Here’s an e-mail that I sent yesterday to David Henderson:
Nice job – as always – summarizing [in the Wall Street Journal] for a general audience the contributions of the most recent econ Nobelists.
I recall back in the ’80s and early ’90s, when I was still interested in I.O., I read much of Oliver Hart’s work. (Less of Bengt Holmström’s, but some.) Reading your essay brought back a memory from long-ago: so much of what Hart – and, I gather, also Holmström – says is a fancied-up version of what Alchian, Demsetz, and Yoram Barzel said. I don’t doubt that our newly minted Laureates each made genuine, and genuinely worthwhile, contributions to our understanding of economic forces at work. But I still remain bitter that Alchian never got the Prize – and that Demsetz continues to be overlooked.
Just venting. Thanks.
I might also have added Lester Telser‘s and Donald Dewey‘s names to those of Alchian, Demsetz, and Barzel. Each of these scholars examined real-world institutions – especially, here, firms and contracts – and refused to join most economists in the mid-20th century in leaping to the conclusion that firm and industrial structures and practices that do not appear in mainstream economic theory are not only manifestations of monopoly power but also arrangements and practices that must be undone or closely superintended by Solonic legislators and judges and administrators who are ever-prepared to apply the latest economic theories to the situations at hand.
Instead, scholars of the caliber of Alchian and Demsetz understood (and understand) that real-world arrangements unfamiliar to economists serve some purposes – and that if there is freedom of entry into industries combined with consumers’ freedom to spend their money largely as they choose, the purposes served by these unfamiliar arrangements are presumably beneficial to society at large. “What function does this contractual term serve?” “Why is this retailing arrangement widespread in the clothing industry?” “Why do so many workers agree to work for these contractually agreed upon terms?” These and similar questions are asked by wise economists. These economists saw (and see) their task as using basic economic reasoning to better understanding reality rather than using textbook economic theory leaping to condemn reality.
As Arnold Kling explains here, the fact that Alchian, Demsetz (and co.) did not formalize their work in ways that is today de rigueur does not mean that their work was and is less valuable or less advanced than is more formalized work. Quite the opposite. Here’s Arnold:
In my view, step 2 [mathematical formalization] is unnecessary. If anything, it tends to get in the way, often creating a barrier to doing step 1 [“Identifying some real-world complexities that affect how businesses operate”] properly, because economists limit themselves to what is mathematically tractable.
The ultimate test of any theory is not how impressive it looks or even how well its predictions are borne out by the quantitative data. Rather, the ultimate test of any theory is how well it improves our understanding of reality. By this test, the works of Armen Alchian and of Harold Demsetz are among the most powerful done by any scholars in the past 100 years at improving our understanding of reality.
My colleague Pete Boettke offers his thoughts here on the 2016 Economics Nobel award.