
The Alchian-Allen Theorem - czr80
http://azmytheconomics.wordpress.com/2011/10/12/the-alchian-allen-theorem/
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adamnemecek
I just checked out the wikipedia page of Armen Alchian and it appears that he
died today <http://en.wikipedia.org/wiki/Armen_Alchian>.

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merraksh
I suppose somebody posted this after learning of his death. His theory
appearing on the HN front page is a way to remember one of his achievements on
the day of his passing.

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adamnemecek
That's what I figured.

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jamesoswald
I wrote the post in October of 2011, but people have reblogged it recently in
response to Alchian's death.

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elteto
Should it be called a theorem? It looks to me more like a theory, since
economics is not an exact science like mathematics. According to Wikipedia,
[1] a theorem is fundamentally deductive, in contrast with a scientific
theory, which is empirical.

[1] <http://en.wikipedia.org/wiki/Theorem>

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csense
My guess is that it's a "theorem" in the sense that you could come up with
some mathematical model of economics in which some translation of Alchain-
Allen into a mathematical statement would be a provable mathematical theorem.

Alchain-Allen being true in _most_ or _every_ model of economics (as the
Church-Turing thesis [1] is true in most models of computation), or being
always true in reality, is a much more debatable question.

Real demand curves can be mighty pathological, for example, you can have D'(P)
> 0 [2] if the good in question is something people buy to show off their
wealth, and so actually _like_ it to be more expensive.

[1] <http://en.wikipedia.org/wiki/Church_Turing_Thesis>

[2] Economists like to put demand on the horizontal axis and price on the
vertical axis. That convention is insane, so I ignore it when I can.

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boomlinde
Regarding [2], forgiving my ignorance in economics, how is that convention
insane?

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jamesoswald
Typically, the independent variable is on the x axis and the dependent is on
the y. Most modern economists consider price independent, hence the axes are
reversed. The convention was created by Alfred Marshall and everyone has stuck
to it ever since. I don't think it matters, since neither variable is causal.
The "inputs" of the function are actually the supply and demand curves
themselves and the output is both price and quantity.

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hcarvalhoalves
The article is good, but I need to point the elephant in the room:

"In the middle ages, people had to travel long distances to view concerts,
which were performed by live musicians. Thus, the fixed costs of consumption
were very high. If you bothered to pay a huge amount of money and time, you
might as well view a long complex opera or symphony. On the flip side, when
fixed costs are as low as a Google search, people prefer short YouTube videos
of cats doing cute things. Don’t think that this means that the quality of
culture has gone down."

By that logic, more people could be watching opera videos on YouTube if they
cared, since the opportunity cost is the same.

I'm inclined to believe the fact most people prefer cat videos is not because
of availability, but because most people are mundane.

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pfedor
The way I understood it, the "cost" of watching an opera on YouTube is the
time and mental effort it takes, which is many times greater than the time and
mental effort it takes to watch a cat video.

Like, say you may derive more enjoyment from reading novels than Hacker News
comments, but when you sit down to quickly eat breakfast you peruse Hacker
News, even though great many high quality novels are also one click away.

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hcarvalhoalves
> The way I understood it, the "cost" of watching an opera on YouTube is the
> time and mental effort it takes, which is many times greater than the time
> and mental effort it takes to watch a cat video.

The original analogy compared with the cost of watching an opera on the
_middle ages_ , but I get your point: people perceive the value of consuming
copious amounts of mundane content to be greater than the reward to be gained
from a single, more elaborate content.

Interesting. Would you say it's a race to the bottom of time and mental effort
then? Cultural production and consumption is limited by the second law of
thermodynamics? That sounds pretty hopeless.

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jamesoswald
The implication is actually that cat videos are more enjoyable per instant
than opera. If that were not the case, people would always watch opera. But if
there were a high fixed cost, such as a ticket price, or the mental energy
required to pay attention, the opera becomes relatively attractive. Imagine
driving to a movie theater and paying $10 to watch a 2 minute cat video. It
would be absurd.

My point about the middle ages was that at that time, the fixed cost for all
media consumption was high, so no one even considered short videos
(preformances?). Now, when fixed costs are lower, you see a dramatically
different pattern of consumption.

High cost/high benefit media is still around - just think about a long running
tv show like Lost or Game of Thrones, where the audience is expected to put a
ton of mental effort into the show. So I don't worry about a race to the
bottom.

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csense
By "increase consumption of the higher-quality good," is that in _absolute_
terms, or _relative_ to the lower-quality good?

Is there a concrete example of "reasonable" demand functions under which a
fixed increase leads to an absolute increase of the higher-quality good?

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jamesoswald
(Original Author): Relative. In the wine example, if you add a fixed cost,
total absolute consumption will decline, but relative consumption of the more
expensive one will increase. Likewise, when fixed costs are lower, absolute
consuption increases, as per the law of demand. People spend more time
watching media in general now than in the Middle Ages, but cat videos are
relatively more popular.

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guygurari
I know very little about economics. I will be happy to know if this 'theorem'
is supported by experimental evidence (none were mentioned in the article).
Otherwise it should really be called a hypothesis.

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networked
There are various formalizations of the Alchian–Allen effect that are theorems
in the mathematical sense of the word in that they have been formally proved.
See, e.g., [http://www.cesifo-
group.de/portal/pls/portal/docs/1/1219670....](http://www.cesifo-
group.de/portal/pls/portal/docs/1/1219670.PDF).

