Tag: Coase

Ronald Coase, 1910-2013

This past weekend Nobel Laureate Ronald Coase died.   He is one of the most influential social science scholars ever, having shaped questions of organizational economics, and virtually founding the field of law & economics.  His 1937 paper, “The Nature of the Firm,” addressed the canonical question for organizational economics, and a mere 23 years later in 1960 he altered the trajectory of social science research with “The Problem of Social Cost.”  As Coase put it:

Transaction costs were used in one case to show that if they were not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (p. 62).

The Cheap Talk guys give us a short, pithy take on the organizations piece, and  Steven Landsburg distills the essence of the externalities argument here. 

It’s difficult to convey what an influence Coase has had on the profession, but it is certainly much greater than the “median” Nobel Prize winner. Peter Klein weighs in:

His “Problem of Social Cost” (1960) has 21,692 Google Scholar cites, and “The Nature of the Firm” has 24,501. Adam Smith’s Wealth of Nations, summed across editions, has about 30,000. Coase changed the way economists think about the business firm and the way they think about property rights and liability….  Not all economists have agreed with his arguments and conceptual frameworks, but they radically changed the terms of debate in the economics of law, welfare, industry, and more. He is the key figure in the “new institutional economics” (and co-founder, and first president, of the International Society for New Institutional Economics).

 The Lawrence Economics Blog’s links to Coase are here, and here is a the University of Chicago notice. If you just type “Coase” into a search engine, you will have plenty to read.   Wow.

‘The Benefits are the Costs’ and Other Links

I’m just going through a backlog of interesting stories to share with my Econ 280 class.  First up, Jonathan Adler points us to a short story on a residential subdivision’s successful legal challenge to the construction of a home windmill.  The residents of a the Forest Hills subdivision just outside of Carson City, Nevada, argued that the proposed windmill would sully their sight-lines and provide interminable noise from the turning of the rotors. This is a solid example of what Shavell would call an ex ante property rule, and you can read all about it in the Las Vegas Sun.  

Speaking of benefits, the fall Journal of Economic Perspectives has another symposium on contingent valuation.  Twenty years ago, Peter Diamond and Jerry Hausman famously asked, “Is Some Number Better than No Number?”   Although Hausman seems to have found some clarity on the issue, I’d say for the profession the question remains unresolved.

Next up in the news, we have a consortium  of cities and businesses is looking at a $200 million reservoir project to satisfy all its water needs, but it is contemplating paying rice farmers $100 million not to farm instead.

Is this Coasean bargaining inevitable? I wouldn’t bet the farm on it.

Finally, we have Thomas Kinnaman offering the classic economist’s take down of two benefit-cost analyses of shale gas production (i.e., fracking):

The costs of natural gas extraction include, paradoxically, all of the items listed as “benefits” in the two reports discussed above. Natural gas extraction requires labor, capital equipment, pipelines, and raw materials. These economic resources, in a fully employed economy, could have been allocated to other uses. The price paid to secure these resources from these other industries indicates the value of these resources to these other industries (had their value been higher, the market price would have been higher). Thus, the quantity of each economic resource times its market price – in fact 13 the total expenses by the industry as gathered in the surveys – represent the cost of utilizing scarce economic resources to gas extraction.

This block quote is a battle we economists will probably never win.  When I tell my students “jobs” are a cost not a benefit, they look at me as if I suddenly began speaking Swahili.   The paper is from Ecological Economics, and an ungated version is available here.

Interview with Ronald Coase

Nobel Laureate Ronald Coase is foundational in both of my courses this term.  His 1937 paper, “The Nature of the Firm,” addressed the canonical question for organizational economics, and a mere 23 years later in 1960 he altered the trajectory of social science research with “The Problem of Social Cost.”  As Coase puts it:

Transaction costs were used in one case to show that if they were not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (p. 62).

Now he’s back pounding the pavement in support of his new book, How China Went Capitalist.  We spoke of his op-ed in the WSJ, and now here is an interview with him on NPR.

The interview is mostly a review of his career, including the famous lighthouse debate.

Coase Goes to China… Literally

Back in 1937 Ronald Coase asked a question fundamental to the economics of organizations — why are there firms?  Then in 1960 he pointed out that externalities stem from the reciprocity of the relationship between harmer and harmee, and that the failure to negotiate and enforce contracts is fundamental to the persistence of “externalities.”  As he says in his essay in “The Nature of the Firm: Influence“:

Transaction costs were used in the one case to show that if they are not included in the analysis, the firm has no purpose, while in the other I showed, as I thought, that if transaction costs were not introduced into the analysis, for the range of problems considered, the law had no purpose (62). 

For these seminal contributions he picked up the Nobel Prize in Economics in 1991 and shortly thereafter helped found — along with Douglass North — the International Society for the New Institutional Economics.

Now, in 2011, he asks the questions, how and why did China go capitalist?  And here comes the book later this month.

China’s road to capitalism was forged by two movements. One was orchestrated by Beijing; its self-proclaimed goal being to turn China into a “modern, powerful socialist country.” The other, more important, one was the gross product of what we like to call “marginal revolutions.” It involved a concatenation of grass-roots movements and local initiatives.

Here’s some more.

There’s a lot of New Institutional Economics work on China, by some very heavy hitters.