Harold Demsetz

American economist

Harold Demsetz (May 31, 1930 – January 4, 2019) was an American economist, and Professor Emeritus of Economics at the University of California at Los Angeles (UCLA). Demsetz belonged to the Chicago school of economics, and was one of the pioneers of New Institutional Economics.

Harold Demsetz, 2009


  • Property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization. Increased internalization, in the main, results from changes in economic values, changes which stem from the development of new technology and the opening of new markets, changes to which old property rights are poorly attuned [G]iven a community's tastes... [for private versus state ownership], the emergence of new private or state-owned property rights will be in response to changes in technology and relative prices.
    • Harold Demsetz, (1967). "Toward a Theory of Property Rights." American Economic Review 57 (May, No. 2): 347-359. p. 350, as cited in Eggertsson (1990; 250)

"Information and Efficiency: Another Viewpoint." (1969)


Harold Demsetz (1969). "Information and Efficiency: Another Viewpoint." Journal of Law and Economics 12 (No. 1): 1-22

  • The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing "imperfect" institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.
    • Cited in: Eggertsson (1990; 22)
  • A relevant notion of efficiency must refer to scarcity and people as they are, not as they could be.
    • Cited in: Eggertsson (1990; 22)
  • Modern analysis has yet to describe inefficiency in a world where indivisibilities are present and knowledge is costly to produce.
    • p. 19; cited in: Eggertsson (1990; 23)

Production, information costs, and economic organization. 1972


Armen A. Alchian and Harold Demsetz. "Production, information costs, and economic organization." The American economic review 62.5 (1972): 777-795.

  • The mark of a capitalistic society is that resources are owned and allocated by such nongovernmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization and this leads to the demand for economic organizations which facilitate cooperation. When a lumber mill employs a cabinetmaker, cooperation between specialists is achieved within a firm, and when a cabinetmaker purchases wood from a lumberman, the cooperation takes place across markets (or between firms). Two important problems face a theory of economic organization—to explain the conditions that determine whether the gains from specialization and cooperative production can better be obtained within an organization like the firm, or across markets, and to explain the structure of the organization.
    • p. 777, Lead paragraph

Harold Demsetz (1980). Economic, Political, and Legal Dimensions of Competition. Amsterdam: North-Holland.

  • The legal substructure is private; the use of payments to influence the behavior of others is neither prohibited nor frowned upon. But the ' frictions" that perfect decentralization assumes away, must be lived with in laissez-faire.
    • p. 21
  • Business firms, in which controlled cooperation takes place, are the first important implication of costly transactions. The laissez-faire filtering process, using the profit test, selects some of these business organizations for survival and rejects others.
    • p. 25

Quotes about Harold Demsetz

  • Demsetz (1980) refers to the hypothetical economic system of neoclassical economics as the decentralized model. According to the usual implicit and explicit assumptions of the decentralized model, the cost of information is zero; private property rights are fully defined and enforced at zero cost; and the state stays in the background, upholding the institutions of market exchange. Economic outcomes derived from this model are found in the standard textbook: For any underlying distribution of resources, wealth is maximized; output is valued by consumers who take indirectly into account the value of leisure and other extra-market activities; income distribution depends on wages and the prices of nonhuman inputs which equal the value of marginal products; and economic resources always find their highest-valued uses.
When transaction costs are added to the decentralized model, we have, according to Demsetz, a laissez-faire economy, a term we shall use below. The laissez-faire model is used to analyze the implications of competition when the cost of transacting is positive.
In a laissez-faire economy, the state does not restrict private ownership rights, but because of information costs, ownership rights are often less than fully defined or enforced. Laissez-faire competition, reacting to these costs, reveals itself in ways not readily understood in terms of the decentralized model
  • Economists have uncovered the conditions necessary if Adam Smith’s results are to be achieved and where, in the real world, such conditions do not appear to be found, they have proposed changes which are designed to bring them about. It is what one finds in the textbooks. Harold Demsetz has said rightly that what this theory analyses is a system of extreme decentralisation. It has been a great intellectual achievement and it throws light on many aspects of the economic system. But it has not been by any means all gain.
    • Ronald Coase (1991), "The Institutional Structure of Production"
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