‘Uncertainty, Evolution, and Economic Theory,’ by Armen Alchian
One of the most persistent criticisms of law & economics is that it rests on unrealistic assumptions. Economic models often assume firms maximize profits, investors respond rationally to incentives, and market participants systematically adjust their behavior in predictable ways. Critics frequently point to these assumptions as evidence that economic analysis is detached from reality. Real business owners do not calculate marginal-cost curves or solve optimization problems. They operate with incomplete information, uncertain futures, and imperfect judgment. From this observation, critics draw a familiar conclusion: if the assumptions underlying economic models are unrealistic, their predictions must also be unreliable.
Armen Alchian’s 1950 article, “Uncertainty, Evolution, and Economic Theory,” offers a powerful reply. Rather than defend the standard assumption, Alchian acknowledged the critics and suggested economists should stop describing firms as profit maximizers altogether. Under genuine uncertainty, firms cannot calculate profit-maximizing strategies in the way traditional models assume. Continuing to rely on that assumption, he argued, unnecessarily exposes economic theory to criticism.
Yet Alchian did not reject the predictive power of economic reasoning. Instead, he explained why profit-maximizing outcomes can emerge even when firms do not consciously maximize profits. Markets generate those outcomes through a process of variation, adaptation, and survival.
As Alchian famously observed, economists should focus less on firms’ intentions and more on the consequences of competition:
The economic counterparts of natural selection are imitation and innovation, the counterparts of heredity are the transmission of successful business practices.
In competitive markets, firms need not solve optimization problems for profit-maximizing behavior to emerge. It is enough that firms experiment—and that firms whose practices fail to generate sufficient profits eventually disappear.