Ronald Coase, 1910-2013: Economics All In Prose

Ronald Coase was born in London before World War One, and died in Chicago on Monday at age 102. He was awarded the Nobel Prize in Economics in his eighties largely for work he did in his twenties, which in his Nobel acceptance he called “a strange experience.” Then he lived twenty-plus more years, and published a book last year at 101, How China Became Capitalist! Coase was one of the greatest 20th-century economists, and likely the greatest who used all prose and no mathematical models. In his Nobel address he said “The Nature of the Firm,” his 1937 article, explained that “in a competitive system there would be an optimum of planning since a firm, that little planned society, could only continue to exist if it performed its co-ordination function at a lower cost than would be incurred if co-ordination were achieved by means of market transactions and also at a lower cost than this same function could be performed by another firm.” The other article cited by the Nobel Committee, “The Problem of Social Cost,” contained what another future Chicago Nobelist, George Stigler (intellectual buddy of Milton Friedman in the U. of Chicago economics department–Coase was a professor at the U. of C. Law School, never economics or business) translated into the “Coase Theorem”: contrary to standard economic theory, under which some government action such as taxation or regulation “was required to restrain those whose actions had harmful effects on others (often termed negative externalities) …. in a regime of zero transaction costs–an assumption of standard economic theory–negotiations between the parties would lead to those arrangements being made which would maximize wealth, and thus irrespective of the initial assignment of rights.” If you need to, stop now and do a search on Coase theorem–right now, in the wake of his death, unexpected even at 102, there is hot debate on blogs and news sites over the meaning of Coase’s work. OK, Coase continues (again from his 1991Nobel speech): “This is the infamous Coase Theorem, named and formulated by George Stigler, although it is based on work of mine. Stigler argues that the Coase Theorem follows from the assumptions of standard economic theory. Its logic cannot be questioned, only its domain. I do not disagree with Stigler. However, I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs….it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies) could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion: Let us study the world of positive transaction costs.”

That is intellectual dynamite. Why? Because the right wing made a fetish idol out of the “infamous Coase Theorem,” using it to ward off any attacks on “free people and free markets” (the WSJ slogan). But Coase said he had no use for articles of faith, nor for the easy tautology (if there are no impediments to bargaining and trading, people will not stop bargaining and trading) to which his work on transaction costs was reduced by self-dealing propagandists. Coase wanted his work to be a stepping stone toward empirical studies, not an end to investigation and analysis. If there were a heaven for political economists, perhaps Coase and Albert Hirschman, that other great economic and social thinker and prose stylist, who died last year at 97, could still be working away.

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