In Memoriam: Ronald H. Coase

by Pejman Yousefzadeh on September 3, 2013

The great man lived for over a century, but as is the case with the passing of other great and productive minds, one feels as though the world did not have him for nearly as long as he was needed. Here is the University of Chicago Law School remembrance, which helps sum up his extraordinary legacy:

Coase, the Clifton R. Musser Professor Emeritus of Economics, is best known for his 1937 paper, “The Nature of the Firm,” which offered groundbreaking insights about why firms exist and established the field of transaction cost economics, and “The Problem of Social Cost,” published in 1960, which is widely considered to be the seminal work in the field of law and economics. The latter set out what is now known as the Coase Theorem, which holds that under conditions of perfect competition, private and social costs are equal.

“That Ronald Coase is among the most influential and best-cited economists in the past 50 years is not debatable,” said Law School Professor Emeritus William M. Landes and Sonia Lahr-Pastor, JD ’13, in “Measuring Coase’s Influence.” They presented the paper at a 2009 conference titled “Markets, Firms and Property Rights: A Celebration of the Research of Ronald Coase.”

“Among the highest aspirations of the University of Chicago is the drive to create new fields of study that change our world for the better,” said University of Chicago President Robert J. Zimmer. “Ronald Coase embodied that ideal. His groundbreaking scholarship made impacts on law and policy that people around the globe continue to feel today. As a scholar, a colleague and a mentor, his historic contributions enriched our intellectual community and the world at large.”

“Ronald Coase achieved what most academics can only dream of – immortality,” said Michael H. Schill, dean of the University of Chicago Law School. “His scholarship fundamentally changed the way lawyers approach issues of when and how government should intervene in the economy, and when and how private contracts should govern. His work could not be more relevant to many of the debates we are enmeshed in today.

“Our great law school has contributed much to the world of law and jurisprudence,” Schill said. “Ronald’s contributions were among the most important.”

His intellectual impact continued late into his life, when at the age of 101, he published his final book, How China Became Capitalist, co-authored with former student Ning Wang, PhD’02.

Read the whole thing. Here as well is the New York Times obituary. My favorite passages from the piece:

In his autobiographical essay written for the Nobel committee after being awarded the prize, he recalled being taken by his father at age 11 to a phrenologist to hear what could be discovered from the shape of his head. The phrenologist detected “considerable mental vigor,” Professor Coase wrote, and recommended that he work in banking or accounting and raise poultry as a hobby.

[. . .]

While teaching at the University of Virginia, Professor Coase submitted “The Problem of Social Cost” to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler wrote later. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”

Jonathan Adler writes that “[m]ost of us [academics] would be lucky were our entire body of work to have the impact of just one of his articles.” Ilya Somin also has some appropriate thoughts for the occasion:

One of my personal favorite Coase articles is “The Lighthouse in Economics,” where Coase shows that private entrepreneurs successfully established and operated an enterprise that most economists believed was the classic example of a public good that could only be provided by government. This doesn’t prove that the private sector can provide all public goods (nor did Coase claim that it can); but it does show that we should be more careful than we usually are in asserting that a given good can only be provided by the state just because it is public in nature. Before Coase, most scholars and public policy experts had simply assumed that the private sector was incapable of providing lighthouses without much investigation of the issue.

Richard Epstein, who was a longtime colleague of Coase’s, also adds his thoughts:

Why was Ronald so great? The answer is not because he was smart. In fact, I suspect that by the usual measures of intelligence Ronald would not do well against the types who excel in proving mathematical theorems or solving crossword puzzles. No, Ronald was not “smart.”  But he wasbrilliant. He could look at the most mundane facts of ordinary life and distill from them insights about how the world worked — and, indeed, had to work.

To make the point more generally, the idea that social interactions took place in a frictional universe was not first discovered by Ronald. The point was in the background of virtually every discussion of the operation of the legal system from the beginning of legal history. But lawyers, in particular, are creatures of doctrine, and their first intuition was to look for elegant points of law over which to argue in the manner of great appellate lawyers and to ignore the inconspicuous substrate on which the entire system rested.

To put it otherwise, what he did was make friction the main event in all cases, not just a sideshow. He did it first when, in The Nature of the Firm, he asked the simple question of why individuals sometimes form firms to organize their business and on other occasions resort to the price system to exchange goods. No one before Ronald has put the point exactly in that way, and yet, once the question was made, his simple answer—namely, that it is costly to form a price system and costly to form a firm—started a huge rush of productive scholarship. No longer does one think of business entities as suspended in space. It is not possible to ask when the transaction costs are higher in the one direction than in the other, so that there is a kind of balance that explains why both types of arrangements are so commonplace.

From there, it turns out that the study of partnerships, corporations, lending agreements, joint ventures, and a host of other arrangements are all amenable to the transaction costs analysis. At each stage in the analysis, we are always sure that there has to be something more to the overall system. But in each case, supposed side constraints fit very well within the simple model that Ronald developed by asking the right question and then looking hard at the everyday facts of the world to see how it operates.

What is obvious now was not obvious then, which is why Coase is not just a distinguished person, but the champion of a worldview—the Coasean worldview—which will rank up there, when all is said and done, with the Hobbesian, Lockean, and Humean views of human nature — and not just because he shares with them the inestimable advantage of a one-syllable name.

Some wise words from Coase, courtesy of Geoffrey ManneCoase’s skepticism of regulation is worth keeping in mind, especially given the plethora of regulation-happy politicians and online pundits. I will close this post by noting Peter Klein’s comment on how Coase constructed his extraordinary oeuvre“despite — or because of? — not holding a PhD in economics, not doing any math or statistics, and not, for much of his career, working in an economics department.”

Requiescat in pace.

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