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Armen Alchian and Alfred Marshall


This post has no connection to free banking, but it is a footnote to the history of economic thought that would otherwise find no outlet.

Armen Alchian recently died at the ripe age of 98. His work showed how much could be accomplished by thinking deeply using basic economic ideas that are taught to college freshman but that even few experienced economists have thoroughly in their bones. Years ago I read Alchian's influential textbook with William Allen, University Economics, and a volume of his collected writings, Economic Forces at Work; the latter has been superseded by a two-volume collected works, which I have not read.

Alchian is known, among other things, for the so-called Alchian-Allen theorem, which first appeared in his textbook. Here it is as Alchian and Allen stated it (1964 edition, page 75):

"Suppose that grapes are grown in California and that it costs 5 cents a pound to ship grapes to New York whether the grapes are "choice" or "standard" … suppose further that in California the "choice" grapes sell for 10 cents a pound and the standard for 5 cents a pound… If grapes are shipped to New York, the shipping costs will raise the costs of "choice" grapes to 15 cents and of "standard" grapes to 10 cents. In New York the costs of "choice" grapes are lower relative to "standard" grapes (1.5 to 1) than in California (2 to 1)… New Yorkers faced with a lower price of "choice" grapes relative to "standard" will consume relatively more "choice" grapes than Californians will."

What I have never seen mentioned in any of the recent or older papers on the theorem is that there is an anticipation of it in Alfred Marshall's Money, Credit and Commerce, published about 40 years earlier (Book III, chapter 1, section 3):

"Again, if two sorts of the same commodity are of unequal usefulness, but cost the same for carriage, the better sort is likely to be chosen for long-distance transport. Where wood is plentiful, thick beams of quick-growing inferior wood may be preferred to thin beams of better wood, which perhaps cost twice as much: but if both have been imported from afar, the cost of carrying the thick beams may cause preference to be given to thin beams of superior wood….

"Again, the commoner sorts of wine are generally consumed near  home, while the better travel far:…."

P.S. Brief Internet research for this post led me to the useful Deardorffs' Glossary of International Economics, which I had not previously seen.