Gary S. Becker received the 1992 Nobel Prize in economics for “having extended the domain of economic theory to aspects of human behavior which had previously been dealt with—if at all—by other social science disciplines such as sociology, demography and criminology.” Becker’s unusually wide applications of economics started early. In 1955 he wrote his doctoral dissertation at the University of Chicago on the economics of discrimination. Among other things, Becker successfully challenged the Marxist view that discrimination helps the person who discriminates. Becker pointed out that if an employer refuses to hire a productive worker simply because of skin color, that employer loses out on a valuable opportunity. In short, discrimination is costly to the person who discriminates. Becker showed that discrimination will be less pervasive in more competitive industries because companies that discriminate will lose market share to companies that do not. He also presented evidence that discrimination is more pervasive in more-regulated, and therefore less-competitive, industries. The idea that discrimination is costly to the discriminator is common sense among economists today, and that is due to Becker. In the early 1960s Becker moved on to the fledgling area of human capital. One of the founders of the concept (the other being Theodore Schultz), Becker pointed out what again seems like common sense but was new at the time: education is an investment. Education adds to our human capital just as other investments add to physical capital. (For more on this, see Becker’s article, “Human Capital,” in this encyclopedia.) One of Becker’s insights is that time is a major cost of investing in education. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist’s concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food. Not even crime escaped Becker’s keen analytical mind. In the late 1960s he wrote a trail-blazing article whose working assumption is that the decision to commit crime is a function of the costs and benefits of crime. From this assumption he concluded that the way to reduce crime is to raise the probability of punishment or to make the punishment more severe. His insights into crime, like his insights on discrimination and human capital, helped spawn a new branch of economics. In the 1970s Becker extended his insights on allocation of time within a family, using the economic approach to explain the decisions to have children and to educate them, and the decisions to marry and to divorce. Becker was a professor at Columbia University from 1957 to 1969. Except for that period, he spent his entire career at the University of Chicago, where he held joint appointments in the departments of economics and sociology. Becker won the John Bates Clark Award of the American Economic Association in 1967 and was president of that association in 1987. Selected Works   1965. “A Theory of the Allocation of Time.” Economic Journal 40, no. 299: 493–508. 1968. “Crime and Punishment: An Economic Approach.” Journal of Political Economy 76, no. 2: 169–217. 1971. The Economics of Discrimination. 2d ed. Chicago: University of Chicago Press. 1975. Human Capital. 2d ed. New York: Columbia University Press. 1981. Treatise on the Family. Chicago: University of Chicago Press.   (0 COMMENTS)

  In 2003, econometrician Robert Engle, along with econometrician Clive Granger, received the Nobel Prize in economics. Engle’s prize was “for methods of analyzing economic time series with time-varying volatility (ARCH).” ARCH stands for “autoregressive conditional heteroskedasticity.” The name is complex, but the idea can be grasped. Many data vary randomly about a constant mean. For instance, the height of six-year-olds may come close to forming a normal distribution around its mean (or average) value. When these data are graphed, they form the so-called bell curve known to all students from their teachers’ practice of “grading on a curve.” But many economic time series (i.e., data recorded in calendar sequence, annually or at shorter or longer intervals) do not display a constant mean. GDP, for example, typically grows over time (see National Income Accounts). Even if the econometrician estimates its trend rate of growth, he still finds that it varies around that trend—that is, is volatile. What is more, if GDP is above trend one quarter, it is likely to remain above trend the next quarter, and if it is below trend, it is likely to remain below trend. Such a time series is said to be “autoregressive.” Effectively, it has a short-run mean and a long-run mean. Any random variation around the long-run mean raises or lowers the short-run mean; and even if there were no more random variations, the time series would adjust only slowly back toward its long-run mean. With GDP, autoregressive behavior implies extended periods of above-normal and below-normal economic activity—booms and slumps. Although econometricians have long known that the variability in stock prices, GDP, interest rates, and other time series is not constant over time, before Engle they modeled the ever-changing mean, making the incorrect assumption that volatility around the short-run mean was constant (i.e., that the spread of the bell curve, measured by the standard deviation, was constant). When the volatility (measured by the standard deviation) is constant, statisticians call it “homoskedastic.” But Engle realized that for many problems, such as calculating insurance premiums or the prices of options, the variability of a series around the mean is just as important as the variability of the mean itself, and that this variability is not always constant—it is “heteroskedastic.” Just as with the mean of GDP, a time series (e.g., corporate profits or inflation rates) is sometimes best characterized as having a long-run and a short-run volatility. The volatility may rise or fall randomly around its long-run value. If, when it is high, it tends to stay high and, when it is low, it tends to stay low, adjusting only slowly back to the long-run value, then the volatility is itself autoregressive. Just as autoregressive variations in GDP describe the business cycle, autoregressive volatility in the prices of financial assets describes cycles of riskiness important to financial traders. Engle figured out a way to formulate and estimate models that could describe these cycles adequately. The term “conditional” in ARCH implies that Engle’s models also take account of the cycles in the mean. His ARCH model, first published in 1982, can be used to forecast volatility, something crucial for investors who want to limit the riskiness of their stock holdings. Engle’s student, Tim Bollerslev, generalized the model, calling it, naturally, GARCH (generalized ARCH).1 GARCH has served a practical use in so-called value-at-risk analysis. Value-at-risk models are used to calculate capital requirements for compliance with the Basel rules that regulate risks in international banking. Using GARCH, economists can figure out how risky a portfolio can be while having only some specified small probability of a maximum loss. Individual investors can do likewise. In an example given on the Nobel committee’s Web site, if you had $1 million in an S&P 500 index on July 31, 2002, there was a 99 percent probability that your maximum loss the next day would be $61,500, or about 6 percent.2 Engle earned his B.S. in physics at Williams College in 1964, his M.S. in physics at Cornell in 1966, and his Ph.D. in economics at Cornell in 1969. He was a professor at MIT from 1969 to 1974 and a professor at the University of California at San Diego from 1974 to 1999. Since 1999, he has been a professor at New York University’s Stern School of Business. Selected Works   1982. “Autoregressive Conditional Heteroskedasticity with Estimates of the Variance of U.K. Inflation.” Econometrica 50: 987–1008. 1986 (with Tim Bollerslev). “Modeling the Persistence of Conditional Variances.” Econometric Reviews 5: 1–50.   Footnotes 1. Tim Bollerslev, “Generalized Autoregressive Conditional Heteroskedasticity,” Journal of Econometrics 31 (1986): 307–327.   2. See http://nobelprize.org/economics/laureates/2003/ecoadv.pdf.   (0 COMMENTS)

  Milton Friedman was the twentieth century’s most prominent advocate of free markets. Born in 1912 to Jewish immigrants in New York City, he attended Rutgers University, where he earned his B.A. at the age of twenty. He went on to earn his M.A. from the University of Chicago in 1933 and his Ph.D. from Columbia University in 1946. In 1951 Friedman received the John Bates Clark Medal honoring economists under age forty for outstanding achievement. In 1976 he was awarded the Nobel Prize in economics for “his achievements in the field of consumption analysis, monetary history and theory, and for his demonstration of the complexity of stabilization policy.” Before that time he had served as an adviser to President Richard Nixon and was president of the American Economic Association in 1967. After retiring from the University of Chicago in 1977, Friedman became a senior research fellow at the Hoover Institution at Stanford University. Friedman established himself in 1945 with Income from Independent Professional Practice, coauthored with Simon Kuznets. In it he argued that state licensing procedures limited entry into the medical profession, thereby allowing doctors to charge higher fees than they would be able to do if competition were more open. His landmark 1957 work, A Theory of the Consumption Function, took on the Keynesian view that individuals and households adjust their expenditures on consumption to reflect their current income. Friedman showed that, instead, people’s annual consumption is a function of their “permanent income,” a term he introduced as a measure of the average income people expect over a few years. In Capitalism and Freedom, Friedman wrote arguably the most important economics book of the 1960s, making a case for relatively free markets to a general audience. He argued for, among other things, a volunteer army, freely floating exchange rates, abolition of licensing of doctors, a negative income tax, and education vouchers. (Friedman was a passionate foe of the military draft: he once stated that the abolition of the draft was almost the only issue on which he had personally lobbied Congress.) Many of the young people who read it were encouraged to study economics themselves. His ideas spread worldwide with Free to Choose (coauthored with his wife, Rose Friedman), the best-selling nonfiction book of 1980, written to accompany a TV series on the Public Broadcasting System. This book made Milton Friedman a household name. Although much of his trailblazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level depends on the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in money supply growth cause employment and output to increase, and decreases in money supply growth have the opposite effect. Friedman’s solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money-supply rule. If the Federal Reserve Board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Friedman’s monetarism came to the forefront when, in 1963, he and Anna Schwartz coauthored Monetary History of the United States, 1867–1960, which contends that the great depression was the result of the Federal Reserve’s ill-conceived monetary policies. Upon receipt of the unpublished manuscript submitted by the authors, the Federal Reserve Board responded internally with a lengthy critical review. Such was their agitation that the Fed governors discontinued their policy of releasing minutes from the board’s meetings to the public. Additionally, they commissioned a counterhistory to be written (by Elmus R. Wicker) in the hope of detracting from Monetary History. Friedman’s book has had a substantial influence on the economics profession. One measure of that influence is the change in the treatment of monetary policy given by MIT Keynesian Paul Samuelson in his best-selling textbook, Economics. In the 1948 edition Samuelson wrote dismissively that “few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle.” But in 1967 Samuelson said that monetary policy had “an important influence” on total spending. The 1985 edition, coauthored with Yale’s William Nordhaus, states, “Money is the most powerful and useful tool that macroeconomic policymakers have,” adding that the Fed “is the most important factor” in making policy. Throughout the 1960s, Keynesians—and mainstream economists generally—had believed that the government faced a stable long-run trade-off between unemployment and inflation—the so-called phillips curve. In this view the government could, by increasing the demand for goods and services, permanently reduce unemployment by accepting a higher inflation rate. But in the late 1960s, Friedman (and Columbia University’s Edmund Phelps) challenged this view. Friedman argued that once people adjusted to the higher inflation rate, unemployment would creep back up. To keep unemployment permanently lower, he said, would require not just a higher, but a permanently accelerating inflation rate (see Phillips curve). The stagflation of the 1970s—rising inflation combined with rising unemployment—gave strong evidence for the Friedman-Phelps view and swayed most economists, including many Keynesians. Again, Samuelson’s text is a barometer of the change in economists’ thinking. The 1967 edition indicates that policymakers faced a trade-off between inflation and unemployment. The 1980 edition says there was less of a trade-off in the long run than in the short run. The 1985 edition says there is no long-run trade-off. Selected Works   1945 (with Simon Kuznets). Income from Independent Professional Practice. New York: National Bureau of Economic Research. 1953. Essays in Positive Economics. Chicago: University of Chicago Press. 1956. Ed. Studies in the Quantity Theory of Money. Chicago: University of Chicago Press. 1957. A Theory of the Consumption Function. Princeton: Princeton University Press. 1962. Capitalism and Freedom. Chicago: University of Chicago Press. 1962. Price Theory: A Provisional Text. Chicago: Aldine. 1963 (with Anna J. Schwartz). A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press. 1972. An Economist’s Protest: Columns on Political Economy. Glen Ridge, N.J.: Thomas Horton and Daughters. 1980 (with Rose Friedman). Free to Choose. New York: Harcourt Brace Jovanovich.   (0 COMMENTS)

  Robert Fogel was corecipient (with Douglass C. North) of the 1993 Nobel Prize in economics “for having renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change.” Fogel earned his master’s degree in economics at Columbia University in 1960, learning economics from george stigler and economic history from Carter Goodrich. He earned his Ph.D. at Johns Hopkins University in 1963, where he worked under simon kuznets. His interest, early on, was in understanding the factors that contribute to economic growth. Because of his training from Stigler and Kuznets, he was empirically inclined. His first major book, based on his Ph.D. dissertation, was Railroads and American Economic Growth. Fogel’s work on railroads is a first-rate, extremely detailed application of one of the most important principles of economics: that there is a substitute for virtually everything. So rather than just accepting the idea that railroads were so important in economic growth because of their ubiquity, Fogel carefully considered where the extension of canals might have replaced railroads had the railroads never been built. He took account also of the cost of these hypothetical canals, along with the cost savings from not building railroads. Fogel concluded that almost all the agricultural land that became economically valuable because of railroads also would have been valuable had there been only an extended series of canals. The net contribution of railroads to gross national product (GNP) due to reducing shipping costs of agricultural products, concluded Fogel, amounted to only about 2 percent of GNP. Of course, Fogel recognized that his methods did not take account of the reduced cost of shipping nonagricultural goods by railroad. Fogel, along with his University of Rochester colleague Stanley Engerman, generated much controversy in the early 1970s with their work on the economics of slavery. Fogel and Engerman claimed, in their fact-filled book, Time on the Cross, that slavery was economically viable before the Civil War and that economic factors would not have brought it down; an ethical commitment to ending slavery was required for that to happen. Fogel and Engerman also claimed that slavery was efficient, although other economic historians (including Gavin Wright, Peter Temin, Paul David, Richard Sutch, Roger Ransom, and, most recently, Jeffrey Rogers Hummel) have contested this claim. From 1960 to 1964, Fogel was on the faculty of the University of Rochester. He left in 1964 for the University of Chicago, where he was on the faculty until 1975, spending fall semesters at the University of Rochester from 1968 to 1975. In 1975, he left for Harvard University and in 1981 returned to the University of Chicago.  In the early 1980s, he began to study a burning question in economic demography: What accounts for the dramatic increase in life expectancy over the last two centuries? Between 1850 and 1950, for example, U.S. life expectancy at birth increased from about forty to sixty-eight years. Fogel found that less than half of the decrease in mortality could be explained by better standards of nourishment. Selected Works   1964. Railroads and American Economic Growth: Essays in Econometric History. Baltimore: Johns Hopkins University Press. 1965. “The Reunification of Economic History with Economic Theory.” American Economic Review 55, nos. 1/2: 92–98. 1974 (with Stanley L. Engerman). Time on the Cross: The Economics of American Negro Slavery. Boston: Little, Brown. 1981 (with James G. March). Aging: Stability and Change in the Family. New York: Academic Press. 1989. Without Consent or Contract: The Rise and Fall of American Slavery. New York: Norton. 2000. The Fourth Great Awakening and the Future of Egalitarianism. Chicago: University of Chicago Press. 2004. “Changes in the Disparities in Chronic Disease During the Course of the Twentieth Century.” NBER Working Paper no. 10311. National Bureau of Economic Research, Cambridge, Mass. 2004. The Escape from Hunger and Premature Death, 1700–2100: Europe, America, and the Third World. New York: Cambridge University Press. 2004. “High Performing Asian Economies.” NBER Working Paper no. 10752. National Bureau of Economic Research, Cambridge, Mass. 2005. “Reconsidering Expectations of Economic Growth After World War II from the Perspective of 2004.” NBER Working Paper no. 11125. National Bureau of Economic Research, Cambridge, Mass.   (0 COMMENTS)

  From the 1950s through the 1970s, John Kenneth Galbraith was one of the most widely read economists in the United States. One reason is that he wrote so well, with the ability to turn a clever phrase that made those he argued against look foolish. Galbraith’s first major book, published in 1952, is American Capitalism: The Concept of Countervailing Power. In it he argued that giant firms had replaced small ones to the point where the perfectly competitive model no longer applied to much of the American economy. But not to worry, he added. The power of large firms was offset by the countervailing power of large unions, so that consumers were protected by competing centers of power. Galbraith made his biggest splash with his 1958 book, The Affluent Society, in which he contrasted the affluence of the private sector with the squalor of the public sector. Many people liked that book because of their view that Galbraith, like Thorstein Veblen before him, attacked production that was geared to “conspicuous consumption.” But that is not what Galbraith did. In fact, Galbraith argued that “an admirable case can still be made” for satisfying even consumer wants that “have bizarre, frivolous, or even immoral origins.” His argument against satisfying all consumer demands is more subtle. “If the individual’s wants are to be urgent,” he wrote, “they must be original with himself. They cannot be urgent if they must be contrived for him. And above all, they must not be contrived by the process of production by which they are satisfied. … One cannot defend production as satisfying wants if that production creates the wants” (p. 124). Friedrich Hayek made the most fundamental criticism of Galbraith’s argument. Hayek conceded that most wants do not originate with the individual. Our innate wants, he wrote, “are probably confined to food, shelter, and sex.” All other wants we learn from what we see around us. Probably all our aesthetic feelings—our enjoyment of music and literature, for example—are learned. So, wrote Hayek, “to say that a desire is not important because it is not innate is to say that the whole cultural achievement of man is not important.”1     Galbraith’s magnum opus is his 1967 book, The New Industrial State, in which he argued that the American economy was dominated by large firms. “The mature corporation,” wrote Galbraith, has “readily at hand the means for controlling the prices at which it sells as well as those at which it buys…. Since General Motors produces some half of all the automobiles, its designs do not reflect the current mode, but are the current mode. The proper shape of an automobile, for most people, will be what the automobile makers decree the current shape to be” (p. 30). The evidence has not been kind to Galbraith’s thesis. Even our largest firms lose money if they fail to produce a product that consumers want. The U.S. market share of GM, for example, one of Galbraith’s favorite examples of a firm invulnerable to market forces, had fallen from about 50 percent when Galbraith wrote the book to less than half that by 2005. Galbraith was born in Canada and moved to the United States in the 1930s. He earned his Ph.D. in agricultural economics at the University of California at Berkeley. He was one of the chief price controllers during World War II as head of the Price Section of the U.S. government’s Office of Price Administration. Unlike almost all other economists, Galbraith had defended permanent price controls. In 1943 Galbraith left the government to be on the editorial board of Fortune. After the war he directed the U.S. Strategic Bombing Survey, whose main finding was that saturation bombing of Germany had not been very effective at slowing down German war production. In 1949 he became an economics professor at Harvard, where he had been briefly before the war. Galbraith was also politically active. He was an adviser to President John F. Kennedy, Kennedy’s ambassador to India, and president of Americans for Democratic Action. He was president of the American Economic Association in 1972. Selected Works   1952. American Capitalism. Boston: Houghton Mifflin. 1952. A Theory of Price Control. Cambridge: Harvard University Press. 1958. The Affluent Society. Boston: Houghton Mifflin. 1967. How to Get out of Viet Nam. New York: New American Library. 1967. The New Industrial State. Boston: Houghton Mifflin. 1981. Life in Our Times. Boston: Houghton Mifflin   Footnotes 1. Friedrich Hayek, “The Non Sequitur of the ‘Dependence Effect,’” Southern Economic Journal 27, no. 4 (1961): 346.   (0 COMMENTS)

  In 1969 Norwegian Ragnar Frisch, along with Dutch economist Jan Tinbergen, received the first Nobel Prize for economics “for having developed and applied dynamic models for the analysis of economic processes.” Frisch received his prize for his pioneering work in econometric modeling and measurement; indeed, Frisch invented the word “econometrics” to refer to the use of mathematical and statistical techniques to test economic hypotheses. Frisch founded the Econometric Society in 1930. Frisch believed that econometrics would help establish economics as a science, but toward the end of his life he had doubts about how econometrics was being used. “I have insisted that econometrics must have relevance to concrete realities,” he wrote, “otherwise it degenerates into something which is not worthy of the name econometrics, but ought rather to be called playometrics.” In a paper on business cycles, Frisch was the first to use the words “microeconomics” to refer to the study of single firms and industries, and “macroeconomics” to refer to the study of the aggregate economy. Frisch spent most of his professional life at the University of Oslo in Norway. Selected Works   1933. “Propagation Problems and Impulse Problems in Dynamic Economics.” In Economic Essays in Honor of Gustav Cassel. Reprinted in R. A. Gordon and L. R. Klein, eds., Readings in Business Cycles. London: Allen and Unwin, 1966. 1934. Statistical Confluence Analysis by Means of Complete Regression Systems. Oslo: University Institute of Economics. 1936. “Annual Survey of General Economic Theory: The Problem of Index Numbers.” Econometrica 4, no. 1: 1–38. 1970. “Econometrics in the World of Today.” In W. A. Eltis, M. F. Scott, and J. N. Wolfe, eds., Induction, Growth and Trade: Essays in Honour of Sir Roy Harrod. London: Clarendon Press.   (0 COMMENTS)

In 1972 American economist Kenneth Arrow, jointly with Sir John Hicks, was awarded the Nobel Prize in economics for “pioneering contributions to general equilibrium theory and welfare theory.” Arrow is probably best known for his Ph.D. dissertation (on which his book Social Choice and Individual Values is based), in which he proved his famous “impossibility theorem.” He showed that under certain assumptions about people’s preferences between options, it is always impossible to find a voting rule under which one option emerges as the most preferred. The simplest example is Condorcet’s paradox, named after an eighteenth-century French mathematician. Condorcet’s paradox is as follows: There are three candidates for office; let us call them Bush (B), Clinton (C), and Perot (P). One-third of the voters rank them B, C, P. One-third rank them C, P, B. The final third rank them P, B, C. Then a majority will prefer Bush to Clinton, and a majority will prefer Clinton to Perot. It would seem, therefore, that a majority would prefer Bush to Perot. But in fact a majority prefers Perot to Bush. Arrow’s more complicated proof is more general. Arrow went on to show, in a 1951 article, that a competitive economy in equilibrium is efficient and that any efficient allocation can be reached by having the government use lump-sum taxes to redistribute and then letting the market work. One clear-cut implication of this finding is that the government should not control prices to redistribute income, but instead, if it redistributes at all, should do so directly. Arrow’s insight is part of the reason economists are almost unanimously against price controls. Arrow also showed, with coauthor Gerard Debreu, that under certain conditions an economy reaches a general equilibrium—that is, an equilibrium in which all markets are in equilibrium. Using new mathematical techniques, Arrow and Debreu showed that one of the conditions for general equilibrium is that there must be futures markets for all goods. Of course, we know that this condition does not hold—one cannot buy a contract for future delivery of many labor services, for example. Arrow was also one of the first economists to note the existence of a learning curve. His basic idea was that as producers increase output of a product, they gain experience and become more efficient. “The role of experience in increasing productivity has not gone unobserved,” he wrote, “though the relation has yet to be absorbed into the main corpus of economic theory.” More than forty years after Arrow’s article, the learning curve insight has still not been fully integrated into mainstream economic analysis. Arrow has also done excellent work on the economics of uncertainty. His work in that area is still a standard source for economists. Arrow has spent most of his professional life on the economics faculties of Stanford University (1949–1968 and 1980–present) and Harvard University (1968–1979). He earned his B.A. in social science at the City College of New York and his M.A. and Ph.D. in economics from Columbia University. Selected Works   1951. Social Choice and Individual Values. New York: Wiley. 1954 (with Gerard Debreu). “Existence of a Competitive Equilibrium for a Competitive Economy.” Econometrica 22, no. 3: 265–290. 1962. “The Economic Implications of Learning by Doing.” Review of Economic Studies 29 (June): 155–173. 1971. Essays in the Theory of Risk-Bearing. Amsterdam: North-Holland. 1971 (with Frank Hahn). General Competitive Analysis. San Francisco: Holden-Day.   (0 COMMENTS)

Armen Alchian, an American economist born in Fresno, California, is in many ways like ronald coase. Like Coase, Alchian has published only a few articles, but very few are unimportant. And like Coase’s, many of Alchian’s articles are widely cited. Many students and others who read economics are disturbed by economists’ assumptions that companies maximize profits. One of their objections is that managers of companies do not know enough to be able to maximize profits. In 1950 Alchian presented a thoughtful response to this objection in his first major article, “Uncertainty, Evolution and Economic Theory.” Alchian argued that even though all companies may not maximize profits, those that survive will be ones whose managers, by luck or by design, came close to maximizing profits. Therefore, those that we observe will have maximized profits. So for the long term at least, argued Alchian, for economists to derive the standard conclusions from the profit-maximization assumption, they do not need to show that all companies try to maximize profits. While in the U.S. Army Air Forces during World War II, Alchian did some of the early work on the learning curve—the curve that relates unit costs to cumulative output. His article on the learning curve in aircraft production was based on statistical work he did during the war, but it could not be published until 1963 because it was based on classified information. Alchian is also known for University Economics (now called Exchange and Production), coauthored with William R. Allen, a textbook that is unique in economics. It is much more literary and humorous than any other modern economics textbook that deals with complex issues for an undergraduate audience. Example: “Since the fiasco in the Garden of Eden, most of what we get is by sweat, strain, and anxiety.” It also welcomes controversy rather than shying away from it, in the process daring the reader to disagree. Take, for example, the book’s discussion of violence: Before condemning violence (physical force) as a means of social control, note that its threatened or actual use is widely practiced and respected—at least when applied successfully on a national scale. Julius Caesar conquered Gaul and was honored by the Romans; had he simply roughed up the local residents, he would have been damned as a gangster. Alexander the Great, who conquered the Near East, was not regarded by the Greeks as a ruffian, nor was Charlemagne after he conquered Europe. Europeans acquired and divided—and redivided—America by force. Lenin is not regarded in Russia as a subversive. Nor is Spain’s Franco, Cuba’s Castro, Nigeria’s Gowon, Uganda’s Amin, China’s Mao, our George Washington. Because of its literary quality and complexity, the textbook generally did not work with undergraduate or even M.B.A. classes. But its impact was out of all proportion to its sales. Many graduate students, particularly at the University of California at Los Angeles, where Alchian began teaching in 1946, and at the University of Washington (where Alchian student Steven Cheung taught), learned their basic economics from this book. Some of the University of Washington students went on to write best-selling textbooks that made many of Alchian and Allen’s insights more understandable to an undergraduate audience. Alchian and Allen’s textbook was truly a public good—a good that created large benefits for which its creators could not charge. And while Alchian played the role of selfish cynic in his class, some who studied under him had the feeling that he put so much care and work into his low-selling text—and into his students—because of his concern for humanity. Other than through his text, Alchian’s largest impact has been in the economics of property rights (he wrote the article on property rights in this encyclopedia). Most of his work in property rights can be summed up in one sentence: You tell me the rules and I’ll tell you what outcomes to expect. In their textbook, for example, Alchian and Allen ask why the organizers of the Rose Bowl refuse to sell tickets to the highest bidders and instead give up wealth by underpricing the tickets. Their answer is that the people who make the decision on ticket prices do not have property rights in the tickets, so the wealth that is given up by underpricing would not have accrued to them anyway. But the decision makers can give underpriced tickets to their friends and associates. Thomas Hazlett, former chief economist at the Federal Communications Commission, used this same line of reasoning to explain why Rep. John Dingell blocked the Federal Communication Commission’s early attempts to auction off the electromagnetic spectrum and instead favored giving it away. Alchian also used the analysis of property rights to explain the incidence of discrimination. In a paper coauthored with Reuben Kessel, Alchian, who was himself subject to discrimination as an Armenian, and Kessel pointed out that discrimination was more pervasive in private firms whose profits were regulated by the government, and then explained that this is what the analysis of property rights would predict. Discrimination is costly—not just to those discriminated against, but also to those who discriminate. The discriminators give up the chance to deal with someone with whom they could engage in mutually beneficial exchange. Therefore, argued Alchian and Kessel, discrimination would be more prevalent in situations where those who discriminate do not bear much of the cost from doing so. A for-profit company whose profits are not regulated would see the cost of discrimination in its bottom line in the form of lower profits. A company whose profits are limited and that is already at the limit would face no cost from discriminating. Alchian and Kessel used this analysis to explain why regulated utilities discriminated against Jews and why labor unions discriminated against blacks. This analysis explains why Alchian has never trusted government—but has trusted free markets—to reduce discrimination. Before teaching at UCLA, Alchian was an economist with the RAND Corporation. Selected Works   1950. “Uncertainty, Evolution and Economic Theory.” Journal of Political Economy 58 (June): 211–221. 1965. “Some Economics of Property Rights.” II Politico 30: 816–829. 1972 (with W. R. Allen). University Economics. Belmont, Calif.: Wadsworth. 1977. Economic Forces at Work. Indianapolis: Liberty Press.   (0 COMMENTS)

  In 1988 Maurice Allais became the first French citizen to receive the Nobel Prize in economics. He won it for his contribution to the understanding of market behavior and the efficient use of resources. Allais also showed that his insights could be applied to help set efficient prices for state-owned monopolies, of which France had many. Allais’s work paralleled, and sometimes preceded, similar work done by English-speaking economists Sir John Hicks and Paul Samuelson. He also proved a result in growth theory in 1947 that had been credited to Edmund Phelps (in 1961). Allais did not get credit as early as his English counterparts because his work was in French. “Had Allais’ earliest writings been in English,” commented Samuelson, “a generation of economic theory would have taken a different course.” Allais also helped revive the quantity theory of money (monetarism). In utility theory, Allais discovered and resolved a paradox about how people behave when choosing between various risks that is now called the Allais paradox. From 1937 to 1944, Allais worked in the French stateowned mine administration. In 1944 he became a professor at the Ecole National Supérieure des Mines de Paris and spent his career there. He is also the research director at the National French Research Council. He was named an officer of the Legion of Honor in 1977. Selected Works   1965. “The Role of Capital in Economic Development.” In The Econometric Approach to Development Planning. Amsterdam: North-Holland. 1966. “A Restatement of the Quantity Theory of Money.” American Economic Review 56 (December): 1123–1157. 1969. “Growth and Inflation.” Journal of Money, Credit and Banking 1, no. 3: 355–426.   (0 COMMENTS)

  George Akerlof, along with Michael Spence and Joseph Stiglitz, received the 2001 Nobel Prize “for their analyses of markets with asymmetric information.” Although much of economics is built on the assumption of perfect information, various economists in the past had considered the effects of imperfect information. Two giants in this area were ludwig von mises and friedrich hayek, who predicted that socialism would fail because central planners could not possibly have the information they needed to plan an economy. One of the next steps in relaxing the perfect-information assumption was to assume, realistically, that one side of a market has better information than the other. That is what all three of the 2001 Nobel Prize winners did. In his classic 1970 article, “The Market for Lemons” Akerlof gave a new explanation for a well-known phenomenon: the fact that cars barely a few months old sell for well below their new-car price. Akerlof’s model was simple but powerful. Assume that some cars are “lemons” and some are high quality. If buyers could tell which cars are lemons and which are not, there would be two separate markets: a market for lemons and a market for high-quality cars. But there is often asymmetric information: buyers cannot tell which cars are lemons, but, of course, sellers know. Therefore, a buyer knows that there is some probability that the car he buys will be a lemon and is willing to pay less than he would pay if he were certain that he was buying a high-quality car. This lower price for all used cars discourages sellers of high-quality cars. Although some would be willing to sell their own cars at the price that buyers of high-quality used cars would be willing to pay, they are not willing to sell at the lower price that reflects the risk that the buyer may end up with a lemon. Thus, exchanges that could benefit both buyer and seller fail to take place and efficiency is lost. Akerlof did not conclude that the lemon problem necessarily implies a role for government. Instead, he pointed out that many free-market institutions can be seen as ways of solving or reducing “lemon problems.” One solution Akerlof noted is warranties, because these give the buyer assurance that the car is not a lemon, and the buyer is therefore willing to pay more for the car with a warranty. Also, the sellers who are willing to offer the warranty are those who are confident that they are not selling a lemon. Another market solution that has come along since Akerlof’s article is Carfax, a very low-cost way of finding out a car’s history of repairs. Akerlof also went beyond cars and showed that the same kind of issues arise in credit markets and health insurance markets, to name two. Akerlof, along with coauthor Janet Yellen, also did some of the pioneering work in new keynesian economics. They considered the case of firms with market power that follow a rule of thumb on pricing. The rule of thumb they considered was that firms do not increase price when demand increases and do not reduce price when demand falls. They showed that such a rule of thumb is “near rational”; that is, firms do not lose much profit from following this strategy relative to a strategy of immediately adjusting prices. They also showed, however, that if many firms followed this strategy, the effect on the overall economy was substantial. This lack of adjustment of prices, they noted, would mean that increases in money-supply growth (see Money Supply) would increase the growth of real output, and short-run drops in money-supply growth would reduce the growth of real output. More recently, Akerlof has tried to explain the persistence of high poverty rates and high crime rates among black Americans. He and coauthor Rachel Kranton argue that many black people face a choice between going along with the mainstream culture and succeeding economically or acting in opposition to that culture and sabotaging themselves. The incentives are high, they argue, for doing the latter. Akerlof earned his B.A. in economics at Yale in 1962 and his Ph.D. in economics at MIT in 1966. For most of his professional life, he has been an economics professor at the University of California at Berkeley. In 1973–1974, he was a senior economist with President Richard M. Nixon’s Council of Economic Advisers; from 1978 to 1980, he was an economics professor at the London School of Economics. Selected Works   1970. “The Market for ‘Lemons’”: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics 84: 353–374. 1976. “The Economics of Caste and of the Rat Race and Other Woeful Tales.” Quarterly Journal of Economics 90: 599–617. 1985 (with Janet Yellen). “Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?” American Economic Review 75: 708–720. 1985 (with Janet Yellen). “A Near Rational Model of the Business Cycle with Wage and Price Inertia.” Quarterly Journal of Economics 100 (suppl.): 823–838. 1990. “The Fair Wage Hypothesis and Unemployment.” Quarterly Journal of Economics 97: 543–569. 1996 (with Janet Yellen and Michael Katz). “An Analysis of Out-of-Wedlock Childbearing in the United States.” Quarterly Journal of Economics 111: 277–317. 2000 (with Rachel Kranton). “Economics and Identity.” Quarterly Journal of Economics 115: 715–753.   (0 COMMENTS)