sponsored by the Liberty Fund; and at the Fourth Annual Interlaken Seminar on Analysis and Ideology, Interlaken, June 1977, sponsored by the Center for Research in Government Policy and Business at the University of Rochester. We are indebted to David Henderson, Eugene Fama, Keith Leffler, Frank Milne, Tom Russell, Jerold Zimmerman, and the participants in the Economics Workshop at the University of Rochester Graduate School of Management for discussions on these issues, but they should not be held responsible for our refusal to accept some of their suggestions. We are also indebted to an anonymous referee and John Gould for comments, and to Armen Alchian for helping us over the years to understand more clearly the importance of rights in determining human behavior. This work has been partially supported by the Managerial Economics Research Center at the University of Rochester, Graduate School of Management.

THE FUTURE AND THE PRESENT IN ECONOMIC LIFE

Economic InquiryVolume 16, Issue 2 p. 157-169 THE FUTURE AND THE PRESENT IN ECONOMIC LIFE KENNETH J. ARROW, KENNETH J. ARROW *James Bryant Conant University Professor, Harvard University. This paper is dedicated to Armen Alchian, on the occasion of his sixtieth birthday and was originally read at a celebration of that happy event. I have learned much from Armen over the years on the subtle interactions of the market and the organization of economic activity in general and have enjoyed his friendship. It is a delight to celebrate his achievements to date, while awaiting new ones.Search for more papers by this author KENNETH J. ARROW, KENNETH J. ARROW *James Bryant Conant University Professor, Harvard University. This paper is dedicated to Armen Alchian, on the occasion of his sixtieth birthday and was originally read at a celebration of that happy event. I have learned much from Armen over the years on the subtle interactions of the market and the organization of economic activity in general and have enjoyed his friendship. It is a delight to celebrate his achievements to date, while awaiting new ones.Search for more papers by this author First published: April 1978 https://doi.org/10.1111/j.1465-7295.1978.tb00278.xCitations: 44 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume16, Issue2April 1978Pages 157-169 RelatedInformation

MAXIMIZING AND BIOLOGY

Economic InquiryVolume 16, Issue 2 p. 171-173 MAXIMIZING AND BIOLOGY PAUL A. SAMUELSON, PAUL A. SAMUELSON *Massachusetts Institute of Technology. I owe thanks for financial aid to the National Science Foundation. This is an abridged version of my remarks made at UCLA at the April 1977 symposium in honor of Armen Alchian, himself a pioneer in the area between economics and biology. Reserved for a future occasion is a more thorough analysis of neo-Darwinian concepts of inclusive fitness, as developed by Hamilton, R. Trivers, E. O. Wilson, and many others. Rather than modify the exposition in terms of more recent analysis by Joel Yellin and me, I have left it in its original form.Search for more papers by this author PAUL A. SAMUELSON, PAUL A. SAMUELSON *Massachusetts Institute of Technology. I owe thanks for financial aid to the National Science Foundation. This is an abridged version of my remarks made at UCLA at the April 1977 symposium in honor of Armen Alchian, himself a pioneer in the area between economics and biology. Reserved for a future occasion is a more thorough analysis of neo-Darwinian concepts of inclusive fitness, as developed by Hamilton, R. Trivers, E. O. Wilson, and many others. Rather than modify the exposition in terms of more recent analysis by Joel Yellin and me, I have left it in its original form.Search for more papers by this author First published: April 1978 https://doi.org/10.1111/j.1465-7295.1978.tb00279.xCitations: 4 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Citing Literature Volume16, Issue2April 1978Pages 171-173 RelatedInformation

Governmental Controls and the Free Market: The U. S. Economy in the 1970's

This volume inquires about the consequences of the increased entry of government into economic activity. The contributors, including Armen Alchian, William A. Niskanen, James M. Buchanan, and Gordon Tullock, are concerned with dangers to the institutions of private property, with profit incentives, and with social interaction guided by principles of self-interest and open-market competition. Contributions are divided into three parts: economic problems, governmental policies, and the modern corporation and its critics. Topics include public attitudes toward free enterprise; inflation; unemployment; the political process; social security; government transfer spending; the efficiency of the modern corporation; and worker alienation and the structure of the firm.

LEGISLATORS AS TAXICABS: ON THE VALUE OF SEATS IN THE U.S. HOUSE OF REPRESENTATIVES

Economic InquiryVolume 15, Issue 2 p. 298-302 LEGISLATORS AS TAXICABS: ON THE VALUE OF SEATS IN THE U.S. HOUSE OF REPRESENTATIVES MARK CRAIN, MARK CRAINSearch for more papers by this authorTHOMAS DEATON, THOMAS DEATONSearch for more papers by this authorROBERT TOLLISON, ROBERT TOLLISON *Crain is at the Virginia Polytechnic Institute and State University, Deaton is at Appalachian State University, and Tollison is at Texas A&M University and the Law and Economics Center, University of Miami. We are grateful to Armen Alchian, Thomas Saving, Roger Sherman, and George Stigler for comments on an earlier draft. The usual caveat applies.Search for more papers by this author MARK CRAIN, MARK CRAINSearch for more papers by this authorTHOMAS DEATON, THOMAS DEATONSearch for more papers by this authorROBERT TOLLISON, ROBERT TOLLISON *Crain is at the Virginia Polytechnic Institute and State University, Deaton is at Appalachian State University, and Tollison is at Texas A&M University and the Law and Economics Center, University of Miami. We are grateful to Armen Alchian, Thomas Saving, Roger Sherman, and George Stigler for comments on an earlier draft. The usual caveat applies.Search for more papers by this author First published: April 1977 https://doi.org/10.1111/j.1465-7295.1977.tb00475.xCitations: 19 AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Citing Literature Volume15, Issue2April 1977Pages 298-302 RelatedInformation

Comment on "Information, Martingales and Prices" (By Armen A. Alchian)

Comment on "Information, Martingales and Prices" (By Armen A. Alchian)

Output Dimensions and Their Implications for Cost and Price Analysis

Armen Alchian made an important contribution to the analysis of costs and outputs by pointing out fundamental distinctions between rate of output and volume of output.' In the following, a third dimension of output will be introduced which constitutes an extension of Alchian's results in the same sense that his work is an extension of the conventional theory of costs and outputs. Specifically, the following will consider (1) annual volume of output; (2) the rate of production (expressed as an annual rate but not necessarily carried out continuously throughout the year); and (3) the total quantity produced in a batch or lot. For example, a demand of 1,000 parts per year might be satisfied by ten production runs of 100 units each, each one produced at the rate of 10,000 units per year (for 0.01 years). Previously-indeed several years prior to Alchian's presentation-it was demonstrated that lot size analysis could be explicitly introduced into cost theory, thus anticipating Alchian in analyzing the multidimensional character of output.2 In this paper the rate of production is introduced along with lot size analysis and annual volume of output. It is interesting to note that these aspects can be incorporated into a classical short-run long-run framework. Hence one could, under an extremely generous interpretation of the latter, contend that this is what was meant all along. With reference to this point, however, Hirshleifer contended that his rather extensive survey of the literature in both economic theory and in business economics has failed to turn up any significant attention devoted to this topic. The distinction between rate of output and volume of output, insofar as effects on cost are concerned, seems not to have been mentioned in such recent works as J. Johnston, Statistical Cost