Armen Alchian and Junior Faculty
Cotton Lindsay
J Wilson Newman Professor Emeritus
Clemson University
I am delighted that Harold invited me to prepare a paper the Journal of Corporate Finance. I
have never been involved in financial or securities research, so this is an opportunity now to
modify my listing on Linked In to include this field among my areas of expertise. However, one
of my early published works was entitled “Measuring Human Capital Returns”1 which has a finance ring to it, and that paper had some important Alchian involvement, as well. More on this
below.
Other contributors to this issue are Armen’s students and are reporting on his qualities as a
teacher. I was not his student but can assure you that his students were not the only beneficiaries of his generous guidance and advice. Indeed, every young faculty member who arrived at
UCLA was visited soon and often by Armen with his invariable opening inquiry of, “What are
you working on…?” This greeting was always delivered with a collegial smile and encouraging
demeanor. Though always friendly, these encounters sometimes brought grief and for me were
always anticipated with anxiety.
I actually had an introduction to Armen as a graduate student at Virginia before I came to UCLA.
He gave a presentation to the faculty and graduate students during my final year as a part of
our regular seminar series each Friday. The topic of his lecture was cost and output and reflected many of his insights published in his now famous but widely ignored (in pedagogy and parlance) paper on that topic2. Needless to say, that meeting had a lasting impact on me and was
the chief reason for my accepting a position at UCLA as my entry point into academic economics, never even having been to California.3
On my arrival in Westwood, I was assigned the office immediately adjacent to Armen’s on the
eighth floor of Bunche Hall where I got to know him very soon. As I was unpacking on my first
day, Armen walked in (office doors were never closed there), gave me a welcome greeting, and
then asked that soon-to-be-familiar question. I was at the time just returned to the States from
a post-doc at the LSE, and therefore on this occasion had a portfolio of half-completed work
that I could draw on. I trotted out a few of these in this initial conversation. He nodded his head
appreciatively as I described the insights that I believed I was bringing to these topics. He then
1
“Measuring Human Capital Returns,” Journal of Political Economy, vol 79, No 6, Nov-Dec, 1195-1215.
Armen A. Alchian, “Costs and Outputs,” in M. Abramovitz et al. The Allocation of Resources: Essays in Honor of
Bernard Francis Haley (Stanford: Stanford University Press, 1959) , 23-40.
3
I was marketing myself from London when the offer was tendered.
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began a series of questions, which was his usual practice for these interviews and which came
to be known among the junior faculty as “oral exams.”
These oral exams immediately homed in on the key issues on which one’s whole approach was
constructed. They tested, often with unhappy findings, whether one’s results were sensitive to
slight variations in the assumed grounding of the theory. Often, however, Armen’s spontaneous
response frequently raced past one’s own carefully developed insights into regions you had
never reached, suggesting wide ranges of applications for the idea. Sadly, most of these were
delivered so rapidly and unconnected to each other, that I, at least, could remember only the
traces of these ideas once he had moved on.
These “oral exams” continued almost daily, and in the process I began to anticipate his responses and queries and build them into my own thought process. In that way, my skill and imagination as an economic thinker were somewhat improved. Eventually, some of these ideas
were recorded in working papers which I dutifully passed along to Armen including two particular papers in which I took some pride.
One of these papers involved an extension of a notion I had published in Economica4 while in
London, namely the analysis of the practice of “sharing.” This new effort was being jointly developed by one of my Virginia fellow students, and it sought to examine the implications for
consumer behavior of putting prices directly into a utility function. We took some pride in our
ability to derive first and second order conditions for optimization of such choice.
The second paper was an attempt to refine measurement of the economic attractiveness of investment in human capital. Most economists who dealt with this issue were happy to treat the
return as the simple difference in earnings with and without the capital. My own idea was that
the return was related to the wage difference, but that an explicit measurement needed some
modification to eliminate a bias in this gauge. The heightened productivity occasioned by the
training allowed the trainee to sell his labor at a higher wage. However, the difference in earnings was the result of changes in both the wage rate and the quantity of labor supplied. A correct measure of the return was therefore an index number issue, and the earnings difference
contained an upward bias of the correctly indexed amount.
Armen’s reactions to these two papers were memorable, and I can recall the conversation that
delivered them like it was yesterday. He made short shrift of the first paper. That paper was “a
bad idea.” I will not belabor readers with the details of Armen’s comments on that effort. The
essence of those remarks is well known to all who share Armen’s methodology and are familiar
with his “Cost and Choice” arguments. His recommendation was to abandon work on that idea,
and his advice was taken. That paper went into the round file, and I never gave it a second
thought.
4
“Medical Care and the Economics of Sharing,” Economica, NS vol 36, No 144, Nov 1969, 351-362.
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Armen was enthusiastic about the second paper, however and made some key suggestions. He
guided me to the index number literature, emphasizing that it was the price change that was
the real return to the investment. Price changes affect both P and q and only q is under the control of the chooser. Armen brought in Jack Hirshleifer who also made important suggestions in
the graphical depiction of the investment choice. The byproduct of that joint effort made it into
the JPE, and many regard it as the highlight of my professional career. It clearly would never
have become the product we see without Armen’s (and Jack’s) help.
I will close this extended anecdote with another involving a colleague of mine who joined the
UCLA faculty at the same time I did. Ben Klein’s office was just down the hall from Armen and
me so that any visit by Ben to Armen involved passing my office occasioning a stop to spend
some moments chatting with me. Ben had very unusual hours. His classes were always scheduled in the afternoon, and he would appear and meet his classes, then come to his office at
about the time many of us were wrapping things up for the day. Ben always began his time in
Bunche Hall with a visit to Armen, and those meetings were not simple courtesies. They would
go on for hours; I know this because I could hear them arguing vigorously and laughing through
the wall. How long it went on, I can only conjecture. It certainly could extend long into the
evening, as I was able to see on occasions when I had to stay late.
Ben’s work schedule I was pretty familiar with. He worked through the night and admitted it.
We had a running joke about our disjoint hours. Occasionally I would pass Ben on his way out of
the parking structure on his way home as I was arriving in the morning. But Armen has a different schedule. Armen was an ardent golfer and played the Rancho Park golf course which was
just half a block from my home on Ayres Avenue. Ben was not a golfer, but another young colleague Doug Shetler was Armen’s constant partner at Rancho Park and explained to me their
usual itinerary. Because Rancho Park was a public course and underpriced, getting a tee time
during daylight hours was very costly. Golfer access was rationed by personally placing a ball in
the hopper then waiting until your ball came to the top at which time you were next to tee off.
Armen and Doug would meet at the first tee at four AM, well before sunrise, to drop their balls
in the hopper early enough to get on the course at daybreak. After their round of golf, they
would change and come to the office.
The observation of this schedule led me to the following puzzle which I never satisfactorily resolved. If Armen spent much of the day in the office, much of the evening chatting with Ben,
and much of the night with Doug at Rancho Park, when did he sleep?
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