07 September 2013

Ronald Coase

On 2 September 2013, one of the great economists of the 20th Century, Ronald Coase, passed away. Coase is particularly remembered for two seminal contributions to economics:

The transaction cost theory of the firm, which states that firms exist because a hierarchical system of organisation has lower costs than relying on the market to co-ordinate production.

The Coase Theorem, which effectively states that absent transaction costs when there are well defined property rights, the distribution of those property rights has no effect on production. By direct implication the only effect of regulatory intervention is the redistribution of wealth; it does not affect production. In later years Coase described this result as “an obvious point”: “all [the theorem] says is that people will use resources in the way that produces most value”.1

Coase argued as a consequence of this result that rights to radio spectrum should be auctioned rather than administratively allocated. Many decades later, Coase’s approach is accepted as the most appropriate approach for allocating radio spectrum. The same principle underpins modern carbon credit trading, where the creation of a tradable property right to emit carbon dioxide (or a carbon dioxide equivalent) allows the market mechanism to function to determine the optimal level of pollution. Coase’s view of pollution was that:
“People don't pollute because they like polluting. They do it because it's a cheaper way of producing something else. The cheaper way of producing something else is the good; the loss in value that you get from the pollution is the bad. You've got to compare the two.”1

Another major contribution of Coase was the founding of the discipline of Law and Economics. The Coase Theorem was a major contributor to the early development of this field, drawing as it did on both economic analysis and analysis of the underpinning legal arrangements. Coase became the author of the Journal of Law and Economics from 1964 to 1982, perhaps one of the most influential journals of its time.

For more obituaries and summaries of Coase’s work see:
1. See interview in Hazlett (1997)