Ronald Coase

Ronald Coase

New institutional economics
Born	(1910-12-29) 29 December 1910 Willesden, London, England
Nationality	United Kingdom
Institution	University at Buffalo, University of Virginia, and University of Chicago
Field	Law and economics
Alma mater	London School of Economics
Opposed	Arthur Cecil Pigou
Influences	Frank Knight
Influenced	Oliver E. Williamson, Armen Alchian, Steven N. S. Cheung
Contributions	Coase Theorem Analysis of transaction costs Coase conjecture
Awards	Nobel Prize in Economics (1991)
Information at IDEAS/RePEc

Ronald Harry Coase (/ˈkoʊs/; born 29 December 1910) is a British-born, America-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took courses with Arnold Plant. He received the Nobel Memorial Prize in Economics in 1991.

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). Coase is also often referred to as the "father" of reform in the policy for allocation of the electromagnetic spectrum, based on his article "The Federal Communications Commission" (1959), where he criticizes spectrum licensing, suggesting property rights as a more efficient method of allocating spectrum to users. Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.

Biography

Ronald Harry Coase was born in Willesden, a suburb of London, on 29 December 1910. His father was a telegraphist for the post office, as was his mother 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 defects. At the age of 12, he was able to enter the Kilburn Grammar School on scholarship. At Kilburn, Coase completed the first year of his B.Comm degree and then passed on to the University of London. Coase married Marion Ruth Hartung of Chicago, Illinois in Willesden, England, August 7, 1937.

Coase attended the London School of Economics, where he received a bachelor of commerce degree in 1932, and was a member of the staff from 1935 to 1951. He then started to work at the University at Buffalo and became an American citizen 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 editor of the Journal of Law and Economics. He was also for a time a Trustee of the Philadelphia Society. He received the Nobel Prize in Economics in 1991.

As his 100th birthday approached, Coase was working on a book concerning the rise of the economies of China and Vietnam. An interview with Coase was conducted by Wang Ning (co-author of the book How China Became Capitalist) December 28–29, 2010, in Chicago. In the interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists. Coase will be honored and will receive an honorary doctorate from the University at Buffalo department of economics in May of 2012.

The Nature of the Firm

Main article: The Nature of the Firm

The Nature of the Firm was a brief but highly influential essay in which Coase tries to explain why the economy is populated by 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 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, that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just 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 with a firm. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs.

There is a natural limit to what can be produced internally, however. Coase notices a "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. This is a countervailing cost 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 lower the costs of organizing and the slower these costs rise with an increase in the number of transactions organized.
• the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organized.
• the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size.

The first two costs will increase with the spatial distribution of the transactions organized 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 organizing transactions across space will cause firms to be larger—the advent of the telephone and cheap air travel, for example, would be expected to increase the size of firms.

Coase does not consider non-contractual relationships, as between friends or family.

The Problem of Social Cost

Main article: The Problem of Social Cost

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 it is economically irrelevant who is assigned initial property rights; the rancher and farmer will work out an agreement about whether to restrict the cattle or not based on the economic efficiency of doing so. Property rights allocation will hence matter only in determining distribution, not efficiency.

With sufficient transaction costs however, initial property rights will have a non-trivial effect. 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 labeled by George Stigler.

Coase Conjecture

Another important contribution of Coase is the Coase Conjecture: 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.

Critics

Some scholars have looked at Coase's work through the lens of its relevance in time. In particular, scholar Patrick Ryan pointed out that "although Coase made one of the world’s leading economic arguments on transaction costs, there is evidence of a massive crack in the Coasian spectrum theory." Ryan points to later statements by Coase that indicate that his spectrum theories were couched in a time that did not have the technology to consider the impact of digital switching on spectrum efficiency.

The Ronald Coase Institute

Coase is research advisor to the Ronald Coase Institute, an organization that promotes research on the institutions - the laws, rules, customs, and norms - that govern real economic systems, with particular support for young scholars from developing and transitional countries.

Quotations

Coase coined the well known, but often misquoted adage "If you torture the data long enough, it will confess."

Publications

•     (1937), "The Nature of the Firm", Economica 4 (16): 386–405, DOI:10.1111/j.1468-0335.1937.tb00002.x 
•     (1960), "The Problem of Social Cost", Journal of Law and Economics 3 (1): 1–44, DOI:10.1086/466560 
•     (1972), "Durability and Monopoly", Journal of Law and Economics 15 (1): 143–149, DOI:10.1086/466731 .
•     (1974), "The Lighthouse in Economics", Journal of Law and Economics 17 (2): 357–376, DOI:10.1086/466796 
•     (1992), "The Institutional Structure of Production", American Economic Review 82 (4): 713–719 . (Nobel Prize lecture)

See also

• Theory of the firm
• Coase theorem
• Merger
• Horizontal integration
• Vertical integration
• Partnership
• List of think tanks

External links

• A video of Prof. Coase talking about law and economics
• Biography at the Nobel site
• Biography at EconLib
• Wireless Communications and Computing at a Crossroads, Journal on Telecommunications & High Technology Law, Vol. 3, No. 2, p. 239, 205 (describing some of Ronald Coase's theories as they apply to wireless communications and providing several footnotes for further research).
• Coase Institute
• "Looking for Results", interview in Reason by Thomas W. Hazlett
• 2003 Coase Centennial Speech delivered by Coase (500MB QuickTime file, recommend downloading video before watching)
• [1], article in The Economist magazine, December 18 thru 31st, 2010.