Sunday, 22 September 2013

Walter Block on Ronald Coase

If there was a humour section to this blog I'm sure this article would appear in it. The, unintended, humour comes from an article, at Economic, Walter Block on The Dangerous Fanatic Ronald Coase. As Block notes he has been a staunch enemy of the economics of Ronald Coase for many decades. Block writes,
Coase’s major “contribution” to the dismal science appeared first in the now very prestigious (at least among mainstream orthodox economists) Journal of Law and Economics. This 1960 publication of his was called “The Problem of Social Cost.” It is a major reason for the Nobel Prize in economics he was later awarded. It is the most heavily cited of all economics publications in the scholarly literature of the profession, and is widely and correctly I think seen as the foundation of the entire relatively new subfield of economics now called Law and Economics.
Actually I would argue that Coase's most important work was his 1937 article on "The Nature of the Firm". It is this paper, also noted as a reason for giving the Nobel Prize, that introduced the idea of "transaction costs", provided the basis for the modern approach to the theory of the firm and started the New Institutional Economics.

Block continues,
I regard Coase as a dangerous fanatic, his views as harmful to the general society and also as particularly and quintessentially evil. Worse, perhaps, so many, many people who should know better have been taken in by his siren song.
and he goes on to say,
[ ... ] For this Nobel Prize winning economist, there are two states of the world, those with zero and those with positive transactions costs. In the former case, Coase avers, it matters not one whit what the judge determines in any lawsuit between contending parties. Insofar as resource allocation is concerned, the same result will ensue either way. Suppose there are cows owned by A that wander onto B’s property and eat his grass. Posit that building a fence to prevent this trespass would cost $40, and that the harm to the latter is $100. If the court rules in favor of plaintiff B, that is the end of the matter; A will be ordered by injunction to build a fence to keep his cows to himself. Now, however, suppose that the jurist finds in behalf of the defendant A. No fence now need be built, at least not pursuant to any court order. However, B will (costlessly) approach A and offer him, say, $75 to build that fence. A will accept this suggestion (Coase reasonably assumes profit maximizing behavior), since he will earn profits of $75 – $40 = $35. B, too will benefit, since he saves $100 damages he would otherwise have to suffer at the cost of only $75, for a profit of $25. Everyone gains, and the fence is built no matter what the judge determines.

There is more wrong here than you can shake a stick at. For the full story, see my 1975 publication. Let me just say at this point that it is improper to support a scenario where B, the victim of trespass, has to pay one red dime to his victimizer, A. And, also, the scenario might fall apart unless B has enough money to finance this bribe. Coase (1960), despite Demsetz to the contrary, never disavows this possibility
But who is the victim? As Coase points out it takes two to tango. You need both the A and B for there to be a problem. That is, both A and B cause the problem so its not clear who the victim is since whoever you determine to be said victim helps cause the problem. Also any payment between A and B is just a transfer that doesn't matte for efficiency. For a discussion of "The Assignment of Rights and the Distribution of Wealth" see section IV of Coase (1988).

Block goes on the say,
Now consider the positive, very high transactions cost model. Here, Coase maintains, the judge’s decision will indeed affect resource allocation (whether or not the fence gets built), for it will be too expensive for any transfer of money to take place. What is Coase’s advice to the judge? To rule in favor of B, and to force A to erect the barrier so that his cows cannot roam. Why, because in this way wealth will be enhanced: “society” will pay $40 and gain $100, for a clear benefit of $60. This is despicable, outrageous, monstrous. Note that private property rights never, ever, not once, enter the Coasean deliberations. There is no such thing as “trespass.” For Coase, there is no “fault.” No blame is ever accorded to anyone. B has just as much responsibility for the economic loss for having his crops where he does on his own private property (there really is no such thing for this defender of free enterprise), as A has for allowing his cows to eat them. Yeah, and it is just as much fault for you having your nose there, as it is mine for punching it, with no provocation on your part. The point is, Coase does not at all look to the past to determine who is in the right and who is in the wrong. No, he looks to the future and asks, under which assignment will GDP be maximized after the decision; Coase is a fanatic about wealth maximization. However, the relative prices of grass, beef, barbed wire, etc., are continually changing. The next time such a case is heard, the very opposite decision might well be reached. This is an entire abnegation of private property rights. Coase is worse than the commies. At least they had a theory of property: all for the proletariat, none for the bourgeoisie. That is not much of a theory, but at least it is a theory. Coase is worse, he is a total nihilist. And the importance of this cannot possibly be overemphasized. Without private property rights, our entire free enterprise system disappears down a veritable sinkhole.
But its not just Coase that Block has total contempt for, economist David Henderson and lawyer Richard Epstein fare no better.
Now for Henderson. He states in the War Street Journal: “Before Coase, most economists had accepted British economist Arthur Pigou’s idea that if, say, a cattle rancher’s cows destroy his neighboring farmer’s crops, the government should stop the rancher from letting his cattle roam free or tax him for doing so. Otherwise the cattle would continue to destroy crops because the rancher would have no incentive to stop them. Coase challenged that view. The rancher, he wrote, would be ignoring an opportunity: the chance to be paid by the farmer not to destroy the crops. If transaction costs were zero—Coase was clear that he wasn’t assuming they were—the farmer and rancher could come to a mutually beneficial agreement.”

Mutually beneficial? It is to laugh. Under certain assumptions of the relative costs of beef, crops, barbed wire, the victim (B, in my example) will be forced to pay off the perpetrator (A). That is justice? We might as well ask the rape victim to pay off her rapist to stay away from her, a point I indeed elaborate upon, particularly in my publication of 1996.

Next up in the batter’s box in the War Street Journal is one Alan Van Dyke in a letter to the editor of 9/10/13. This worthy starts off on the wrong foot: “I am a great admirer of Ronald Coase.” What, you “greatly admire” a man who supports rapists, murderers, trespassers? (Hey, read my articles on this; I’m only writing an op ed here; but this is indeed the reductio ad absurdum I launch at Coase in the peer reviewed literature). However, Van Dyke is brilliant when he says in criticism of Henderson: “The rancher had no rightful ‘opportunity’ to profit by being paid to not allow his cows to destroy the farmer’s crops. The transaction that was described wasn’t a market transaction, it was extortion.” But this means that Van Dyke is an “admirer” of someone who supports extortion. Say it is not so, Van Dyke. You were so close to seeing the errors, and, yes, the evil, of Coaseanism.

Whereupon Epstein enters the fray (letter to the editor, 9/11/13), to defend Henderson against Van Dyke. Epstein has the temerity to say “in that counterfactual world (of zero transactions costs) neither extortion nor deception is possible.” Let’s give half credit to Epstein. Yes, deception is not possible in this model, which explicitly rules it out. But extortion? It is not extortion to force the victim to pay to get the trespasser to stop violating his rights? God knows what Epstein is teaching his NYU law students. But my favorite expression of Epstein’s is his reference to the: “legitimate … uses of state coercion.” This is a libertarian?
What can you say, the Walter Blocks of this world make life interesting.

  • Coase, R.H. (1988). 'Notes on the Problem of Social Cost'. In R.H. Coase, "The Firm, the Market, and the Law" (pp. 157-86), Chicago: University of Chicago Press.

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