Sunday, 8 September 2013

A bizarre piece on Coase

The Guardian in the UK has an absolutely bizarre article on Coase written by a David Walker - no relation I'm very pleased to say or if he is I'm disowning my family! The article is Ronald Coase has died, but his individualist dogma is everywhere: You can't divorce the ideas of the Chicago school economist from his followers today, intent on destroying the protective state.

The piece opens with,
He believed in privatising lighthouses, opposed regulating taxis, thought pollution was a price worth paying for profit, wanted to abolish the BBC and didn't think private companies could ever be monopolistic – you might not call him extreme but the label ideological would surely be applicable.
For a start what exactly would be wrong with privatising lighthouses and doing away with the BBC? What Coase set out to show in his paper on lighthouses was that lighthouses, an often used example of something that has to be provided by the government, were in fact provided by private enterprise in the early years of the British lighthouse system. So privatisation is perfectly possible. As to firms never being monopolistic I don't that Coase ever said this. Murray Rothbard did argue this by applying Mises's argument that about why socialism can't work for a country to the firm. If a firm gets very large it starts to take over its input markets and thus loses prices from those markets and therefore economic calculation is not longer possible. But I don't know what Coase thought about this.

Walker continues,
If, over a long career, that person had won renown as an economist but never once addressed income and wealth inequality or, in markets, the everyday imbalance of bargaining power between employers and employees, you might either think his fame overblown, or the way his reputation was inflated somewhat suspect.
Coase did not say much about income and wealth inequality, but many economists have won renown while not saying much about income and wealth inequality. So what? Its bit like saying X won renown as a physicist but said nothing about elementary particle physics. Well if he wasn't an elementary particle physicist this is not surprising. All this says is that there are gains of specialisation and the division of labour. We don't have a comparative advantage in everything. So we don't work on everything.

Walker goes on,
Coase, they say, was influential. But like cites like. He won a Nobel prize but by what transparent standard is a committee of the Swedish academy the sole arbiter of intellectual merit, or itself unswayed by beliefs and world views? In economics the line between scholarship and ideology is not just fine, but carefully screened from prying eyes.
But by what standard is a committee of the Royal Swedish Academy of Sciences. we could ask, the arbiter of intellectual merit in physics and chemistry, the other wards they decide. Someone has to decide who gets any award, for the economics, physics and chemistry Nobels it just happens to be the the Royal Swedish Academy of Sciences. Again, so what. You could ask this question no matter who gave the award. As to ideology, what are we to make of the awards to people like Gunnar Myrdal, Amartya Sen, Daniel Kahneman, Paul Krugman or Arthur Lewis, for example.

Later Walker writes,
Coase was praised for writing about the real world, for example his assertion that firms grow in relation to the cost of doing business. It's a theory, and attracted attention because so little economics is about real existing companies and the highly imperfect markets in which they operate. But Coase was careful never to frame his theory to make it empirically testable.
Both the transactions cost and property rights theories, which follow from Coase's work, have been empirically tested often. Oliver Williamson has noted at different times over the years,
The transaction cost approach to the study of integration yields numerous refutable implications many of which are unique to this approach. The cumulative evidence, which includes mundane, forward, lateral, and backward integration, is broadly corroborative.
To be sure, transaction cost economics, like everything else, will beneļ¬t from more and better empirical work. I have no hesitation, however, in declaring that transaction cost economics is an empirical success story.
TCE is an empirical success story ... research has been broadly corroborative of the predictions of transaction cost economics
In their 2007 look at "Vertical Integration and Firm Boundaries: The Evidence" Francine Lafontaine and Margaret Slade note that
Since Ronald H. Coase’s (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating.
Its hard to see empirical work accumulating for 25 years if the theories are not empirically testable.

After this Walker comments,
Coase belonged to the Chicago school. Like his pal Milton Friedman, government was anathema. Without regulation, and particularly without the welfare state, markets would resolve themselves in benign benefit – all you need are saintly courts and judges where the rampant individualism prevalent everywhere else is miraculously absent.
Was Coase part of the Chicago School? In many ways yes but in others no. Coase, for example,  rejected Friedmanite positivism, as David Henderson has written,
A gentle man, Coase is also quite willing to take on some of the giants of economics when he disagrees with them. In one essay, "How Should Economists Choose?," Coase criticizes a famous 1953 article on methodology by Milton Friedman. Friedman had argued that the correctness of one's assumptions is unimportant and that all that matters for an economic theory is that it be capable of accurate predictions. Coase responds with a devastating counterexample.

"We could have predicted," writes Coase, "over the last few years what the American government's policies on oil and natural gas would be if we had assumed that the aim of the American government was to increase the power and income of the OPEC countries and to reduce the standard of living in the United States. But I am sure that we would prefer a theory that explains why the American government, which presumably did not want to bring about these results, was led to adopt policies which harmed American interests. Testable predictions are not all that matters. And realism in our assumptions is needed if our theories are ever to help us understand why the system works the way it does. Realism in assumptions forces us to analyze the world that exists, not some imaginary world that does not."
Was government really an anathema to Coase (or Friedman for that matter)? Coase showed that in a world of zero transaction costs government actions - normally the imposition of taxes - were not needed to correct for negative externalities. But he goes on to say,
Of course, it does not imply, when transaction costs are positive, that government actions (such as government operation, regulation or taxation, including subsidies)  could not produce a better result than relying on negotiations between individuals in the market. Whether this would be so could be discovered not by studying imaginary governments but what real governments actually do. My conclusion: Let us study the world of positive transaction costs.
In a world of positive transactions costs what policy should be carried out can only be determined by working out empirical case studies. Does this sound like a man for whom government is an anathema or a man who just wants to study the world, including markets and governments, as they really are.

The truth about Coase, work and his legacy is much more subtle than David Walker seems able to comprehend.

1 comment:

Tim Worstall said...

David Walker is also Polly Toynbee's husband and co-author.

His views are therefore predictable.