Professor Alchian and Associate Professor Allen teach economics at the University of Califor­nia, Los Angeles.

Economics sometimes has been described (and condemned) as the study of selfish behavior. The con­ception of the “economic man” has been ridiculed as a bloodless abstraction which constitutes a calumny on real people who are warm in spirit and generous in heart. For (most) real people are not wholly self-centered creatures, coldly calculating only how best to aid themselves even at the cost of injuring others, if need be.

This is but a parody of the “economic man” notion specifically and of the concern of economic study generally. Economics, ac­curately conceived, is directed to the analysis not of selfish behavior as such, but of efficient behavior. The basic question asked by the economist is not, “In light of the egocentric avariciousness of peo­ple, how can one best skin one’s neighbor?” Rather, he asks, “In light of the scarcity of resources, how can one squeeze the greatest return—which can take myriad forms, e.g., goods, power, utility, inner glow of contentment—from given productive services, talents, and environment? Or, alterna­tively, how can one achieve his desired goals with the minimum cost?” His goals can involve not only his own immediate welfare, but also that of other people.

Giving with Efficiency

We can usefully illustrate the matter by considering the grant­ing of a subsidy or gift. The motivation of the giver may be as humanitarian and philanthropi­cally pure as can be, but what of the efficiency with which the aid is given?

Suppose that a university—call it U.C.L.A.—wishes, for reasons good or bad which we shall not consider here, to subsidize the veterans in the student body by providing campus housing. U.C.­L.A., it can be imagined, possesses a substantial amount of land on which are placed a number of war-surplus barracks. The barracks are renovated into a total of 1,000 apartments. The rent is set at $30 per month, which exactly clears the veterans’ market, i.e., at $30, the veterans, of whom there are more than 1,000, wish to take 1,000 apartments. (If the price is set at less than $30, there is at the outset a messy problem of ad­ministrative rationing, for at such a low price, more than 1,000 vet­erans will demand apartments.) The U.C.L.A. administrators de­cree that no non-veterans are al­lowed to occupy apartments, so non-veterans do not apply.

The land being devoted to vet­erans’ housing has some alterna­tive valuable uses, e.g., as parking space, playing fields, or simply scenic lawn; so there is a cost in­volved in the housing program. The major question is now in order: for the given cost borne by U.C.L.A., are maximum bene­fits being bestowed, or, stated dif­ferently, could benefits equivalent to those actually bestowed be at­tained at smaller cost to U.C.L.A.?

Maximizing the Benefits

For the moment, concentrate on maximizing benefits. Are the bene­ficiaries of the subsidy as well off as possible with the resources be­ing made available to them? As things stand, the veterans must take their assistance in a specified form, i.e., a barracks apartment, or not receive aid at all. And with more veterans than apartments, some veterans receive nothing. Now, if the apartments were to be opened to the whole student body, the market-clearing rent presumably would be higher than $30; suppose it to be $40. Some veteran might feel that, in­stead of living in the barracks at $30, it would be preferable to sub­lease his barracks apartment for $40 and apply the excess proceeds to the renting of a more desirable apartment in town at, say, $60. In this fashion, the veteran would in effect obtain a gift in the form of money ($10) which he then ex­pends as he pleases.

Who gains and who loses by this subleasing procedure?

Before subleasing was allowed, the veteran had the alternatives of (a) a barracks apartment at $30 or (b) a town apartment at $60. But now the veteran is presented with an additional alternative, viz., (c) rent and sublease a barracks apartment, gaining a $10 profit, and live in a town apartment. Al­though the town apartment may be more conducive than a barracks apartment to gracious living, the veteran might prefer alternative (a) over (b); i.e., he might pre­fer the inferior apartment plus an extra $30 to spend on other things over the more expensive apart­ment. But in comparing alterna­tive (a) to (c), staying in the barracks apartment would provide only an extra $20 for other things, and this extra $20 might or might not be sufficient to compensate for the poorer apartment. Finally, we certainly can say that if he pre­fers alternative (b) over (a), he will prefer (c) over (a), for a town apartment plus an extra $10 (i.e., alternative c) is preferable to a town apartment without an extra $10 (i.e., alternative b). In any event, the subleasing alterna­tive cannot hurt the veteran, and it may help him.

Non-Veterans Also Gain

Has the non-veteran student who is subleasing from the vet­eran at $40 been helped or hurt? He may feel envious that he is not a member of the privileged group eligible for the barracks at $30, but this is true whether or not subleasing is permitted. Prior to subleasing, his only alternative was a town apartment at $60, but with subleasing he can now rent a barracks apartment at $40. He may prefer the latter. The sub­leasing offer has given him, too, an additional alternative, and his accepting the new alternative is evidence that he is better off by moving into the barracks.

U.C.L.A. also is involved. The university is financially indiffer­ent, for it receives $30 per apart­ment whether or not the apart­ment is subleased.

It appears that no one is hurt by the subleasing practice, and the veteran and the other student are both better off. Why, then, are administrators generally loath thus to widen the alternatives of those they are intending to aid? If the university wants to put valuable resources at the disposal of veterans, why does it prevent the full potential benefits being realized by restricting the use to which the veterans can put the subsidy? Perhaps administrators would consider it “untidy” and “inappropriate” to provide veter­ans’ housing which is occupied by non-veterans. Or perhaps the ad­ministrators feel that they know what is best for the veterans, and barracks-living at $30 is deemed by them to be preferable for vet­erans to town-living at $60 and a $10 profit.

The moral is plain. A free price system enables men to use their resources in the ways they con­sider best. If it is felt that wel­fare is enhanced by broadening the alternatives available, a free price system enlarges welfare.

Alternative Land Use

Consider another possibility, which presents some additional complications. Suppose that the land now occupied by the barracks could be rented by U.C.L.A. at a rate equivalent to $50 per month for each apartment—or the land could be sold and the proceeds in­vested in acceptable fashion at a rate of interest equivalent to $50. With 1,000 apartments, this alter­native income, as rent or interest, is $50,000 per month, compared to $30,000 when the land is used as barracks apartments for veterans.

In this “no barracks” case, U.C.­L.A. could keep $30,000, so that the university would be equally well off under the two schemes, and allocate the remaining $20,­000 among all veterans, of whom there are, let us say, 2,500. Each veteran receives $8 per month. How would the veterans fare now compared to the other schemes?

When subleasing of the bar­racks was not allowed, 1,000 vet­erans chose to live in the barracks at a rent of $30, and the remain­ing 1,500 received nothing from the university. Now, under the “no barracks” plan, with $20,000 being distributed among all vet­erans, clearly the 1,500 who would not have been in the barracks are better off: $8 is better than noth­ing. However, we cannot general­ize about the other 1,000, for some of them will prefer $8-and-no-bar­racks-apartment, while some would have preferred the barracks­apartment-and-no-$8.

Other Possibilities

When subleasing is allowed, it is again the case that 1,500 veterans do not benefit, for they cannot ob­tain an apartment. But the 1,000 with apartments can either keep the apartment at $30 or sublease at $40 and net $10 cash. In the “no barracks” case, with each veteran receiving $8 from U.C.L.A., those 1,000 who would have had a bar­racks apartment are worse off. However, if there were only 1,600 veterans, so that each receives $12.50 from the university, those who were willing to sublease (and perhaps even some of those who preferred to keep a barracks apart­ment when the alternative was to gain only $10 through subleasing) are better off.

And, of course, the greater the amount of money to split among a given number of veterans, the greater the share of each. If the market value of the land is $80,000, then $50,000 could be divided among the 2,500 veterans, giving each $20. That is, the better the alternative use U.C.L.A. has for its land, the greater and more widespread will be the benefits of utilizing the alternative and dis­bursing cash.

The Market Maximizes Alternatives for All Concerned

Let us summarize the conclu­sions from this array of possibili­ties. We began with veterans ob­taining barracks apartments at the market-clearing rent of $30, with­out the right of subleasing. The university is discriminating not only in favor of veterans, but also in favor of those particular veter­ans who prefer a $30 barracks apartment to a $60 town apart­ment.

Now, if subleasing is allowed, another alternative is made avail­able to both veterans and non-veterans. Those veterans who pre­fer to stay in the barracks have not lost, and those who prefer to sublease have gained. Similarly, some non-veteran students will not be interested in subleasing, but others are. Financially, U.C.L.A. is not affected. The introduction of subleasing rights has not hurt any­one, and some are benefited.

However, if subleasing is al­lowed, the apartments become more valuable. Even though a particular veteran might not demand an apartment at $30 for his own use, he is happy to rent at the pegged price of $30 in order to sublease at $40. The veterans’ mar­ket is no longer cleared: all 2,500 veterans seek an apartment, and there are only 1,000 apartments. With a pegged rent of $30 and no prohibition on subleasing, the uni­versity is discriminating among veterans in a new way, viz., in fa­vor of those 1,000 veterans who happen to acquire apartments when all 2,500 want apartments.

Suppose that U.C.L.A. decides to get out of the veteran-housing business and sell the land or lease it in its most profitable use. Then receipts are available to disburse among all veterans. It may well be that some of the veterans who would have acquired barracks apartments will not be pleased by giving up the apartment and re­ceiving cash. However, the more the cash, i.e., the better is the al­ternative use to which the land is now devoted, the fewer and the less insistent will be the complaints. In any case, those veterans who did not have apartments will be bene­fited by distribution of the cash. No longer is there discrimination among the veterans, for the re­sources made available to the fa­vored group are evenly disbursed among all members of the group.