50 Years of Coasean Brilliance

|Peter Boettke|

In December 2009, Ronald Coase will celebrate his 99th birthday.  Amazing.  But this month, we also celebrate the 50th anniversary of his brilliant article on the Federal Communications Commission published in Vol. 2 of the Journal of Law and Economics in October 1959.

Readers of this blog should concentrate their attention on p. 18 of the original paper where Coase lays out his basic comparative instituitonal analysis of market allocation and government control.  In his discussion he relies not only on Adam Smith's 'invisible hand' but public choice analysis of political pressure groups and administrative agency costs, but Misesian arguments about monetary calculation and Hayekian arguments about dispersed knowledge.  It is as brilliant a restatement in as concise a use of language as you can find.  As I have been teaching students for 20 years, Coase is the master of economic minimalism --- minimal amount of theory, maximum amount of insight into how the world works.

But many readers get confused by Coase and think his work is about the so-called "Coase Theorem" and the implications of a zero transaction cost world.  Coase has denied this, and it is true.  His zero transaction cost analysis (most famously in his Problem of Social Cost paper) served mainly to disabuse the pretense of Pigovian analysis and remedies.  But that is another story for another day.  With respect to the FCC paper, it really is about how ownership rights work in practice to solve social dilemmas, and how when government control substitutes for exchange relations the decision process inevitably falls back on arbitrary rules which produce a misallocation of resources due to lack of knowledge, inflexibility and the influence of political pressure groups.

An important aspect of Coase's work is to look for problem soliving efforts by individuals in society. We economists should be alert to the variety of ways that individuals tackle social dilemmas and realize the gains from trade.  As the brilliant Bob Higgs put it in a session this morning discussing Coase's paper --- "look for the deals".  Bob taught at University of Washington from 1968-1983, and as he put it, this is what he, Steven Cheung, and Yoram Barzel took from Coase --- blackboard theory says one thing, look out in the world to see how people get around the blackboard.  I have tried to tell a similar story to my students when I say that their field research begins with a recognition of a problem where is appears that "history defies what logic dictates".  The point isn't to throw up your hands, but instead to dig in with your hands to study the institutional details (rule regimes) that permit the cooperative solution to emerge in situations of conflict.  We owe that program to Coase's framework of analysis.

Happy Birthday to Ronald Coase in advance of 99th, and thank you for 50 years of brilliance from the FCC paper.

Comments

[Sheldon Richman]

Thanks for this, Pete. I like to think of the mythical physicist who insisted that bumble bees can't fly because their wings are too small, oblivious of the bumble bees flying right in front of him. So when someone says "the market" or people unaided by the State can't do X, I want to shout: Look outside. Bumble bees fly!

[Mario Rizzo]

The Coase Theorem is considered a useless tautology by a ton of economists today. If numbers are small then there are all sorts of strategic bargaining problems; if numbers are large there are high transactions costs. So, of course, we should never observe transactions.

[Richard Ebeling]

Steven G. Medema's new book, "The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas" (Princeton University Press, 2009), presents a very clear and fairly thorough exposition of Ronald Coase's ideas (both in his article on the Federal Communications Commission, and his later writings on "social cost," transaction costs, and the institutional order).

What is also useful in the book is that Medema does so in a setting of showing the rise of modern "welfare economics" in the late 19th and early 20th centuries (including Pigou's regulatory proposals to handle externalities), the dead-end of the hyper-mathematical general equilibrium approach in dealing with public goods and externality issues, and the important challenge the "market failure" literature received at the hands of Coase and the emerging Public Choice approach in the second half of the 20th century.

Coases's signficance in the arena of issues relating to property rights, regulation, and the state is emphasized by Medema with great force.

Richard Ebeling

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[Manage Your Money]

Economic minimalism is especially important in today's society. Great teacher in Ronald Coase. He hit the century mark in December!

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99 years is a good age to live to but as you say it is more important that there is a 50 year anniversary for the economic theory that has enhanced thinking it terms of how the world may be viewed.