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The Genius of Armen Alchian

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UPDATE below.

Regular readers of Cafe Hayek know of my unalloyed esteem for the economics of Armen Alchian [2] (1914-2013).  No one has ever done price theory better than Alchian – that is, no one has ever excelled Alchian’s ability to explain the reason, role, and nuances of prices, of competition, and of property rights [3].  And only a precious few – I can count them on my fingers – have a claim for being considered to have done price theory as well as he did it.

Here’s a fine example of Alchian’s genius for seeing connections that we mortals would never see without the economic lenses that he crafted.  It’s from page 499 of a March 23, 1978, speech that he gave in College Station, Texas.  The speech is entitled “Abbott and Costello in Washington” (as this speech is reprinted in Volume 1 of The Collected Works of Armen A. Alchian [4] [Daniel K. Benjamin, ed., 2006]); here Alchian is speaking of the then-nationally-mandated maximum speed limit on U.S. roads and highways of 55 mile per hour,* and note that in 1978 the legislated minimum wage in the United States was $2.65 per hour:

Consider, if I drive 55 instead of 65, I save about 4 gallons per hour of driving time, and thereby earn the equivalent of about $2.50 an hour; that means that I am working and earning less than the minimum legal wage.  With a passenger, we’re earning only half the legal rate.  Now what shall I do?  Break the speed limit or the minimum wage law – it’s one or the other.  Since I dislike both laws I wish I could break both – but I can’t; it’s one or the other – and it’s the speed limit that I choose to break because my time is valuable.

In this speech Alchian brilliantly explains why government mandated “energy efficiency” standards inevitably make energy use less efficient than it would be under the market prices that would establish themselves absent government meddling in markets.

UPDATE: Jason Scheppers e-mails to me this note, which seems correct:

I was reading your excellent blog post The Genius of Armen Alchian and would like to point to a correction that may be warranted. I believe that 4 gallons per hour should be 0.4 gallons per hour. The point made remains strong but clarity on the math may add more weight. Below is my calculation:

Take a trip 65 miles long.

It would take 1.18 hours at 55 mph and 1 hour at 65 mph.

Back in 1978 my memory serves me to take an average fuel economy of 15 mpg and I apply that to the 65 mph speed. I project an improved fuel economy of 17 mpg at 55 mph.

Therefore the 65 mile trip would use 4.33 gallons at 65 mph and 3.82 gallons at 55 mph, a difference of 0.51 gallons. Of course my crude estimate should in no way rule out 0.4 gallons, but I feel it does establish the order of magnitude.

Finishing the calculation gas prices in 1978 were between $0.65 and $0.71 and by dividing 0.51 gal by $0.71/gal yields $0.36 as the gas savings at a cost of 0.18 hours yielding a $1.99/hr value of time. Again a price of $0.90 makes Dr. Alchian’s work perfectly and my range of cost for 1978 could be off finding no reason not to support Alchian’s quote.

…..

* The nationwide maximum speed limit of 55MPH was imposed not to enhance highway safety but to save fuel.

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