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Armen Alchian ªºÁ¿¸q¡G


Chapter 1




    You're taking a course in Economics, and this is the text. Congratulations! Though you probably haven't thought seriously about it, consider for a moment the problems solved by the economic system. You now have this book. Yet, none of the thousands of people, involved in creating this textbook ,whose special skills included making the paper and the ink, authoring, designing, printing, binding, and distributing the book -- knew everything required to make and distribute a book.

    In fact, no one person or agency planned it all with the objective of producing this book for you. Indeed, none of them knew exactly who, if anyone, would be the purchaser. Nevertheless, here it is. Everyday, an incredibly wide range of goods and services are available to you. How are people motivated and coordinated to accomplish that in a decentralized economy in which the specific final products and users aren't known?

    And, why, in that process, do some people earn more than others? How does it happen that no one need understand how and most probably don¡¦t  care -- except for a few like you, which is undoubtedly a reason you're learning Economics.


    Motivating and underlying all behavior is the inevitable presence of SCARCITY.

 ¡§Scarcity¡¨ means your wants and desires exceed what is available. Ever since the fiasco in the Garden of Eden, most of what you enjoy is acquired by your efforts, accompanied by strain, sweat, and anxiety. And, no matter how successful your efforts, you want even more.
    We want more too. Two apparent devils restrict what you can have -- first,  the limited amounts of goods, and second, the rest of us who want them too. You and the remainder    of us want more than there is any prospect of ever achieving. One of the authors wants membership in the Augusta National Golf Club, better golfing talent, a second home at Mauna Kea, more scientific knowledge and expertise in mathematics, more research for curing heart disease and cancer, finer art objects, and a private plane. The other wants a third car, better friends, a 6-foot digital TV with a wall-to-wall sound system, an 80 foot yacht, and a villa in France ... for starters. Everyone, rich folk too, live in a state of scarcity, if not poverty.

    And it's not because society produces the "wrong" things (cosmetics, beer, pop-jazz, TV games) instead of the "right" things (museums, symphony orchestras, art). That contention reveals merely different, not "right" or "wrong", tastes. Scarcity is a fact for all living objects, people, animals, plants and even germs.

    Self-interest, as the concept is used in Economics, means you want more power to control resources, whether for your own or for someone else's benefit. You may act as a "Good Samaritan" in emergencies. Economic analysis recognizes that charity is present, though not a motive or objective in market transactions, however much it occurs elsewhere. People who say they are seeking to serve the ¡§public interest¡¨, act also with their own personal interest in mind. Neither extreme -- total narrow exclusive self-interest or total altruism -- is the presumption of economic analysis, although both extremes and most everything in between can be understood with that analysis.

Goods: Economic or Free

    A "good", as that word is used in Economics, is anything of which more is wanted -- milk, candy, shoes, gasoline, etc. It includes also services by doctors, painters, singers, athletes. The word, "goods", means services as well as physical things. Fresh chicken eggs are more plentiful than stale eggs; but fresh eggs are scarce. Fresh eggs are goods; stale eggs are not. In economic terms, fresh eggs are economic goods, the term we use to    describe any good for which more is desired than is available.

    If a good, however desirable, is so abundant that no one wants more of it, it is a
" free¡¨ good. But examples are not easy to find. The classic case of a free good, to most of us most of the time, is air: we simply inhale, and there it is, without our sacrificing anything to obtain it. However, air is an economic good to the astronaut and the deep-sea diver and so is fresh air to the city resident on a smoggy day. Caution: "free good" does not mean something for which a zero price is charged, like "free education", "freeways", "free   public parks" "free libraries" and "free beaches".

    Those "zero-price" goods are scarce (economic) goods. Charging a zero-price does not convert an economic good into a free good. As we will see later, distributing goods for "free" (at a zero price) paradoxically makes their scarcity seem even greater. Hereafter, the one word "good" will always mean an "economic" (scarce) good. If we mean "free good" we'll write "free good".

    Admittedly, the term "good" creates a psychological bias suggesting that "goods" are    necessarily good, and perhaps even good for you.  In Economics, however, "goods" are whatever a person wants, no matter why. Your notion of what is proper may differ from other people's. Maybe you think cigarettes are not "goods" and people would be better off without them. Nevertheless, as long as someone thinks they are desirable and wants more -- that makes them "goods".


    Scarcity's inevitable companion is competition with other people for "more". Never presume it is absent, unless you enjoy fantasies, for which the movies are more effective. According to a master competitor, the golfer Arnold Palmer, "If you aren't competing, you're dead!" To which we add, "If you aren't dead, you must be competing." How? Consider a few.


    Violence is a respected common mode of competition. Alexander, Caesar, Napoleon, Ieyasu, Eisenhower, Lenin and Mao were highly respected and revered. To be sure, had Caesar merely roughed up only a few Romans he would have been crucified. Had Lenin been defeated, he would have been liquidated on the spot. If violence is attempted on a large enough (e.g. national) scale, the perpetrators are condemned only if they fail.

    The power of violence is the jealously guarded near-monopoly of a "government"-- by definition of what a government is. "Near-monopoly" because, within a nation, it is often used byindividuals in street demonstrations for access to political power.

    A wealthy nation is more likely to be attacked---unless the potential aggressors know it is willing and able to defend itself and impose severe losses on the aggressor. The Iraqi government in 1991 attempted to confiscate wealth from Kuwait, butwas rebuffed by the cooperation of other nations. Some years earlier, the poorer North Koreans attacked the South Koreans, but they also were rebuffed by the aid of richer countries that had taken the precaution to have sufficient defensive armor. The early Mongols and Tartars lived by    raiding productive, but less defended, communities. Europeans invaded the Southeastern Asiatic regions to expropriate wealth from the less ably defended areas. And similar events occurred in the migration to the Western hemisphere.

Allocations by Authorities

    Consider a hypothetical university -- possibly yours -- which has 5,000 students and only 2,000 parking spaces. On the assumption that most students desire a parking space, it has a rationing problem: in one way or another, the spaces must be allocated among competitors for the space. Who gets a parking space and who doesn¡¦t? There are    alternative ways to assign them.

First Come, First Served

    They could be allocated on a first-come, first-served basis. Though the money price would be zero, a competitive cost would be incurred in getting to the campus before dawn in an effort to get a space. Costs need not be in money payments. A zero price does not make something free.

Most Deserving

    The costly scramble to be earlier for a space could be avoided by prior assignment of the spaces to the most "deserving" or "needy". Professors will, of course, get space. The committee dispensing privileges would say, "Who are the most deserving, most needy ones?" There is almost no limit to the ingenuity of dispensing committees in rationalizing   their favors. Among the criteria may be: distance from campus, age, health, senior status, family size, major of student, grades, etc. But one question leads to another. For example, should those awarded rights to a parking space be allowed to sell the rights to others?

Competitive Cooperation By Exchanges

    The primary focus of economic analysis is on (a) competition in exchange of rights to services and goods and on (b) cooperation in creating wealth.

    Competition by offers of exchange is also a form of cooperation. "I'll do this for you if you'll do that for me -- at better terms than someone else." In a private property economy, an offer of exchange of property rights is a dominant form of competitively controlled cooperation. Let Adam Smith, the 18th century Scot, author of the first systematic and    classic treatise on economics, "An Inquiry Into the Nature and Causes of the Wealth of Nations" comment on why it is powerful:

    "Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them.

    ... Give me that which I want, you shall have this which you want. ... It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but their regard of their own interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

Jungle or Civilized Competition

    You may have heard "Competition in the free enterprise, private property economy promotes anti-social, jungle-like behavior, socially irresponsible behavior, and it increases the inequality of incomes." There is a strong case to the contrary. A memorable proposition is that in all economic systems -- capitalist, communist, socialist, ecclesiastic, or whatever -- scarcity is inevitable and so competition, and inequality are inescapable. The forms of competition and their extent are affected by the kind of economic system in a society. The resulting type of competition affects the kind of culture and behavior of the public. It appears that the forms of competition that are less conducive to greater production and    "civilized" behavior are less likely to be tolerated.


    All competition and choice is discriminatory.

    Choice is merely another name for discrimination ... to rank alternatives according to some attribute. It is not discrimination that is condemned, but "invidious" discrimination -- which is discrimination by whatever criteria enough people consider undesirable -- such as religion, nationality and gender. But some forms are more conducive to production and civility in human relations, as we¡¦ll see later.


    At the same time people compete, they cooperate with each other -- in the market, in the family, in firms and in governments. We cooperate to make the "pie" larger, we compete over how much of the pie each of us gets. Any effective combination of cooperation and competition requires a control of the permissible types of competition so as to not obstruct cooperation. If people could be trusted to work and cooperate as they promise, life would be unimaginably different.

Procedure: Analyzing, Not Surveying

    This text is not a guided tour through the economy with our running commentary and opinions. We assume you want to understand the causes and consequences of economic events in the economy in which you live and will work. For that you must have a working familiarity with the basic concepts and principles of economics. We emphasize "working familiarity", because that means both a knowledge of the principles and also an ability to    apply them. Therefore, this textbook presents validated principles of economics, along with illustrative applications. The examples and applications will increase your familiarity with the principles and your ability to apply them.

    Our intent is to make your study of Economics interesting and enjoyable. But, we promise one possibly unanticipated result: you'll be brain-washed -- in the good sense of removing fallacious and erroneous beliefs. We predict you¡¦ll begin to believe that a vast majority of what people popularly believe about economic events is wrong. A few examples of errors are:

    price controls prevent higher costs to consumers;

    reducing unemployment requires creating more

    larger incomes for some people require smaller
    incomes for others;

    free, or low, tuition reduces costs to students;

    unemployment is wasteful;

    stockbrokers and investment advisors predict better
    than throwing a dart at a list of stocks;

    international trade deficits are bad and surpluses
    are good;

    inflation is caused by government deficits;

    government budget deficits reduce saving and raise
    interest rates;

    new taxes are borne by the consumer of the taxed

    employers pay for "employer provided insurance";

    tax-exempt bonds avoid taxes:

    minimum wages help unskilled and minorities;

    housing developers drive up the price of land;

    foreign imports reduce domestic jobs;

    "equal pay for equal work" aids women, minorities
    and the young;

    very low unemployment causes inflation;

    the Federal Reserve Board controls the rate of

    Fortunately, societies have progressed despite almost universal ignorance of economic principles.  For example, the United States economy, over more than two centuries, has generally performed very well, yielding a growth and prosperity which is embarrassingly conspicuous in world history. And, the socialist collapse in Soviet Russia was not the    result of a sudden awareness of economic principles. Instead, tough, unavoidable experience showed its weaknesses and motivated the changes.

Organization of This Book

    This text has, roughly, four main groups of chapters or zones of concentration. (a) The first group focuses on principles, explaining the operations of markets in a decentralized economy in which you will be spending and investing your income and wealth. (b) The second group pertains to firms in which you, your spouse, or both, will earn incomes. (c) A third group concentrates fluctuations in aggregate, nationwide incomes --  recessions -- that will affect your earnings and wealth. (d) The fourth group attends to governments in affecting economic activity within the nation and across national boundaries.

    As an aid for your learning, we recommend a visit to your college library (the educational and    romantic heart of your campus) to get acquainted with the U.S. Statistical Abstract. Published by the U.S. Department of Commerce, it¡¦s a  compendium of facts and measures of population, incomes, commerce, finance, government,    international trade and related matters. Browsing through it will give perspective and facts about the size of the economy. Another good source of data about the economy is the U.S. Department of  Commerce¡¦s monthly ¡§Survey of Current Business¡¨. And you¡¦ll find the Monthly Labor Review, published by the U.S. Department of Labor, contains interesting information about wages and working conditions.

    Finally, a word of assurance: Economics really is easy. Some say it's just common sense, which, as you have been reminded often, is uncommon. The most frequent source of failure and confusion is not the difficulty of learning and applying the principles. Instead, forgetting to apply them is the trouble. Always, always remember and be aware of them -- as alertly and fully as you heed the law of gravity, because economic principles are more    powerful and accurate. The law of gravity says that if you put a $20 bill on a table, it will stay there. Economics says it will quickly disappear!

Product Warrant Disclaimer

    Most product quality warranties contain disclaimers . We include two -- and not in smaller print.

    (1) This textbook is not an independent, stand-alone teaching device. Otherwise, you could just buy and study it without being tied to a class! Please rely also on your instructor to elaborate concepts and principles in the ways most appropriate to you.

    (2) "We disclaim all liability for any damage done to your wealth or beliefs consequent to your use of this text and the principles of economics." To persuade us to bear this liability, we would have to request a share of the wealth you gain by studying this text. Nevertheless, we trust this text will be interesting and valuable in your future, though    surprising and contrary to some of your present beliefs.

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