Sunday, 15 November 2015

Forever Contemporary - The Economics of Ronald Coase

is the title of a new book edited by Cento Veljanovksi from the IEA in London. It provides an introduction to the ideas of Ronald Coase.

A quick summary of the book is
  • R. H. Coase (1910–2013), a leading modern figure in the classical liberal tradition, was awarded the Nobel Prize in Economics in 1991 for his analysis of the significance of transaction costs and property rights for the functioning of the economy.
  • Before Coase’s work in the 1930s, there was no real understanding of the relation between the theory of the firm and the theory of markets. Coase showed that the size and structure of firms, and the location of the border between internal exchange within the firm and external exchange through markets, are systematically related to the costs of transactions.
  • These transaction costs, which Coase termed ‘costs of using the price mechanism’, include search and information costs (those involved in finding business partners, rather than having to produce your own inputs), bargaining costs (which rise sharply with the number of contractual partners) and enforcement costs (which, in the absence of a strong and effective legal framework, depend largely on trust in partners). When these costs alter dramatically, for example, as a result of introducing innovative technology, we can expect substantial alterations in firm and market structures.
  • Coase was a pioneer in the modern analysis of environmental issues. He showed that, with clear property rights and low transactions costs, private solutions to many environmental problems can be achieved without government regulation. Such solutions were logically independent of the initial distribution of property rights. This is highly relevant to a number of modern economic problems which the government currently handles badly, such as land-use planning.
  • His work has had a profound effect on later generations of economists, several of whom themselves won Nobel Prizes. His work on environmental issues, for example, influenced another Nobel Prizewinner in Elinor Ostrom, whose work focused on how common pool resources could be used effectively with minimal government intervention. This is especially relevant to debates about environmental and ecological degradation in forestry, fishing and game animal resources – perhaps particularly in developing economies.
  • Similarly his work on the firm led to the development of the ‘New Industrial Economics’, now associated with Oliver Williamson, which has changed our understanding of issues of economic governance. This is relevant to current concerns over corporate social responsibility.
  • Coase’s editorship of the Journal of Law and Economics over many years did much to stimulate economic analysis of legal institutions, an innovation which has had a major influence on public policy, particularly in the US. It has fed, for instance, into recommendations for accident compensation.
  • Coase’s insights have challenged economists’ assumptions about the nature of public goods, which he demonstrated could often be provided more effectively by various forms of private initiative. He also illuminated such varied topics as the allocation of spectrum bandwith, the regulation of financial institutions and water resource management.
  • Methodologically, Coase was opposed to ‘blackboard economics’ which relied on theory or econometric analysis at the expense of more practical investigation. He favoured careful examination of case studies and the history of industries when analysing economic policy issues.
  • His work retains considerable significance in the twenty-first century. Coase’s analysis of China’s economic advance, published shortly before his death, sheds light on its future prospects, while his transaction cost approach can be argued to explain the new phenomenon of the ‘sharing’ economy which is reshaping businesses and employment. Furthermore his work should continue to be at the forefront of debates surrounding regulation, broadcasting and the environment. If policymakers and the economists who advise them ignore Coase, they are in danger of perpetuating policies which may work ‘in theory’ but do not work effectively in practice.
The table of contents reads:

1 Introduction   1
     Cento Veljanovski
     A short biography    1
     Coase’s approach    3
     What of the future?    6
     Contributions   8
2 The economics of Ronald Coase    14
     Cento Veljanovski
     What Coase did    14
     Coase’s impact    23
     New Institutional Economics (NIE)    24
     Economic analysis of law    28
     Economics   31
     Regulation   37
     Antitrust   39
     Spectrum: from wireless to mobile phones    42
     Coase’s legacy    44
3 Ownership, governance and the Coasian firm   46
      Martin Ricketts
      The nature of the frm    46
      ‘ownership’ in the Coasian theory of the frm    49
      The hazards of transacting    52
      Competition and the selection of governance structures   57
      Public policy towards the governance of enterprise    64
      Conclusion   68
4 Coase’s contributions to the theory of industrial organisation and regulation    70
      Alex Robson
      Introduction   70
      The nature of the firm: implications for the theory of industrial organisation    73
      Regulating utilities: the Coasean critique of marginal cost pricing    77
      The hold-up problem: implications for regulation    80
      Regulation and industrial organisation of the communications industry    83
      The development of the radio broadcasting industry in Britain    85
      The allocation of radio frequency spectrum in the United States    86
      Conclusion   89
5 Coase on property rights and the political economy of environmental protection    92
       Mark Pennington
       Introduction   92
       Coase on the problem of social cost    94
       Coasian analysis and the scope for environmental markets   100
       Ethical objections to the extension of environmental markets   108
       Conclusion   116
6 Coase and water    118
       Nicola Tynan
       Introduction   118
       Clearly defned property rights    120
       Integrated water resources management    124
       Conclusion   136
7 The Coase research agenda: public goods, transaction costs and the role of collective action   137
       Stephen Davies
       Introduction   137
       Was the lighthouse a public good?    138
       Conditions for private provision    140
       Coase’s research agenda    141
       Bundling private with public goods    147
       Coase’s way    159
8 Stock exchanges as lighthouses    160
        Philip Booth
        Lighthouses – what does not work ‘in theory’ works in practice   162
        Financial regulation – what does not work ‘in theory’ works in practice    163
        Private regulation and stock exchanges    166
       ‘Big bang’ and ‘deregulation’    172
        The further development of statutory regulation    175
        Could bank regulation be provided by market institutions?   178
        Conclusion   182
        Coda   185
9 Coase and the ‘sharing economy’    187
        Michael Munger
        Introduction   187
        Tomorrow 3.0: rent or own?    189
        The power drill trope: it’s about time    191
        Entrepreneurs can sell reductions in transactions costs   195
        Middlemen as brokers and sellers of connections    197
        Why sell products when you can sell reductions in transactions costs?    200
        Coase’s insight    204
Publications by Ronald H. Coase in chronological order    209

Interestingly in the book Coase is seen as "a leading modern figure in the classical liberal tradition", but this is not how everybody sees him. Bylund (2014), for example, sees Coase's paper "The Nature of the Firm" as a defense of socialist economic planning!!!

And not many people have ever called Ronald Coase a socialist!

For me the "The Nature of the Firm" is one of the - if not the - greatest papers in economics in the 20th century. It is this paper that introduced the idea of transaction costs and lead to the modern theory of the firm. Coase asked the big three questions about the firm: questions about the existence of the firm, the boundaries of the firm and the internal organisation of the firm. It is these questions that have largely driven the contemporary theory of the firm.

Bylund, Per (2014). 'Ronald Coase's "Nature of The Firm" and the Argument for Economic Planning', Journal of the History of Economic Thought, 36(3) September: 305-29.

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