Henderson on Coase

In Wednesday’s WSJ economist David Henderson has an op-ed on Ronald Coase’s legacy. As henderson notes, the primary thrust of Coase’s work was a rejection of “Blackboard economics” in favor of careful examinations of the real world, with a particular focus on institutions. This was the theme that unified his work across various subjects. Although Coase had distinctly libertarian leanings, this was not always his view of the world. Writes Henderson:

In his early 20s, Coase was a socialist, but he had a trait that few socialists have: curiosity about how economies work. On a trip to the United States from his native Britain in 1931 and 1932, he dropped in on perennial Socialist Party presidential candidate Norman Thomas, and he visited Ford and General Motors. How, he wondered, could economists say that Lenin was wrong to believe that the Russian economy could be run like one big factory, when some big firms in the U.S. seemed to run well?

Coase’s answer, in his widely cited 1937 article “The Nature of the Firm”: Companies are like centrally planned economies, but unlike the latter, they are formed because of people’s voluntary choices. But why do people make these choices? Coase wrote that the answer is “marketing costs,” or what economists now call “transaction costs.” If markets were costless to use, there would be no point in forming companies. Instead, people would make arm’s-length transactions. But because markets are costly to use, the most efficient production process often takes place within a company. His explanation of why companies exist spawned a whole literature.

Coase wrote this article when he was only 26, and it was only one of several important papers he would write over the course of his life. More Henderson:

In 1959, Coase wrote that the Federal Communications Commission was unnecessary; electromagnetic spectrum could be bought and sold in a free market. There was nothing special about the scarcity of spectrum, since all economic goods are scarce. This view was derided at the time, but is now almost standard fare among economists.

Coase’s later article, “The Problem of Social Cost,” was actually based upon this 1959 work on the FCC.

A final bit from Henderson:

Coase made many intellectuals uncomfortable by pointing out an obvious implication of their belief in government regulation: If regulation works so well in the market for goods, then it should work even better in the market for ideas.

Why? As Coase said in a 1997 Reason interview, “It’s easier for people to discover that they have a bad can of peaches than it is for them to discover that they have a bad idea.” Many intellectuals thought Coase was arguing for government regulation of ideas. He wasn’t. His point was to get intellectuals to see that their case for regulating goods is weak.

UPDATE: Here is the NYT obituary, an appreciation by Lynne Kiesling, and a comment by Mark Kleiman.