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Comment on Paper by Alchian and Demsetz

It is generally understood that the job of a discussant is to concentrate on those aspects of the paper that he finds either ambigious or erroneous or both. However, I happen to think that Alchian and Demsetz have written a fine paper on an important topic. For that reason my comments will not conform to this time-honored tradition. A short paragraph on the second page of the manuscript clearly reveals the central purpose as well as significance of Alchian's and Demsetz's paper. They wrote: "Recent years have witnessed increasing attention to the subject of property rights and to the beginning of a somewhat different approach to the analysis of social problems that find their source in scarcity." In this statement Alchian and Demsetz call our attention to the significant body of literature that has grown around the concept of property rights structures. The purpose of the property rights approach is to attempt—via the analysis to the interconnectedness of ownership rights, incentives and economic behavior—a generalization of the standard theory of production and exchange to obtain an expanded scope of its validity. It argues that the purpose of trade (and production) is to exchange bundles of rights to do things with goods that are exchanged. Thus the value of the goods that are traded increases and, consequently, the terms of trade improve with increases in the degree of property rights in those goods. It follows that the scope and content of property rights over resources affect the way people behave in a world of scarcity. Some years ago Alchian wrote: "In essence, economics is the study of property rights over resources . . . The allocation of scarce resources in a society is the assignment of right to use of resources . . . for the question of . . . how prices should be determined, is the question of how property rights should be defined and exchanged, and on what terms." While the importance of property rights assignments over resources had always been recognized by economists, Alchian and Demsetz were, I believe, the first to formally incorporate the subject of property rights into the standard theory of production and exchange; they were the first to show that the property rights analysis tends to build on and merge with the standard theory of production and exchange. The key theoretical concepts of this attempt toward a generalization of the standard theory are (1) the objective of wealth maximization is replaced by that of utility maximization; (2) the classical competitive model where one particular set of private property rights governs the use of all resources is no longer accepted as the only relevant configuration; and (3) transac-