Scanned photo of Coase from University of Chicago Law School archives
Ronald Harry Coase
29 December 1910
|Died||2 September 2013 102) (aged|
|Institution|| University of Dundee |
University of Liverpool
London School of Economics
University at Buffalo
University of Virginia
University of Chicago
|Field||Law and economics|
|New institutional economics|
|Alma mater|| University of London |
London School of Economics
|Contributions|| Coase theorem |
Analysis of transaction costs
|Awards||Nobel Prize in Economics (1991)|
|Information at IDEAS / RePEc|
Ronald Harry Coase ( // ; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.
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Coase, who believed economists should study real markets and not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace.Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms; and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.
Ronald Harry Coase was born in Willesden, a suburb of London, on 29 December 1910. His father, Henry Joseph Coase (1884–1973) was a telegraphist for the post office, as was his mother, Rosalie Elizabeth Coase (née Giles; 1882–1972), before marriage. As a child, Coase had a weakness in his legs, for which he was required to wear leg-irons. Due to this problem, he attended the school for physical defectives. At the age of 12, he was able to enter Kilburn Grammar School on scholarship. At Kilburn, he studied for the intermediate examination of the University of London as an external student in 1927–29.Coase married Marion Ruth Hartung of Chicago, Illinois in Willesden, England, 7 August 1937. Although they were unable to have children, they were married 75 years until her death in 2012, making him one of the longest-married Nobel Prize laureates.
Coase attended the London School of Economics, where he took courses with Arnold Plantand received a bachelor of commerce degree in 1932. During his undergraduate studies, Coase received the Sir Ernest Cassel Travelling Scholarship, awarded by the University of London. He used this to visit the University of Chicago in 1931–1932 and studied with Frank Knight and Jacob Viner. Coase's colleagues would later admit that they did not remember this first visit. Between 1932 and 1934, Coase was an assistant lecturer at the Dundee School of Economics and Commerce, which later became part of the University of Dundee. Subsequently, Coase was an assistant lecturer in commerce at the University of Liverpool between 1934 and 1935 before returning to London School of Economics as a member of staff until 1951. He then started to work at the University at Buffalo and retained his British citizenship after moving to the United States in the 1950s. In 1958, he moved to the University of Virginia. Coase settled at the University of Chicago in 1964 and became the co-editor of the Journal of Law and Economics with Aaron Director. He was also for a time a trustee of the Philadelphia Society. He received the Nobel Prize in Economics in 1991.
Nearing his 100th birthday, Coase was working on a book concerning the rise of the economies of China and Vietnam.In an interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists. This became "How China Became Capitalist" (2012) co-authored with Ning Wang. Coase was honoured and received an honorary doctorate from the University at Buffalo Department of Economics in May 2012.
Coase died in Chicago on 2 September 2013 at the age of 102.His wife had died on 17 October 2012. He was praised across the political spectrum, with Slate calling him "one of the most distinguished economists in the world" and Forbes calling him "the greatest of the many great University of Chicago economists". The Washington Post called his work over eight decades "impossible to summarize" while recommending five of his papers to read.
In "The Nature of the Firm" (1937), a brief but highly influential essay, Coase attempts to explain why the economy features a number of business firms instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that "production could be carried on without any organization [that is, firms] at all", Coase asks, why and under what conditions should we expect firms to emerge?
Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
The traditional economic theory of the time (in the tradition of Adam Smith) suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.
Coase noted, however, a number of transaction costs involved in using the market; the cost of obtaining a good or service via the market actually exceeds the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something from another party. This suggests that firms will arise which can internalise the production of goods and services required to deliver a product, thus avoiding these costs. This argument sets the stage for the later contributions by Oliver Williamson: markets and hierarchies are alternative co-ordination mechanisms for economic transactions.
There is a natural limit to what a firm can produce internally, however. Coase notices "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. These factors become countervailing costs to the use of the firm.
Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.
Other things being equal, therefore, a firm will tend to be larger:
The first two costs will increase with the spatial distribution of the transactions organised and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organising transactions across space may allow firms to become larger – the advent of the telephone and of cheap air travel, for example, would be expected to increase the size of firms.
A further exploration of the dichotomy between markets and hierarchies as co-ordination mechanisms for economic transactions, derived a third alternative way called Commons based peer production, in which individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals.
Upon publishing his article The Federal Communications Commission in 1959, Coase received negative feedback from the faculty at the University of Chicago over his conclusions and apparent conflicts with A. C. Pigou. According to Coase, "What I said was thought to run counter to Pigou's analysis by a number of economists at the University of Chicago and was therefore, according to them, wrong. At a meeting in Chicago I was able to convince these economists that I was right and Pigou's analysis faulty." Coase had presented his paper in 1960 during a seminar in Chicago, to twenty senior economist including George Stigler and Milton Friedman. He gradually won over the usually skeptic audience, in what has later been considered a "paradigm-shifting moment" in the genesis of Chicago Law and Economics.Coase would join the Chicago faculty four years later.
Published in the Journal of Law and Economics in 1960, while Coase was a member of the Economics department at the University of Virginia, "The Problem of Social Cost" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.
Coase argued that without transaction costs the initial assignment of property rights makes no difference to whether or not the farmer and rancher can achieve the economically efficient outcome. If the cost of restraining cattle by, say, building a fence, is less than the cost of crop damage, the fence will be built. The initial assignment of property rights determines who builds the fence. If the farmer is responsible for the crop damage, the farmer will pay for the fence (as long the fence costs less than the crop damage). The allocation of property rights is primarily an equity issue, with consequences for the distribution of income and wealth, rather than an efficiency issue.
With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).
This seminal argument forms the basis of the famous Coase theorem as labelled by Stigler.
Though trained as an economist, Coase spent much of his career working in a law school. He is a central figure in the development of the subfield of law and economics. He viewed law and economics as having two parts, the first "using the economists' approach and concepts to analyze the working of the legal system, often called the economic analysis of the law"; and the second "a study of the influence of the legal system on the working of the economic system."Coase said that the second part "is the part of law and economics in which I am most interested."
In his Simons Lecture celebrating the centennial of the University of Chicago, titled "Law and Economics at Chicago", Coase noted that he only accidentally wandered into the field:
It is generally agreed that this article has had an immense influence on legal scholarship, but this was no part of my intention. For me, "The Problem of Social Cost" was an essay in economics. It was aimed at economists. What I wanted to do was to improve our analysis of the working of the economic system. Law came into article because, in a regime of positive transaction costs, the character of the law becomes one of the main factors determining the performance of the economy. If transaction costs were zero (as is assumed in standard economic theory) we can imagine people contracting around the law whenever the value of production would be increased by a change in the legal position. But in a regime of positive transaction costs, such contracting would not occur whenever transaction costs were greater than the gain that such a redistribution of rights would bring. As a consequence the rights which individuals possess will commonly be those established by the law, which in these circumstances can be said to control the economy. As I have said, in "The Problem of Social Cost" I had no intention of making a contribution to legal scholarship. I referred to legal cases because they afforded examples of real situations as against the imaginary ones normally used by economists in their analysis. It was undoubtedly an economist who invented the widget. But in "The Problem of Social Cost" I did something else. I pointed out that the judges in their opinions often seemed to show a better understanding of the economic problem than did many economists even though their views were not always expressed in a very explicit fashion. I did this not to praise the judges but to shame economists.
Despite wandering accidentally into law and economics, the opportunity to edit the Journal of Law and Economics was instrumental in bringing him to the University of Chicago:
[W]hen I was approached to fill Aaron Director's place on his retirement, what I found most attractive about coming to Chicago was the opportunity it gave me of editing the Journal. Indeed, it is probable that without the Journal I would not have come to Chicago. I knew nothing of the original aim of the Journal. What I wanted to do was to encourage the type of research which I had advocated in "The Problem of Social Cost," and I used my editorship of the Journal as a means of bringing this about.
Coase believed that the University of Chicago was the intellectual center of law and economics. He concluded his Simons lecture by stating:
I am very much aware that, in concentrating in this lecture on law and economics at Chicago, I have neglected other significant contributions to the subject made elsewhere such as those by Guido Calabresi at Yale, by Donald Turner at Harvard, and by others. But it can hardly be denied that in the emergence of the subject of law and economics, Chicago has played a very significant part and one of which the University can be proud.
Another important contribution of Coase is the Coase conjecture, which states that an informal argument that durable-goods monopolists do not have market power because they are unable to commit to not lowering their prices in future periods.
When asked what he considered his politics to be, Coase stated,
I really don't know. I don't reject any policy without considering what its results are. If someone says there's going to be regulation, I don't say that regulation will be bad. Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't.
Coase admitted that early in life, he aligned himself with socialism.
As a young man I was a Socialist. The first challenge to this belief came when, in 1931, 5 months before I took the final examinations for the B.Com. degree, I attended Arnold Plant's seminar at the London School of Economics (LSE). He introduced me to Adam Smith's invisible hand and to the advantages of a competitive system. He also pointed out that government schemes in the economic sphere were often ill-conceived and were introduced to placate special interests. I adopted many of Plant's positions but continued to regard myself as a Socialist. That this meant holding what could be considered, and were, inconsistent positions was not unusual at that time. Abba Lerner, a fellow student and a fine theorist, with whom I had a very friendly relation, also believed in the virtues of a competitive system but was even more attached to Socialism than I was.
Guido Calabresi wrote that Coase's focus on transaction costs in The Nature of the Firm was the result of his socialist beliefs. Reflecting on this, Coase wrote: "It is very difficult to know where one's ideas come from but for all I know he may well be right." Coase continued:
My socialist sympathies gradually fell away and this process was accentuated as a result of being assigned in 1935 at LSE the course on the Economics of Public Utilities. I soon found out that very little was known about British public utilities and I set about making a series of historical studies on the water, gas, and electricity supply industries and of the Post Office and broadcasting. These researches taught me much about the public utility industries and they certainly made me aware of the defects of government operation of these industries, whether municipal or through nationalisation. These researches were interrupted by the war, when I joined the civil service, at first, for a short period, in the Forestry Commission, then responsible for timber production, and for the rest of the war, in the Central Statistical Office, one of the offices of the War Cabinet. This war-time experience did not significantly influence my views but I could not help noticing that, with the country in mortal danger and despite the leadership of Winston Churchill, government departments often seemed more concerned to defend their own interests than those of the country.
Coase was research advisor to the Ronald Coase Institute, an organisation that promotes research on institutions and organizations – the laws, rules, customs, and norms – that govern real economic systems, with particular support for young scholars from developing and transitional countries.
The University of Chicago Law School carries on the legacy of Ronald Coase through the mission of the Coase-Sandor Institute for Law and Economics. Each year, the University of Chicago Law School hosts the Coase Lecture, which was delivered in 2003 by Ronald Coase himself.
In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods, or services of a communal nature do not pay for them or under-pay. Free riders are a problem because while not paying for the good, they may continue to access or use it. Thus, the good may be under-produced, overused or degraded. Additionally, it has been shown that despite evidence that people tend to be cooperative by nature, the presence of free-riders cause this prosocial behaviour to deteriorate, perpetuating the free-rider problem.
In economics, an externality is the cost or benefit that is imposed by one or several parties on a third party who did not agree to incur that cost or benefit. The concept of externality was first developed by economist Arthur Pigou in the 1920s.
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient– that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
“The Nature of the Firm” (1937), is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market. The author was awarded the Nobel Memorial Prize in Economic Sciences in 1991 in part due to this paper. Despite the honor, the paper was written when Coase was an undergraduate and he described it later in life as "little more than an undergraduate essay."
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike production costs, decision-makers determine strategies of companies by measuring transaction costs and production costs. Transaction costs are the total costs of making a transaction, including the cost of planning, deciding, changing plans, resolving disputes, and after-sales. Therefore, the transaction cost is one of the most significant factors in business operation and management
Oliver Eaton Williamson was an American economist, a professor at the University of California, Berkeley, and recipient of the 2009 Nobel Memorial Prize in Economic Sciences, which he shared with Elinor Ostrom. His transaction costs theories are influential in the social sciences.
Law and economics or economic analysis of law is the application of economic theory to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. There are two major branches of law and economics. The first branch is based on the application of the methods and theories of neoclassical economics to the positive and normative analysis of the law. The second branch focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes.
In law and economics, the Coase theorem describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This 'theorem' is commonly attributed to Nobel Memorial Prize in Economic Sciences winner Ronald Coase during his tenure at the London School of Economics, SUNY at Buffalo, University of Virginia, and University of Chicago.
A Pigovian tax is a tax on any market activity that generates negative externalities. The tax is intended to correct an undesirable or inefficient market outcome, and does so by being set equal to the external marginal cost of the negative externalities. Social cost include private cost and external cost. However, in the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. Often-cited examples of such externalities are environmental pollution, and increased public healthcare costs associated with tobacco and sugary drink consumption.
Douglass Cecil North was an American economist known for his work in economic history. He was the co-recipient of the 1993 Nobel Memorial Prize in Economic Sciences. In the words of the Nobel Committee, North and Fogel "renewed research in economic history by applying economic theory and quantitative methods in order to explain economic and institutional change."
The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles.
Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other words, it is the sum of personal and external costs. Private costs refer to direct costs to the producer for producing the good or service. Social cost includes these private costs and the additional costs associated with the production of the good for which are not accounted for by the free market. Mathematically, social marginal cost is the sum of private marginal cost and the external costs. For example, when selling a glass of lemonade at a lemonade stand, the private costs involved in this transaction are the costs of the lemons and the sugar and the water that are ingredients to the lemonade, the opportunity cost of the labor to combine them into lemonade, as well as any transaction costs, such as walking to the stand. An example of marginal damages associated with social costs of driving includes wear and tear, congestion, and the decreased quality of life due to drunks driving or impatience, and many people displaced from their homes and localities due to construction work. In their simplest words it is the private cost+external cost.
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behaviour, structure, and relationship to the market.
Armen Albert Alchian was an American economist. He spent almost his entire career at the University of California, Los Angeles (UCLA). A major microeconomic theorist, he is known as one of the founders of new institutional economics and widely acknowledged for his work on property rights.
Steven Ng-Sheong Cheung is a Hong-Kong-born American economist who specializes in the fields of transaction costs and property rights, following the approach of new institutional economics. He achieved his public fame with an economic analysis on China open-door policy after the 1980s. In his studies of economics, he focuses on economic explanation that is based on real world observation. He is also the first to introduce concepts from the Chicago School of Economics, especially price theory, into China. In 2016, Cheung claimed to have written "1,500 articles and 20 books in Chinese" during his academic career.
New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.
"The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost–benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. If there are sufficiently low costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer.
Microeconomics is the study of the behaviour of individuals and small impacting organisations in making decisions on the allocation of limited resources. The modern field of microeconomics arose as an effort of neoclassical economics school of thought to put economic ideas into mathematical mode.
Diluted property rights theory is a macroeconomics theory proposed by founder of Holland Meissner Company, Amber Persons(formerly known as Monica Lester). The theory is meant to serve as an extension of property rights theory. Property rights theory has not received substantial theoretical or empirical attention despite its potential to explain various phenomena dealing with business transactions. Diluted property rights theory addresses this lack of progression by approaching property rights theory from the position of approximating the conditions that actually exist when rights are negotiated, exchanged, and handled.
Douglas Ward Allen is a Canadian economist and the Burnaby Mountain Professor of Economics at Simon Fraser University. He is known for his research on transaction costs and property rights, and how these influence the structure of organizations and institutions. His research covers four broad areas: transaction cost theory, economic history, agricultural organizations, and the family.
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