A world of economics has lost the greatest economist of the 20th century. The death of Ronald Harry Coase has deprived the economists profession of one of its creative and innovative thinkers. His introduction of transaction costs into economics gave rise to the modern theory of the firm, law and economics and the new institutional economics.
For me the most important thing in Coase’s work is that we see most of the main issues of the modern theory of the firm being raised together for the first time. He sets out to “discover why a firm emerges at all in a specialized exchange” − a question about the existence of the firm; he also sets out to “study the forces which determine the size of the firm” − an issue to do with the boundaries of the firm; and he inquires into the reasons for “diminishing returns to management” − issues to do with the internal organisation of the firm. It was the efforts to answer these questions that initiated the charge from seeing the theory of the firm as just part of price theory to seeing it as an important topic in its own right. Coase also provides one of the main building block for answers to these issues, the “costs of using the price mechanism” or transaction costs.
Update: Matt Nolan comments at the TVHE blog here.