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Ronald Coase RIP

I have just read that Ronald Coase has died aged 102.

Certainly one of the greatest figures in modern economics.  His “dumb” question “What is a firm?” was one of those “dumb” questions that transformed microeconomics.   A firm as an island in an ocean of markets. On the island market forces didn’t operate – managerial fiat did.  This led to the Williamson et al literature that focused on the internal workings of firms and how they were managed.  A major gap between economics and how we view the business world was closed.  After it was done it all seemed so obvious.

Another of Coase’s other great insights centred around the connections between property rights and externalities.  This was the Coase Theorem which, when first stated, was rejected by the profession’s elite such as Milton Friedman.  Gradually the experts came around to understand the Coase logic and these days some even see the core idea as simple-minded. It ‘aint.  The idea that Pigovian taxes and subsidies were necessary correctives in a market economy was the overwhelming conventional wisdom when I first studied microeconomics.  That such correctives could sometimes be replaced by a legal system which enforced property rights in the presence of a bargaining process among those affected by externalities is an astonishing insight.   Again, once the insight got bedded done, the smartie math types saw it as “obvious”.

Recognising the obvious when no-one else does is a sign of careful independent thinking. Ronald Coase was an intellectual giant who changed the way economists looked at the world.

Update: Here is a good appreciation which also discusses Coase’s important insights on durable goods and monopoly.

 

7 comments to Ronald Coase RIP

  • To begin with, the insight in “The Problem of Social Cost” was not the Coase Theorem, a term probably coined by Stigler to describe one small piece of the argument. And, by Stigler’s account, when Coase presented his ideas to a gathering of Chicago economists at a dinner at Aaron Director’s house the conversation started with everyone disagreeing with Coase, ended with everyone agreeing–so your “gradually the experts came around” covers a period of an hour or so. That’s consistent with Coase’s description of the evening as well.

  • hc

    I’ll provisionally stand by both points and hunt around for the reference that gave rise to my claim – its a few years since I read the history. If I have it wrong I will withdraw*. My understanding was the presentation at University of Chicago led to a disagreement that lasted nearly a year. Interpreting the “Problem of Social Cost” has become something of a game – it discusses examples and it is difficult to discern a single idea. Other interpretations suggest that it was the idea that transaction costs limit the possibilities for bargaining was this point that was central.

    * To be clear, no disrespect intended towards Milton Friedman who I also unreservedly admire.

  • MikeM

    The issue first arose out of Coase’s article on the Federal Communications Commission, which appeared in 1959. The meeting at Aaron Director’s house occurred the following year. So the disagreement lasted almost a year, but, as David Friedman has said above, total disagreement changed during the evening at Aaron Director’s house to full agreement.

    Coase describes the event in the Youtube video of part 4 of his 2003 Coase Lecture, http://www.youtube.com/watch?v=GVjIB9b59ig

    Coase also gives his view on the so-called Coase Theorem”.

  • Jim Rose

    coase was one the great economists of the century, the finest english economist since marshall.

    I am sure the after-dinner debate was great. I do not remember the year.

    see http://www.jstor.org/discover/10.2307/724810?uid=3738776&uid=2129&uid=2&uid=70&uid=4&sid=21102604042787 for the first footnote to the social cost paper saying that comments of others on his 1959 FCC article made him make explicit the implicit arguments in that.

    this footnote suggests that Coase was an asute listener who used debate and disagreement to take his ideas forward.

  • On the interpretation of “The Problem of Social Cost,” at least from my point of view, see:

    http://www.daviddfriedman.com/Academic/Coase_World.html

    Coase’s comment on the article was that one didn’t understand one’s ideas until someone else explained them to one. Now I’ll never find out if he was being sarcastic–but then, I didn’t expect to.

  • Uncle Milton

    It seems to me, based on no research, that Nobel Prize winners in economics live longer than the population average. Coase was >100, Samuelson and Friedman died in their 90s, Arrow is still going in his 90s, as is Lawrence Klein.

    I know you have to live a long time just to be around when your work is recognised with a Nobel, but still …

  • hc

    David, Its a clearly written and useful piece. I think with the exception of the last bit on “law and property rights” my interpretation of Coase doesn’t come up as too misleading. The second part of your argument – that transactions costs limit efficient bargaining – I mention above.