**📅 Date:** [[2025-01-12-Sun 〚 Uncertainty, Evolution and Economic Theory ▪ Organisation〛]] **🗺️ Site**： #🌏/🇨🇳 **🕴 Who**： ➤ Richard Lester ➤ Fritz Machlup ➤ Milton Friedman **📌 Time**: Published in: Journal of Political Economy, 1950 **💭 Note:** ➤ This paper provides a solid foundation for the entire edifice of economics. ➤ Author: Armen Alchian (April 12, 1914 - February 19, 2013) ⇩ 🅻🅸🅽🅺🆂 ⇩ **🏷️ Tags**: #💰/Paper **🗂 Menu:** ⌈[[✢ M O C ➣ 01 ⌈J A N - 2 0 2 5⌉ ✢|2025-J A N-MOC]]⌋ ➤ ⌈[[Cost]]⌋ **📑 PDF**： [[AlchianJPE- Uncertainty, Evolution and Economic Theory - 1950.pdf]]   ---- ##### **Why** is this paper important? ## 1. The Rationality Debate between Two Economists --------- You may have heard: >[!opinions] >Economics is based on the assumption that humans are rational. It presupposes rationality. >- But in reality, humans are often irrational, so economic theories can sometimes be right and sometimes wrong. >- When humans are rational, it's right. When humans are irrational, it's wrong. This debate has been around for a while. Once, two great economists had this debate and they took it to the pages of economic journals. ### Richard Lester After his research, he found that the way entrepreneurs do things is different from what is described in economics. Examples: - When the wage rate of employees rises, the price of their products doesn't change much. Rather, changes in supply and demand lead to significant changes in product prices. - Sometimes when wage rates rise, entrepreneurs don't hire fewer people, so they're not very sensitive to cost changes. In fact, ==entrepreneurs do not make decisions entirely based on the optimization principle stated by economists. So in economic theory, the so-called marginal analysis is not consistent with reality and is not reliable, this is the economist's view ==. ### Fritz Machlup >[!info] >He defended "marginal analysis" >He said, of course, people don't understand economics when they make decisions, and they don't have a computer to do calculations, but unknowingly, they've conformed to the assumptions of economics, they've conformed to the principle of maximization. Example: A person driving on the road sometimes accelerates, sometimes decelerates, sometimes changes lanes, sometimes overtakes. Of course, he doesn't have a computer to calculate, but in fact, he's already following the principle of optimization. ==The question they were arguing about was whether entrepreneurs have a "supply and demand chart" on hand when making decisions, and whether everyone is making decisions in accordance with the principle of optimisation==. ## 2. The Young Alchian --------- The young Alchian, then a junior professor at UCLA, shared his views with his students (and thought this debate was not a complicated issue). After hearing his views, these students spread them around and told other professors. Among them was a professor named ==Stephen Enke== - After hearing Alchian's view, he thought it was important and urged Alchian to write it down. - Alchian said it wasn't worth writing, wasn't it a common idea, everyone knows it. Professor Enke said no, you have to write it down, at least for the sake of the students, you have to write it down. So Alchian wrote down his ideas. After reading it, Professor Enke asked him to submit it for publication. Alchian submitted it to the Journal of Political Economy. - Not long after, the editor-in-chief of the Journal of Political Economy replied, saying that they would publish his article with minor modifications. This editor-in-chief was a very important person, his name was ==Milton Friedman == —— a famous economist, == the standard-bearer of free economics ==, >[!info] This is how Friedman and Alchian met. >[!abstract] >The lecture note prepared by Alchian for students was published in 1950. Since then, this article has become one of the most cited in economics —— "Uncertainty, Evolution and Economic Theory". ## 3. Survival of all things depends on conditions, not on whether they are rational or not. The preceding two economists, arguing whether people are rational, and whether they can calculate accurately: - **Richard Lester** said that he had not seen them calculating; they never had the kind of supply and demand table that economists have when they make decisions. - **Fritz Machlup** said they were actually calculating, secretly calculating. They are arguing about this matter. **Alchian** then said: >[!info] Firstly, the world is full of uncertainties. From the perspective of statistics, as long as there is uncertainty, we cannot calculate the so-called optimal solution, at most there is an optimal probability range. ### 🌰 ex There are two investment schemes: 1. One is high risk and high return. 2. The other is low risk and low return. - Which one is better? >[!info] Logically, they can be equivalent, and you cannot tell who is the best. So there is no such thing as the best in real life. ==What everyone is seeking in the world is not the best, but survival==. >[!key] >Alchian says, what economics cares about is the conditions of survival. How can a person, an organization, or even a system survive? What conditions must it have to survive? This has nothing to do with whether people are rational. ### 🌰ex: Opening a gas station Several people want to open gas stations. Where to open them? One person opened a gas station in his backyard, another person opened a gas station on the top of the mountain, and another fool, he accidentally opened a gas station on the roadside. In the end, who can survive, who has business? It's the accidental person, it's the fool, he opened the gas station on the roadside, he succeeded. Is he smart? ==Does he have a plan? What was he thinking? These don't matter, as long as he happens to open a gas station in the right place, he can survive==. ### 🌰ex: A group of people want to escape from Chicago, each choosing their own route. As outsiders, we look from afar, there is only one route, only the one who happens to choose the route with gas stations along the way can successfully escape from Chicago. Other people, no matter what they think, how they make decisions, no matter what their intentions are, they can't leave Chicago in the end. >[!info] Therefore, what economics cares about is the conditions for survival. >- Under what circumstances can people survive, if the conditions change, how will people's survival situation change? Economics is concerned about this, and it has nothing to do with whether the person involved is rational. Alchian continued to illustrate, for a tree, on the side facing the sunlight, the leaves are denser; on the side that backs the sunlight, the leaves are sparser. Are these leaves rational? Did they think of this, understood this optimization principle, and therefore compete to grow on the side facing the sun? We don't know. The leaves may not be rational, but whether the leaves are rational or not, we only care about a rule, that is, the leaves on the sun-facing side are dense, and the leaves on the side that backs the sun are sparse. ==This is the issue that we economics are concerned about, and it has nothing to do with whether the leaves themselves are rational==. >[!info] >In this way, Alchian found a solid foundation for economics. What it cares about has nothing to do with whether people are rational, what they think, and what their intentions are. ## 4. The rules of the game determine the probability of winning --------- You might say, Alchian's theory is similar to Darwin's survival of the fittest --> he said so himself. >[!info] If we change the rules, we can know the different probabilities of winning and losing. For example, in basketball, if we change the rules of basketball and say that you have to play in high heels. At this time, you can predict that the real basketball star will not be Jordan, but some models. #👾/Comment The relationship between the "victor" in a certain field and the "rules" and "measurement standards ex: - Many schools like to invite successful seniors to come back and share their success experiences with juniors. Actually, I often think, even if their stories are true, the juniors who follow them to do the same may not necessarily succeed, because the situation is different. - On the contrary, if you turn it around, please those who have failed to come back and talk about their failure experience, it may also be enlightening. The only problem is that those failed seniors may not be easy to find, they have already disappeared in the crowd. ## Summary ----- >[!info] >Economics is concerned with the conditions of survival. Whether a person, an organization, or even a system can survive depends on various conditions and changes in the situation, and it has nothing to do with whether people are rational. ------ 1. **Evolutionary Approach**: Alchian uses an evolutionary approach to describe firms' behavior, drawing parallels between success and survival in the market and the mechanism of variation and natural selection in evolutionary biology. 2. **Survival and Profit Maximization**: Alchian suggests that firms do not necessarily need to consciously strive to maximize profits. Instead, market forces such as scarcity and competition ensure the survival of firms that behave as if they are maximizing profits. 3. **Uncertainty and Profit Maximization**: Alchian dismisses profit maximization and utility maximization as meaningful attributes of firms' survival. He argues that uncertainty and probabilistic outcomes make the maximization of any objective function meaningless. 4. **Mimicry and Survival**: Firms that quickly emulate successful firms increase their chances of survival. Over time, this leads to a population of firms that appear to be consciously maximizing profits, even if their strategies were developed without explicit profit-maximization goals. 5. **Influence and Impact**: Alchian's work was heavily influenced by his education and background in statistical analysis. His article is considered a seminal contribution to economic theory and is hailed by most evolutionary economists. 6. **Criticism**: The article has drawn criticism, notably from Sidney G. Winter, who argued that Alchian failed to consider the transmission mechanisms that determine successful behaviors and how they can be maintained and copied over time.