Sunday, 27 May 2012

Coase v. Hayek

Last week in the comments section of a posting at Tim Worstall's blog, Cris Dillow makes a couple of interesting points about the relationship between the work of Coase and that of Hayek.
You say “two” great 20th C economists: who was the other? What’s rather sadder is Coase’s relationship with Hayek. Although they were colleagues at the LSE, they never discussed his essay “The nature of the firm.” This is odd, as it argued that markets were (sometimes) inferior to centrally organized economic activity – a contradiction of Hayek’s thinking.
@ Paul Walker – you’re not sure how they fit together because they don’t. One flatly contradicts the other. The qn is: under which circumstances is Coase right, and under which is Hayek right? If they’d ever discussed this, we might be more enlightened.
My point would be that I'm not so sure that they do contradict each other. On the surface they look like they do. After all the two arguments work at different levels of analysis. Hayek is looking at the difference between a markt order and political central planning, while Coase is concerned with the details of how a market order works.

But in other respects they are asking the same question: what are the limits to the market and the firm? But are their answers compatible?

I take it from what Coase has written that he seems to think they are,
Not to include transaction costs in the theory leaves many aspects of the working of the economic system unexplained, including the emergence of the firm, but much else besides. In fact, a large part of what we think of as economic activity is designed to accomplish what high transaction costs would otherwise prevent or to reduce transaction costs so that individuals can negotiate freely and we can take advantage of that diffused knowledge of which Friedrich Hayek has told us.
Thus Coase's argument seems to me to be that firms are one kind of "individual" that makes use of the knowledge of the particular circumstances of time and place, as Hayek emphasises. Activities and organisations which circumvent or lower high transaction costs make utilising such knowledge possible.

1 comment:

Streetwise Professor said...

Hayek indeed focused on the price system as a means of coordination, whereas Coase focused on what determined the boundary between the region where resources are allocated by price, and the region where they are not (i.e., inside firms). I think that the difference is more apparent than real, because Hayek was indeed likely thinking of firms as individual actors interacting through the price system, and didn't pay much attention to what determined the boundary of the firm.

In this, he was grounded in conventional neoclassical economics. Coase's contribution was to break outside of those conventions, but the import of his work didn't become widely understood until the very end of Hayek's active intellectual career.

One way of reconciling the two is to think of allocation of resources by freely negotiated contracts, as opposed to allocation by government dictate.