Tag Archives | Coase

Coase on Contemporary Economics

One of Ronald Coase’s last essays was a short co-authored piece in the Harvard Business Review lamenting the current state of academic economics. Here’s a snippet:

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.

Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task.

Businessweek reported on the column here. [...]

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Coase and UVA

The Charlottesville Hook has an article suggesting Ronald Coase and James Buchanan were both pushed out of the University of Virginia due to ideological objections to their work.  (HT: Michelle Meyer)  If true, UVA got its just deserts, as both were awarded Nobel Prizes in Economics after their  respective departures.  More here. [...]

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Henderson on Coase

In Wednesday’s WSJ economist David Henderson has an op-ed on Ronald Coase’s legacy. As henderson notes, the primary thrust of Coase’s work was a rejection of “Blackboard economics” in favor of careful examinations of the real world, with a particular focus on institutions. This was the theme that unified his work across various subjects. Although Coase had distinctly libertarian leanings, this was not always his view of the world. Writes Henderson:

In his early 20s, Coase was a socialist, but he had a trait that few socialists have: curiosity about how economies work. On a trip to the United States from his native Britain in 1931 and 1932, he dropped in on perennial Socialist Party presidential candidate Norman Thomas, and he visited Ford and General Motors. How, he wondered, could economists say that Lenin was wrong to believe that the Russian economy could be run like one big factory, when some big firms in the U.S. seemed to run well?

Coase’s answer, in his widely cited 1937 article “The Nature of the Firm”: Companies are like centrally planned economies, but unlike the latter, they are formed because of people’s voluntary choices. But why do people make these choices? Coase wrote that the answer is “marketing costs,” or what economists now call “transaction costs.” If markets were costless to use, there would be no point in forming companies. Instead, people would make arm’s-length transactions. But because markets are costly to use, the most efficient production process often takes place within a company. His explanation of why companies exist spawned a whole literature.

Coase wrote this article when he was only 26, and it was only one of several important papers he would write over the course of his life. More Henderson:

In 1959, Coase wrote that the Federal Communications Commission

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Ellickson’s “Case for Coase”

One of my favorite articles about the work of Ronald Coase is Robert Ellickson’s “The Case for Coase and Against Coaseanism.”  Here is a portion of the introduction:

Poor Ronald Coase. In an introductory essay to a recently published collection of his articles, Coase laments his lack of influence among economists. “My point of view has not in general commanded assent, nor has my argument, for the most part, been understood.”‘ One can imagine the muttering that Coase’s plaint will provoke in the university towns across America. “Wait a minute, buster,” will grouse the professors. “It must be tough when you’ve merely written the most cited article in the legal literature and when Yale has been bothering you with the offer of an honorary degree. Listen up and we’ll tell you some stories about scholarship that
has gone underappreciated.”

. . . Coase’s name is consistently attached to propositions that he has explicitly repudiated. Predictions identified as “Coasean” are predictions that Coase would never make. The “Coasean world” is not only not Coase’s world but, ironically, is more like the world of the economic theorists that Coase has attacked. . . . Just as some believe Marx would complain of what is currently done in the name of Marxism, Coase has reason to be appalled at the emerging contours of “Coaseanism.”

I think part of the problem that Ellickson identifies comes from the way “The Problem of Social Cost” is routinely excerpted in textbooks to emphasize the prelude (the zero transaction cost world) and ignore the primary substance of the article. [...]

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Coase on Externalities

The existence of “externalities” — effects (costs or benefits) of market transactions that are not experienced by those involved in the transaction, but are instead experienced by others, those “external” to the transaction —  is routinely proffered as a justification for governmental regulation of private economic activity.  Ronald Coase had a different view, however. In his seminal essay, “The Problem of Social Cost,” Coase never used the term — and with good reason. In Coase’s view, the word “externality” did not do much work.  In his introduction to The Firm, The Market, and the Law, Coase wrote:

the existence of “externalities” does not imply that there is a prima facie case for government intervention, if by this statement is meant that, when we find “externalities,” there is a presumption that governmental intervention (taxation or regulation) is called for rather than the other courses of action which could be taken (including inaction, the abandonment of earlier governmental action, or the facilitating of market transactions). . . .

. . . it is easy to show that the mere existence of “externalities” does not, in itself, provide any reason for governmental intervention. Indeed, the fact that there are transaction costs and that they are large implies that many effects of people’s actions will not be covered by market transactions. Consequently, “externalities” will be ubiquitous. The fact that governmental intervention also has its costs makes it very likely that most “externalities” should be allowed to continue if the value of production is to be maximized. This conclusion is strengthened if we assume that the government is not like Pigou’s ideal but is more like his normal public authority–ignorant, subject to pressure, and corrupt. Whether there is a presumption, when we observe an “externality,” that governmental intervention is desirable, depends on the cost

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Ronald Coase R.I.P.

I am stunned and saddened to learn that Nobel Laureate economist Ronald Coase has died. As the author of such seminal works as “The Lighthouse in Economics,” “The Nature of the Firm, ” and “The Problem of Social Cost,” Coase was one of the most influential thinkers of his generation. (See also Brian Leiter’s comment here.) Although over 100 years old, Coase continued to think and write, publishing a book on China just last year. He set a high bar for academics. Most of us would be lucky were our entire body of work to have the impact of just one of his articles. Indeed, Coase was probably mis-cited more than most of us have ever been (or ever will be) cited. He may be gone, but his work will live on.

UPDATE: Geoff Manne adds his thoughts and note this 1997 interview in Reason.

SECOND UPDATE: Here’s a remembrance from the University of Chicago.  More from Don Boudreaux, Art Carden, Geoff Manne (again), and Kevin Bryan.  I also recommend this article by David Friedman, written in honor of Coase’s receipt of the Nobel Prize in Economics.

THIRD UPDATE: Still more from Alex Tabarrok, David Henderson, and Henry Farrell. MORE: Steve Hayward. [...]

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