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
A short biography 1
Coase’s approach 3
What of the future? 6
2 The economics of Ronald Coase 14
What Coase did 14
Coase’s impact 23
New Institutional Economics (NIE) 24
Economic analysis of law 28
Spectrum: from wireless to mobile phones 42
Coase’s legacy 44
3 Ownership, governance and the Coasian firm 46
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
4 Coase’s contributions to the theory of industrial organisation and regulation 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
5 Coase on property rights and the political economy of environmental protection 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
6 Coase and water 118
Clearly defned property rights 120
Integrated water resources management 124
7 The Coase research agenda: public goods, transaction costs and the role of collective action 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
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
9 Coase and the ‘sharing economy’ 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.