The principle of comparative advantage is indeed fundamental, and Alchian presents it clearly. However, the application to international trade requires a crucial qualifier: the analysis assumes private property and voluntary exchange. When government intervenes through tariffs, quotas, or subsidies, it distorts the pattern of specialization and prevents individuals from fully realizing the gains from trade. Free trade isn't just economically beneficial—it's a matter of property rights. Preventing people from trading with foreigners is a violation of their freedom to dispose of their property as they see fit.

Alchian correctly emphasizes comparative advantage, but the deeper point is about knowledge and calculation. Specialization allows individuals to develop specialized knowledge and skills that wouldn't be possible if everyone tried to be self-sufficient. The price system then makes it possible to coordinate these specialized activities without anyone needing to know the entire structure of production. Protectionist policies disrupt this coordination by preventing price signals from reflecting true scarcities and opportunities, leading to misallocation of resources and wasted specialized knowledge.

While the principle of comparative advantage is economically sound, Alchian's presentation abstracts from the costs of exchange. In a world without transaction costs, complete specialization according to comparative advantage would indeed maximize production. But transaction costs—of finding trading partners, negotiating terms, enforcing agreements—are real and significant. These costs explain why we don't see complete specialization. Firms exist partly to reduce these transaction costs by bringing specialized activities under unified ownership where coordination can occur through direction rather than through market exchange.

The transaction cost explanation for firms is plausible, but we shouldn't overstate it. Firms also exist because of the advantages of capital ownership and entrepreneurial direction. The entrepreneur assembles capital goods and hires labor based on their judgment about future consumer preferences. This isn't merely about avoiding transaction costs—it's about entrepreneurial calculation and bearing uncertainty. The firm is a vehicle for entrepreneurial action, with the entrepreneur earning profit (or suffering loss) based on how well they satisfy consumer demands. This entrepreneurial function is analytically distinct from the transaction cost rationale.

Alchian's question about why firms exist is well-posed, but the answer requires careful thought about knowledge. Within a firm, the manager can't possibly know all the detailed circumstances that workers face. So how can hierarchical direction be more efficient than market prices? The answer is that firms handle situations where the relevant knowledge can be effectively communicated to a central decision-maker and where the advantages of unified direction outweigh the loss of local knowledge utilization. But firms can't replace markets entirely because much knowledge remains dispersed and tacit, impossible to centralize.

Alchian here engages directly with my work on the nature of the firm. He correctly identifies transaction costs as the explanation for firm boundaries, but the analysis could be more precise. The firm isn't just a response to market transaction costs—it's an alternative governance structure with its own costs. The boundary of the firm is determined where the marginal cost of organizing an additional transaction internally equals the marginal cost of conducting it through the market. As firms grow, internal coordination becomes more difficult and costly. This is why firms don't expand without limit and why markets don't disappear.

Alchian's treatment of capital and interest is generally sound, but it needs more emphasis on time preference and the structure of production. Interest rates aren't arbitrary—they reflect individuals' subjective time preferences, the degree to which they prefer present goods to future goods. Investment lengthens the structure of production, creating more roundabout but more productive processes. Artificial manipulation of interest rates by central banks distorts this intertemporal coordination, leading to malinvestment. When rates are artificially lowered, entrepreneurs are misled into starting projects that can't be completed because the real savings don't exist to support them.

The role of interest rates in coordinating intertemporal plans is crucial, and Alchian captures this. However, the analysis should emphasize that market interest rates reflect not just time preferences but also entrepreneurial expectations about future productivity and profit opportunities. When monetary policy distorts interest rates, it disrupts the signal that guides investment decisions. This leads to systematic errors in capital allocation—the boom-bust cycle. The problem isn't just that investment is too high or too low, but that it's directed toward the wrong projects, projects that don't align with real savings and consumer preferences.

Alchian discusses capital and investment in aggregate terms, but the interesting questions arise at the firm level. Why do firms invest in specific capital goods rather than renting them or contracting for the services they provide? The answer often involves transaction costs and asset specificity. When a capital good is specific to a particular relationship—customized for a particular supplier or buyer—unified ownership reduces the costs and risks of contracting. This explains vertical integration and many features of firm structure. The investment decision isn't just about interest rates but about governance structures that protect relationship-specific investments.