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Ronald Harry Coase was born on 29 December 1910 in the London suburb of Willesden. He received the BSc in Commerce from the London School of Economics in 1932 and while there was greatly influenced by Arnold Plant, who, as Coase has said, taught him many of the lessons that later came to be associated with the Chicago School. Interestingly, Coase did not take a single economics course while he was at the LSE, which he suggests gave him ‘a freedom in thinking about economic problems which [he] might not otherwise have had’ (1990, p. 3).

Upon completing his studies at the LSE, Coase took up a position at the Dundee School of Economics and Commerce, where he taught with his friend and public choice pioneer Duncan Black from 1932 to 34. Coase moved on to the University of Liverpool in 1934–35 before returning to the LSE, where he remained from 1935 until 1951. His time at the LSE was interrupted by the Second World War, during which he served as a statistician at the Forestry Commission (1940–41) and in the Central Statistical Office, Offices of the War Cabinet (1941–46). Coase left the LSE for the US and the University of Buffalo in 1951, remaining there until 1958. Following a year spent at the Center for Advanced Study in the Behavioral Sciences at Stanford, he accepted an appointment at the University of Virginia in 1959.

Although Coase is most closely associated with the Chicago School, his two most influential works – ‘The Nature of the Firm’ (1937) and ‘The Problem of Social Cost’ (1960) – were written before he arrived at Chicago, in 1964, to teach at the Law School and to join Aaron Director in editing the Journal of Law and Economics. Coase retired from the University of Chicago in 1981 and was awarded the Nobel Prize in Economics in 1991.

Scholarly Work

While most economists identify Coase with his two classic articles on the firm and social costs, his published output is very extensive and ranges across topics such as accounting, advertising, public goods, consumer surplus, public utility pricing, monopoly theory, blackmail, the economic role of government, and the history of economic thought. Several themes appear throughout Coase’s work: the important role played by institutions – in particular the firm, the market and the law – in determining economic structure and performance, the role of transaction costs in economic activity, the need for a comparative institutional approach to economic policy, and a distaste for abstract theorizing. These themes come through unmistakably in The Firm, the Market and the Law (1988) and Essays on Economics and Economists (1994), which, together, collect many of Coase’s most significant writings.

The lion’s share of Coase’s work during the first part of his career dealt, in one way or another, with firm behaviour and organization. His earliest contributions analysed the formation of producers’ expectations (for example, Coase and Fowler 1935), using the pig cycle as the case study. The conventional cobweb theorem explanation for these cycles was that producers expected current prices and costs to continue into the future. The adjustments in supply that resulted then gave rise to disequilibrium cycles. Coase and Fowler found that this explanation was incorrect – that producers did in fact adjust their expectations of prices and costs very quickly, and that the prediction errors arose from the difficulty of predicting variations in demand and in foreign supply. This work was later cited by J.F. Muth (1961, p. 21) in one of his classic papers on rational expectations. Coase also collaborated with Fowler and Ronald Edwards on a series of pieces dealing with the interrelations between accounting and economics (for example, Coase 1938; Coase et al. 1938). These writings, which were very much in the LSE cost tradition, demonstrated that traditional accounting practices do not adequately capture the true (opportunity) nature of costs and also pointed to the problematic nature of designing workable accounting methods to do so.

Coase also wrote a number of articles dealing with monopoly and imperfect competition, a few of which bear mention of here. Two of his theoretical pieces are of particular import. ‘Durability and Monopoly’ (1972) demonstrated that a monopoly firm which produces a good that is infinitely durable will be forced to sell the good at the competitive price, unless it can decrease the durability of the good or make contractual arrangements through which it promises to limit its production – a result which has come to be known as ‘the Coase conjecture’. ‘The Marginal Cost Controversy’ (1946) is Coase’s most significant work on monopoly and deals with public utility pricing and regulation. Abba Lerner and others had claimed that marginal cost pricing accompanied by a government subsidy is the efficient pricing policy for public utilities. Against this, Coase argued that marginal cost pricing is inferior to a system of multi-part pricing and may in fact be inferior to average cost pricing. This paper, and three related papers that followed it, are illustrative of one of the central themes in Coase’s work – that, in assessing the efficiency of economic outcomes, one must focus broadly, rather than narrowly, on benefits, costs, and incentives.

Coase’s work on public utilities also has an historical strand. Articles on the British Post Office discuss the rise of the penny postage in Great Britain under Rowland Hill and the attempts by the Post Office to enforce its monopoly against incursions by private entrepreneurs, including the messenger companies (for example, 1955). His study of British broadcasting analyses the development of wireless and wire radio broadcasting, as well as of television broadcasting and the rise of the BBC as the monopoly supplier of all of the above (1950, 1954). His interest in the government’s role in broadcasting carried over to the United States and an analysis of the role of the Federal Communications Commission (1959, 1966) in the allocation of broadcast frequencies. In fact, it was from this study that ‘The Problem of Social Cost’ came to be written.

While the foregoing gives a sense for the breadth of Coase’s contributions, it is unquestionable that his most influential work is contained in two papers – ‘The Nature of the Firm’ (1937) and ‘The Problem of Social Cost’ (1960), the two works cited by the Royal Swedish Academy in awarding Coase the Nobel Prize. In the former, Coase set out to explain why firms exist and what determines the extent of a firm’s activities. He found the answer in a concept to which most economists had until recently paid scant attention – transaction costs. Coase suggested that we tend to see firms emerge when the cost of internal organization is lower than the cost of transacting in the market, and that the limit of a firm’s activities (or, the extent of internal organization) comes at the point where the cost of organizing another transaction internally exceeds the cost of transacting through the market. Although published in 1937, ‘The Nature of the Firm’ attracted little attention until the early 1970s, when Oliver Williamson, Armen Alchian, Harold Demsetz and others began to build on or take off from Coase’s contribution to bring transaction costs, the contracting process, and firm organization to the fore in economic analysis.

‘The Problem of Social Cost’ took the transaction-cost paradigm in a different direction – the legal-economic arena and situations of conflicts over rights. Although ‘The Problem of Social Cost’ is one of the most cited articles in all of the economics and legal literatures, it has also been widely misunderstood. From this paper comes the now-famous Coase theorem – actually codified as such by George Stigler (1966) – which says that when transaction costs are zero and rights are fully specified, parties to a dispute will bargain to an efficient outcome, regardless of the initial assignment of rights. But Coase recognized that the transaction costs are pervasive and will generally preclude the working of this bargaining mechanism. Coase thus concludes that legal decision-makers should assign rights so as to maximize the value of output in society – a concept that lies at the heart of the modern law and economics movement (Medema 1999; Medema and Zerbe 2000).

The crux of ‘The Problem of Social Cost,’ however, is Coase’s attempt to demolish the Pigovian tradition of social cost theory (Pigou 1932). The analysis that came to be known as the Coase theorem was used to demonstrate that, under standard neoclassical assumptions, Pigovian remedies for externalities are unnecessary: costlessly functioning markets, like the costlessly functioning governments of Pigovian welfare theory, will generate efficient outcomes. The problem, as Coase pointed out, is that neither markets nor governments function costlessly, and thus neither will generate optimal solutions. This leaves policymakers with a choice among imperfect alternatives, and Coase advocates a close examination of the benefits and costs associated with the alternative policy options, in order to facilitate the adoption of policies (including doing nothing at all) which maximize the value of output.

That government failure is at least as pervasive as market failure, and that economists are too quick to advocate tax, subsidy, and regulatory solutions without a careful examination of the situation, are recurring themes in Coase’s work. His analyses of social cost issues, public utility pricing, and his classic article on role of the lighthouse in public goods theory as against the actual history of private lighthouse provision in Great Britain (1974) are excellent examples of Coase’s position here. When Coase looks at government, he sees agencies captured by special interests, making policies that usually make matters worse rather than better, and operating in virtual ignorance of the virtues of the market. Yet a careful reading of Coase suggests that he is not ‘anti-government’ but, rather, an advocate for economic theorizing and policymaking which recognizes that policy choices are always among imperfect alternatives.

These criticisms are part of Coase’s more general concern about the way that economists practice their trade (1994). He is suspicious of consumer theory as a whole and of the way in which mathematical and quantitative techniques have been used in modern economics. His own writings evidence some graphs and some technical intuitive analysis, but, reflecting Coase’s lifelong distaste for using mathematics in his work, there is not an equation to be found. Coase believes that economists are obsessed with what he calls ‘ blackboard economics’, an economics where curves are shifted and equations are manipulated on the blackboard, with little attention to the correspondence (or lack thereof) between these models and the real-world economic system. This, he says, has manifested itself in economists’ ignorance of the role played by transaction costs and economic institutions generally, and in an approach to public policy that fails to examine in any kind of depth the consequences of alternative policy actions.

Coase and Chicago

Coase’s critical attitude toward the practice of economics does not stop at the doors of the University of Chicago. Indeed, his close association with the Chicago School belies a degree of tension in the relationship and highlights the risks involved in thinking in terms of a homogeneous Chicago school. In spite of his position as a founding father of law and economics and, by extension, the expansion of the boundaries of economics so closely associated with Chicago, Coase has been critical of economic imperialism generally and of the economic analysis of law in particular (Coase 1977, 1993). Coase’s interest is not the economic analysis of law, but rather the study of how the legal system impacts the economic system – old-style Chicago law and economics of the sort being published in the Journal of Law and Economics in the 1960s and 1970s. As such, his interest and intellectual commonalities lie much more with the older Chicago school of Frank Knight and Jacob Viner than with the Becker–Stigler–Posner generation, and he has a much greater interest in the new institutional economics (of which he is also regarded as a founding father) than in the modern economic analysis of law movement à la Richard Posner. Coase has been chastised by Posner (1993) on this and other counts, but he remains unapologetic. That Coase has a place within the Chicago tradition goes without saying, but he has also remained his own man – dissenting from the received doctrine when it did not fit with his views.

See Also

Selected Works

  • 1935. (With R.F. Fowler.) Bacon production and the pig-cycle in Great Britain. Economica, New Series 2: 142–167.

  • 1937. The nature of the firm. Economica, New Series 4: 386–405.

  • 1938. Business organisation and the accountant. In Studies in costing, ed. D. Solomons. London: Sweet and Maxwell, 1952.

  • 1938. (With R.S. Edwards and R.F. Fowler.) Published balance sheets as an aid to economic investigation: Some difficulties. London: Accounting Research Association Publication No. 3.

  • 1946. The marginal cost controversy. Economica, New Series 13: 169–182.

  • 1950. British broadcasting: A study in monopoly. London: Longmans, Green and Co.

  • 1954. The development of the British television service. Land Economics 30: 207–222.

  • 1955. The postal monopoly in Great Britain: An historical survey. In Economic essays in commemoration of the Dundee School of Economics 1931–1955, ed. J.K. Eastham. London: William Culcross and Sons.

  • 1959. The Federal Communications Commission. Journal of Law and Economics 2: 1–40.

  • 1960. The problem of social cost. Journal of Law and Economics 3: 1–44.

  • 1966. The economics of broadcasting and government policy. American Economic Review 56: 440–447.

  • 1972. Durability and monopoly. Journal of Law and Economics 15: 143–149.

  • 1974. The lighthouse in economics. Journal of Law and Economics 17: 357–376.

  • 1977. Economics and contiguous disciplines. In The organization and retrieval of economic knowledge, ed. M. Perlman. Boulder: Westview Press.

  • 1988. The firm, the market, and the law. Chicago: University of Chicago Press.

  • 1990. Accounting and the theory of the firm. Journal of Accounting and Economics 12: 3–13.

  • 1992. The institutional structure of production. American Economic Review 82: 713–719.

  • 1993. Law and economics at Chicago. Journal of Law and Economics 36: 239–254.

  • 1994. Essays on economics and economists. Chicago: University of Chicago Press.