Ronald Coase: A Postmodern Economist
“Economic theory has suffered in the past from a failure to state clearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected. The examination is, however, essential not only to prevent the misunderstanding and needless controversy which arise from a lack of knowledge of the assumptions on which a theory is based, but also because of the extreme importance for economics of good judgement in choosing between rival sets of assumptions.”
The above quote is from the 1937 paper The Nature of the Firm by Ronald Coase, a Nobel economist who passed away at the age of 102 this week. It was a ground-breaking piece of work that is still frequently cited today.
As the quote above illustrates, one of Coase’s major contributions to economics was in examining the way in which the apparently frictionless plain of blackboard economics can differ significantly from the world they are attempting to describe. Without first understanding the assumptions underpinning a theory and examining their practical use we can have little confidence in the conclusions.
It was in this light that he addressed the problem of assessing the behaviour of business in his 1960 article The Problem of Social Cost. Although arguments about the social cost of business activity are usually framed by what, in an ideal world, corporates should or should not have the right to do in pursuing efficiency and competitive advantage, Coase took a more subtle approach. He wrote that “if factors of production are thought of as rights, it becomes easier to understand that the right to do something which has harmful effects (such as the creation of smoke, noise, smells, etc.) is also a factor of production.”
He was not here asserting the rights of business over the individual, but making the observation that neither the rights of the individual nor that of a corporate can be absolute. Instead we must, in framing policy, have regard for the total effect to attempt to ascertain whether it causes more harm to the rights of all parties.
Unfortunately, Coase’s work was all too often seized upon by the political right to make the case for wholesale de-regulation and free-market policies, and ignored by the left as inconvenient. This is a deep shame. If anything Coase was calling for economists and policymakers alike to climb down from their ivory towers and address more of the gritty realities that they were supposedly trying to improve.
His passing is undoubtedly tragic but it would be all the more so if we fail to heed some of the core messages that he espoused. As Deirdre McCloskey of the University of Iowa wrote:
“I commend Coase for his old-fashioned ways. The old-fashioned ways have become the latest fashion, actually. You read it here: Ronald Coase is a postmodern economist. And his theorem, a post-modern one, is about the difficulty of knowing what is to be done.”