Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a
bachelor of commerce
A Bachelor of Commerce (abbreviated BComm or BCom; also, ''baccalaureates commercii'') is an undergraduate degree in business, usually awarded in Canada, Australia, India, Sri Lanka, Pakistan, Ireland, New Zealand, Ghana, South Africa, Myanmar, ...
degree (1932) and a PhD from the
London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
, where he was a member of the faculty until 1951. He was the Clifton R. Musser Professor of Economics at the
University of Chicago Law School
The University of Chicago Law School is the law school of the University of Chicago, a private research university in Chicago, Illinois. It is consistently ranked among the best and most prestigious law schools in the world, and has many dist ...
, where he arrived in 1964 and remained for the rest of his life. He received the
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...
in 1991.
Coase believed economists should study real-world wealth creation, in the manner of
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, stating, "It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy." He believed economic study should reduce emphasis on
Price Theory
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics foc ...
or theoretical markets and instead focus on real markets.
He established the case for the corporation as a means to pay the costs of operating a marketplace.
Coase is best known for two articles: "
The Nature of the Firm
"The Nature of the Firm" (1937) is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies, and other business entities rather than trading bilaterally through contracts on a market. ...
" (1937), which introduces the concept of
transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
s to explain the nature and limits of
firms; and "
The Problem of Social Cost
"The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coa ...
" (1960), which suggests that well-defined
property rights
The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically ...
could overcome the problems of
externalities
In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...
if it were not for transaction costs (see
Coase theorem
In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low trans ...
). Additionally, Coase's transaction costs approach is currently influential in modern
organizational economics
Organizational economics (also referred to as ''economics of organization'') involves the use of economic logic and methods to understand the existence, nature, design, and performance of organizations, especially managed ones.
Organizational eco ...
, where it was reintroduced by
Oliver E. Williamson
Oliver Eaton Williamson (September 27, 1932 – May 21, 2020) was an American economist, a professor at the University of California, Berkeley, and recipient of the 2009 Nobel Memorial Prize in Economic Sciences, which he shared with Elinor Ostro ...
.
Biography
Ronald Harry Coase was born in
Willesden
Willesden () is an area of northwest London, situated 5 miles (8 km) northwest of Charing Cross. It is historically a parish in the county of Middlesex that was incorporated as the Municipal Borough of Willesden in 1933, and has formed ...
, a suburb of London, on 29 December 1910. His father, Henry Joseph Coase (1884–1973) was a
telegraphist
A telegraphist (British English), telegrapher (American English), or telegraph operator is an operator who uses a telegraph key to send and receive the Morse code in order to communicate by land lines or radio.
During the Great War the Royal ...
for the post office, as was his mother, Rosalie Elizabeth Coase (née Giles; 1882–1972), before marriage. As a child, Coase had a weakness in his legs, for which he was required to wear
leg-irons. Due to this problem, he attended the school for physical defectives. At the age of 12, he was able to enter
Kilburn Grammar School
Kilburn Grammar School was an English grammar school which opened in 1898 in Kilburn, north-west London. The school ceased to exist in 1967.
History
The school's history is detailed in a book by Richard E Brock. It was founded by the Rev. Dr. H ...
on scholarship. At Kilburn, he studied for the intermediate examination of the
University of London
The University of London (UoL; abbreviated as Lond or more rarely Londin in post-nominals) is a federal public research university located in London, England, United Kingdom. The university was established by royal charter in 1836 as a degree ...
as an
external student in 1927–29.
Coase then continued his studies at the University of London, enrolling as an internal student of the
London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
, where he took courses with
Arnold Plant
Sir Arnold Plant (29 April 1898 – 19 April 1978) was a British economist.
Biography
Plant was born in Hoxton, London, the son of a municipal librarian, William Charles Plant, and Thomasine Emily Plant. Coase, Ronald H. (1995). "12: Arnold Pl ...
and received a
bachelor of commerce
A Bachelor of Commerce (abbreviated BComm or BCom; also, ''baccalaureates commercii'') is an undergraduate degree in business, usually awarded in Canada, Australia, India, Sri Lanka, Pakistan, Ireland, New Zealand, Ghana, South Africa, Myanmar, ...
degree in 1932. During his undergraduate studies, Coase received the Sir Ernest Cassel Travelling Scholarship which he used to visit the University of Chicago in 1931–1932 studying with
Frank Knight
Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago School. Nobel laureates Milton Friedman, George S ...
and
Jacob Viner
Jacob Viner (3 May 1892 – 12 September 1970) was a Canadian economist and is considered with Frank Knight and Henry Simons to be one of the "inspiring" mentors of the early Chicago school of economics in the 1930s: he was one of the leading fig ...
. Coase's colleagues would later admit that they did not remember this first visit.
Between 1932 and 1934, Coase was an assistant lecturer at the Dundee School of Economics and Commerce, which later became part of the
University of Dundee. Subsequently, Coase was an assistant lecturer in commerce at the
University of Liverpool between 1934 and 1935 before returning to
London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
as a member of staff until 1951 in which year he was awarded an earned doctorate in economics from the University of London. He then started to work at the
University at Buffalo and retained his British citizenship after moving to the United States in the 1950s. In 1958, he moved to the
University of Virginia. Coase settled at the
University of Chicago in 1964 and became the co-editor of the ''
Journal of Law and Economics'' with
Aaron Director. He was also for a time a trustee of the
Philadelphia Society. He received the
Nobel Prize in Economics in 1991.
Nearing his 100th birthday, Coase was working on a book concerning the rise of the economies of China and Vietnam. In an interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists. This became "How China Became Capitalist" (2012) co-authored with Ning Wang. Coase was honoured and received an honorary doctorate from the university at Buffalo Department of Economics in May 2012.
Coase married Marion Ruth Hartung of Chicago, Illinois in Willesden, England, 7 August 1937. Although they were unable to have children, they were married 75 years until her death in 2012, making him one of the longest-married Nobel Prize laureates.
Coase himself died in Chicago on 2 September 2013, at the age of 102. His wife had died on 17 October 2012.
He was praised across the political spectrum, with
Slate
Slate is a fine-grained, foliated, homogeneous metamorphic rock derived from an original shale-type sedimentary rock composed of clay or volcanic ash through low-grade regional metamorphism. It is the finest grained foliated metamorphic rock. ...
calling him "one of the most distinguished economists in the world"
and ''
Forbes'' calling him "the greatest of the many great University of Chicago economists".
''
The Washington Post'' called his work over eight decades "impossible to summarize" while recommending five of his papers to read.
Contributions to economics
"The Nature of the Firm"
In "The Nature of the Firm" (1937), a brief but highly influential essay, Coase attempts to explain why the economy features a number of
business firms instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that "production could be carried on without any organization
hat is, firms
A hat is a head covering which is worn for various reasons, including protection against weather conditions, ceremonial reasons such as university graduation, religious reasons, safety, or as a fashion accessory. Hats which incorporate mecha ...
at all", Coase asks, why and under what conditions should we expect firms to emerge?
Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
The traditional economic theory of the time (in the tradition of
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
) suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.
Coase noted, however, a number of
transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
s involved in using the market; the cost of obtaining a good or service via the market actually exceeds the price of the good. Other costs, including search and information costs, bargaining costs, keeping
trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something from another party. This suggests that firms will arise which can internalise the production of goods and services required to deliver a product, thus avoiding these costs. This argument sets the stage for the later contributions by
Oliver Williamson: markets and hierarchies are alternative co-ordination mechanisms for economic transactions.
There is a natural limit to what a firm can produce internally, however. Coase notices "decreasing returns to the entrepreneur function", including increasing
overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. These factors become countervailing costs to the use of the firm.
Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.
Other things being equal, therefore, a firm will tend to be larger:
* the lower the costs of organising and the slower these costs rise with an increase in the number of transactions organised
* the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organised
* the greater the lowering (or the smaller the rise) in the supply price of factors of production to firms of larger size
The first two costs will increase with the spatial distribution of the transactions organised and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organising transactions across space may allow firms to become larger – the advent of the telephone and of cheap air travel, for example, would be expected to increase the size of firms.
A further exploration of the dichotomy between markets and hierarchies as co-ordination mechanisms for economic transactions derived a third alternative way called
Commons based peer production, in which individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals.
"The Problem of Social Cost"
Upon publishing his article The Federal Communications Commission in 1959, Coase received negative feedback from the faculty at the University of Chicago over his conclusions and apparent conflicts with
A. C. Pigou. According to Coase, "What I said was thought to run counter to Pigou's analysis by a number of economists at the
University of Chicago and was therefore, according to them, wrong. At a meeting in Chicago I was able to convince these economists that I was right and Pigou's analysis faulty." Coase had presented his paper in 1960 during a seminar in Chicago, to twenty senior economist including
George Stigler and
Milton Friedman. He gradually won over the usually skeptic audience, in what has later been considered a "paradigm-shifting moment" in the genesis of Chicago Law and Economics. Coase would join the Chicago faculty four years later.
Published in the ''Journal of Law and Economics'' in 1960, while Coase was a member of the Economics department at the
University of Virginia, "The Problem of
Social Cost" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.
Coase argued that without
transaction cost
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
s the initial assignment of property rights makes no difference to whether or not the farmer and rancher can achieve the economically efficient outcome. If the cost of restraining cattle by, say, building a fence, is less than the cost of crop damage, the fence will be built. The initial assignment of property rights determines who builds the fence. If the farmer is responsible for the crop damage, the farmer will pay for the fence (as long the fence costs less than the crop damage). The allocation of property rights is primarily an equity issue, with consequences for the distribution of income and wealth, rather than an efficiency issue.
With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).
This seminal argument forms the basis of the famous
Coase theorem
In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low trans ...
as labelled by Stigler.
Law and economics
Though trained as an economist, Coase spent much of his career working in a law school. He is a central figure in the development of the subfield of
law and economics. He viewed law and economics as having two parts, the first "using the economists' approach and concepts to analyze the working of the legal system, often called the economic analysis of the law"; and the second "a study of the influence of the legal system on the working of the economic system."
Coase said that the second part "is the part of law and economics in which I am most interested."
In his Simons Lecture celebrating the centennial of the University of Chicago, titled "Law and Economics at Chicago", Coase noted that he only accidentally wandered into the field:
Despite wandering accidentally into law and economics, the opportunity to edit the Journal of Law and Economics was instrumental in bringing him to the University of Chicago:
Coase believed that the University of Chicago was the intellectual center of law and economics. He concluded his Simons lecture by stating:
I am very much aware that, in concentrating in this lecture on law and economics at Chicago, I have neglected other significant contributions to the subject made elsewhere such as those by Guido Calabresi at Yale, by Donald Turner at Harvard, and by others. But it can hardly be denied that in the emergence of the subject of law and economics, Chicago has played a very significant part and one of which the University can be proud.
Coase theorem
In
law and economics, the Coase theorem () describes the
economic efficiency
In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts:
* Allocative or Pareto efficiency: any changes made to assist one person would harm another.
* Productive efficiency: no addit ...
of an economic
allocation
Allocation may refer to:
Computing
* Block allocation map
* C++ allocators
* Delayed allocation
* File allocation table
* IP address allocation
* Memory allocation
* No-write allocation (cache)
* Register allocation
Economics
* Asset alloca ...
or outcome in the presence of
externalities. The theorem states that if trade in an externality is possible and there are sufficiently low
transaction costs
In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike produ ...
, bargaining will lead to a
Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This 'theorem' is commonly attributed to Coase.
Coase conjecture
Another important contribution of Coase is the
Coase conjecture, which states that an informal argument that durable-goods
monopolists do not have market power because they are unable to commit to not lowering their prices in future periods.
Political views
When asked what he considered his politics to be, Coase stated,
I really don't know. I don't reject any policy without considering what its results are. If someone says there's going to be regulation, I don't say that regulation will be bad. Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't.
Coase admitted that early in life, he aligned himself with socialism.
Guido Calabresi wrote that Coase's focus on transaction costs in ''The Nature of the Firm'' was the result of his socialist beliefs. Reflecting on this, Coase wrote: "It is very difficult to know where one's ideas come from but for all I know he may well be right." Coase continued:
Ronald Coase Institute
Coase was research advisor to the
Ronald Coase Institute, an organisation that promotes research on institutions and organizations – the laws, rules, customs, and norms – that govern real economic systems, with particular support for young scholars from developing and transitional countries.
Coase-Sandor Institute for Law and Economics
The University of Chicago Law School carries on the legacy of Ronald Coase through the mission of the Coase-Sandor Institute for Law and Economics. Each year, the University of Chicago Law School hosts the Coase Lecture, which was delivered in 2003 by Ronald Coase himself.
Publications
*
*
*
*
* (Nobel Prize lecture)
* Coase, R. H. (1994) ''Essays on Economics and Economists''. The University of Chicago Press. .
*
*
*
* ''How China Became Capitalist ''(2012) co-authored with Ning Wang. Palgrave Macmillan. .
See also
*
Government failure
Government failure, in the context of public economics, is an economic inefficiency caused by a government intervention, if the inefficiency would not exist in a true free market. The costs of the government intervention are greater than the bene ...
*
Horizontal integration
*
List of think tanks
*
Vertical integration
References
Bibliography
*
External links
A video of Prof. Coase talking about law and economics*
*
Wireless Communications and Computing at a Crossroads Journal on Telecommunications & High Technology Law, Vol. 3, No. 2. pp. 205, 239
Coase Institute interview in ''
Reason'' by Thomas W. Hazlett
2003 Coase Centennial Speech delivered by Coase(500MB QuickTime video file)
"Why do Firms Exist?" Schumpeter, ''The Economist'', 2010.
Russ Roberts's "Coase on Externalities, the Firm, and the State of Economics"from the
Library of Economics and Liberty
Liberty Fund, Inc. is an American private educational foundation headquartered in Carmel, founded by Pierre F. Goodrich. Through publishing, conferences, and educational resources, the operating mandate of the Liberty Fund was set forth in an un ...
No Cheap Victories – Last Interview and Tribute The New Yorker, 2013
*
*
*
Guide to the Ronald H. Coase Papers 1805–2013at th
University of Chicago Special Collections Research Center
{{DEFAULTSORT:Coase, Ronald
1910 births
2013 deaths
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