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Quotation of the Day…

… is from page 645 of the transcript of the great Armen Alchian’s November 1978 speech, to the Southern Economic Association, titled “Private Rights to Property: The Basis of Corporate Governance and Human Rights,” as this speech appears in volume 2 of The Collected Works of Armen A. Alchian (2006) (original emphasis):

Under private property rights of people to goods and resources, the anticipated future effects of one’s current actions are capitalized now in to his current and future exchange opportunities. Precisely for that reason do I like the name “capitalism” to denote a private property regime. It suggests the capitalization into present market-values of foreseeable events of current actions, which induces the private property rights owners to be responsive to the foreseeable distant effects and even the unforeseen effects.

DBx: I don’t share Alchian’s enthusiasm for calling a dynamic, innovative market economy – one in which producers ultimately serve consumers – “capitalism,” although I myself often call it just that. The term, unjustifiably, has been splattered with some taint.

But Alchian here nevertheless puts his finger on a profoundly important consequence of a system of market exchanges of rights to private property: contrary to popular myth, the monetary prices resulting from these exchanges reflect not just today’s circumstances and not just the whims, wishes, and knowledge of those who are the immediate parties to each exchange, but also – indeed, chiefly – the expectations of countless people about the future. Further, with the future reflected in today’s prices, today’s actions taken in response to today’s prices are actions that are taken in consideration of the future,.

And so, for example, the prices of corporate shares incorporate the expectations of all owners and potential owners – of all buyers and sellers, and of all potential buyers and potential sellers – regarding the future performance of corporations.

The claim is not that market participants always have correct expectations. The claim is that (1) the greater the number of people who are allowed to buy and sell corporate shares, the more likely it is that the resulting prices of corporate shares will accurately reflect corporations’ future prospects; and (2) there is no indication of corporations’ future prospects that is the equal of the corporate-share prices that emerge on markets. (It is a common but mistaken move to leap from the reality that markets are less than perfect to the conclusion that markets should therefore be replaced or modified with directives issued by government officials.)


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