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Manne and Alchian

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Henry Manne’s death prompts me to ponder just why I admire him and his work so deeply.  The reason has much to do with Henry’s close association with the late Armen Alchian [2].

As anyone who has spent even a modest amount of time with Henry knows, Alchian was Henry’s great hero – and Henry was decidedly not a man prone to having heroes.  Yet Henry’s regard for Alchian, the man and his work, was vast and unreserved.  I think what Henry saw in Alchian – and what Henry’s own admirers saw in Henry – was the reality that each unfailingly understood that competition in human affairs is an intrepid force and, hence, realized that the ways that competition plays out in reality are far greater than are the ways that are identified in even the best economic textbooks.

Alchian and Henry had a too-rare knack for using formal economic theory properly.  Never did they mistake the categories (such as “prices,” “quantities,” “marginal-cost schedule”) used in textbooks for being either descriptions of reality or prescriptions for reality.  They understood what such categories – and their verbal, graphical, and mathematical depictions – are: tools of thought and analyses to help our puny minds get a better grip on the enormously complex economic reality.  Alchian and Henry used microeconomic theory with far greater facility than do 99 percent of all other economists because they understood its limitations better than do 99 percent of economists.

Alchian and Henry were both masters at identifying ways that competitive forces, if suppressed at point A in the economy, would intensify at points B and C.  The fact that points B and C are never identified in any formal economic model never kept Alchian and Henry from knowing that B and C exist and are affected when there is change in those parts of the economy that are identified in conventional theory.

Here’s one straightforward example of the insightful mindset that I’m describing: Henry Manne almost single-handedly exposed [3] the fundamental flaw in Adolf Berle’s and Gardiner Means’s argument [4] that, because executives in large modern corporations seldom personally own large ownership shares of the firms that they manage, this ‘separation of ownership from control’ causes modern corporations to be managed poorly.  Henry identified other economic margins in reality on which competition aligns the interests of corporate managers with those of corporate shareholders.  The stock market, and the ability especially of corporate raiders to take advantage of the low share prices of poorly managed firms, protects shareholders from being victimized by lazy, incompetent, or corrupt managers even when these managers own not a single share of stock in the corporations that they manage.  And, so, also of course, Henry understood that government efforts to prevent so-called ‘corporate raiding’ would not merely prevent corporate raiding: it would, in fact, protect incumbent managers from the bracing and healthy forces of competition – a protection that would indeed divorce the interests of incumbent managers from the interests of corporate shareholders.

Henry and Alchian, in short, naturally saw – naturally knew to look for – that which even most other economists are blind to.  Henry and Alchian instinctively refused to accept claims that competition suppressed here, or artificially stimulated there, means that competition in toto is dimmed or intensified.  Reactions are inevitable, and they were both intrepid in searching for, and finding, just where and how such reactions played out.

….

It is perhaps difficult for non-economists to appreciate the importance of these traits in Alchian and Henry.  But for economists – or, at least, for this economist – the brilliance and example of their scholarship looms large.  I too often encounter economists, frequently highly credentialed and respected ones, who take their models too literally.  If they don’t see it in their models, it doesn’t exist.  These economists, perhaps blinded by their mastery of formal theory, slip unawares into supposing that the formal theory that they know (or in ways that they can tweak) is a close-enough description of reality to make that theory an appropriate basis for prescribing government fixes and adjustments to reality.  But reality is indescribably larger and more complex than even the best models and theory.  Alchian and Henry – with wisdom – always saw this fact and pursued its implications with a brilliance and creativity seldom matched and never yet surpassed.

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