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In Memoriam: Harold Demsetz, 1930-2019

Armen Alchian. Gordon Tullock. William Baumol. Now Harold Demsetz. The list of economists who should have won the Nobel Prize but didn’t added another name with the passing of Harold Demsetz (b. 1930) on January 4. In 2013, he was named a Distinguished Fellow of the American Economic Association and was described as “one of the most creative and deep microeconomists of the 20th century.” Demsetz spent most of the 1960s at the University of Chicago and is therefore considered a member of the “Chicago School” in good standing. During his time at Chicago, he published a pathbreaking essay titled “Toward a Theory of Property Rights” that helped us understand how property rights regimes evolve. This video from LearnLiberty explains Demsetz’s contribution:

Demsetz’s Chicago bona fides notwithstanding, he is also notable for the work he did to develop a unique intellectual tradition at UCLA that transcended the department’s reputation as the “Chicago of the West Coast.” As Peter Boettke puts it in a post on Demsetz’s legacy, the UCLA tradition was “all about the analytics of price theory, and in particular the role that relative prices play in guiding exchange and production decisions.”

In 2011, his 1972 paper (coauthored with the aforementioned Armen Alchian) “Production, Information Costs, and Economic Organization” was selected as one of the Top 20 articles published in the first hundred years of the American Economic Review, which is the economics profession’s flagship journal. The committee that selected the Top 20 articles describes their paper as follows:

What is the special role of the firm in organizing production? The authors argue that it is the ability to measure inputs and their productivity and to allocate hired resources in production involving the cooperation of many inputs. It is this phenomenon that explains why all cooperation of factors does not take place through market-determined contracts. The firm is made to be the residual claimant because that approach creates the appropriate incentives for management. Many implications of this hypothesis are developed.

I’ve heard it said that there are two kinds of economists in the world: 9-5 economists who use the economic way of thinking when they are on the job but who then shut it off once the workday is finished, and 24-7 economists for whom the economic way of thinking is an indispensable intellectual tool for all walks of life and (importantly) does not lose its explanatory power and implications once the workday is through. Just as Demsetz was, in Boettke’s words, “a practitioner of UCLA price theory par excellence,” he was a 24-7 economist par excellence. And he was a 24-7 economist who made contributions of timeless applicability, as in the current debates about the “platform economy” and the allegedly inefficient and harmful market power of firms like Facebook and Amazon. Here is Boettke again:

...the relevance of the work of Demsetz is as critical to understanding the dynamics of marketplace today as it was when he first approached the study of industry structure and competitive behavior. If you look at the emerging market structure of the past decade, one would certainly have to recognize the near-monopoly status of Amazon, Apple and Netflix, yet one would also have to recognize the great level of consumer satisfaction associated with these firms. Despite their dominant market share, these firms provide quality goods and services at low prices. And there is no expectation that these firms will have any ability to behave differently than continuing to strive to provide high quality products for the lowest price. This is because they compete in a contestable market. Consider the classic browser wars with Microsoft and competitors from a decade ago. How monopolistic can a firm behave if its product can be used to freely download its competitors product? The standard Structure-Conduct-Performance paradigm in industrial organization simply is incapable of providing a clean explanation for the competitive marketplace in the age of the internet. Market leaders will fall by the wayside unless they keep moving forward faster to further satisfy consumer preferences. Amazon and Netflix know they better keep innovating or Hulu, or some other streaming service, is right there to better satisfy the demand of consumers.

Demsetz was a model of intellectual rigor and, importantly, an intellectual humility that we should all strive to emulate. This is not to say he was unsure of himself or unsure of what economics had to teach us. Rather, he followed the theory and the evidence wherever it led. Donald J. Boudreaux writes that “(t)he roster of actual [Nobel] Prize winners who are less-deserving of that honor than is Demsetz is long.“ Indeed, it is a shame that he was never honored with the Nobel Prize he so richly deserved, but this should do nothing to tarnish his legacy.

Art Carden is a Research Fellow at the Independent Institute and an Associate Professor of Economics at Samford University’s Brock School of Business.

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