by Wladimir Zanoni
Alumnus of the 2003 workshop on
institutional analysis in São Paulo, Brazil.
In May 2003, on a
regular workday at my office in Caracas, I received an e-mail
calling for applications to a workshop on
institutional analysis organized by the Ronald Coase Institute, to
be held at the University of São Paulo, Brazil. Ever since my
participation in that 2003 seminar, the Institute has been a
visible hand supporting my career: my research
on the informal
sector in Venezuela;
participation in the 2005 ISNIE conference; letters of
recommendation from Institute faculty members, and more. In March
2006, while I was a student at the University of Chicago in the Harris
Graduate School of Public Policy, the Institute
gave me another remarkable opportunity: the chance to meet Professor
Ronald Coase.
The Meeting
Note: The author is absolutely
responsible for the description of the conversation
and any misunderstandings herein expressed.
After a regular day of classes, while at home with my wife, I
received a phone call from Lee and Alexandra Benham in St.
Louis. A very kind and warm greeting was followed by a surprising
announcement. "Wladimir, you may soon receive a call from
Ronald Coase. He is interested in meeting and having lunch
with you." Two days later, barely recovered from the
astonishment and excitement produced by this call, I received a
phone call from Professor Coase himself: "Please come to my
place."
That night I reflected that thousands of people at that very moment
might be studying either the Coase Theorem or the idea of
transaction costs. What a responsibility; what a privilege for a
student from a developing country! After considering whether to
re-read Professor Coase's articles beforehand, I decided just to
enjoy the gift of having the opportunity to meet this extraordinary
person. Four days later, nervous, excited and proud, I was at the
residence of Professor Coase. He came forward and extended his hand
to introduce himself, smiling and saying in a British accent: "I
am pretty sure you knew who I was, and I knew who you were."
The meaning of being lucky
Professor Coase made me feel very welcome. I didn't want to
talk at all but rather to listen to him. However, he encouraged me
to speak about myself, my work, my studies at the University of Chicago,
and how I found new institutional economics. He also reminded me
that our meeting involved lunch, so I was supposed to eat. (That
part, by the way, I had totally forgotten.) His sense of humor and
charisma made me feel as if I were talking with somebody I had known
a long time.
After I talked about my simple and trivial graduate student
experiences, Professor Coase told me that two events had been
turning points in his life. Both of them, he considered, had been
matters of luck. While studying commerce at the University of London,
under the influence of Professor Arnold Plant he came to the USA on
a Cassel Travelling Scholarship in 1931. He would have become a
lawyer if he had not received that fellowship! Meeting Professor
Plant was decisive in shaping his work as an economist and helping
him to come to the USA at a historical moment when mass production
was just developing.
In an apparent contradiction for somebody who holds the Nobel Prize
in economics, he said that his early lack of knowledge of the
neoclassical theory of the firm was another stroke of luck. "Had
I studied economics, I wouldn't have been able to address the
underlying question in 'The Nature of the Firm' in the way I did."
His interest in the empirical dynamics of American industries,
different from the neoclassical approach of the firm as a production
function, and his careful observations of the organizational
structure of business in a number of production plants and
businesses in the USA - these enabled him to observe the fundamental
feature of firms: transactions inside them are hierarchically
organized to minimize the cost of using the price system.
I was totally fascinated by his account. He said that he wasn't
thinking as an economist when he came up with the idea that would
transform the whole theory of the firm. Does this mean that economic
theory can restrict our perceptions concerning the actual dynamics
of the economy?
The limits of economic thought
Following that question, Professor Coase shared with me his opinion
about a paper on labor economics he had recently read. "I read
this paper with a deep sense of shame. One can be perfectly
logical while not thinking." Disconnected from empirical
foundations about how real interactions between human beings take
place, economic models can be perfectly logical and very complex,
while the assumptions that support their logical structure and
determine validity can be totally disconnected from reality.
A constant attempt to refine explanations about a system of economic
relations theoretically described by Adam Smith and not empirically
grounded in our time, limits economists' perception of the actual
economic system. In such attempts, there is an abuse of the use of
mathematics. Mathematical consistency or the internal logic of
economic models shouldn't be the primary concern of economists, as
it appears to be today in mainstream economics. Real thinking
entails a creative endeavor. Ingenious ideas about economic
interactions are not to be found inside mathematics. Mathematics "can
help as a means to express ideas, but it should not be an end in
itself."
Empirical studies should underlie the efforts to build a more
general theory of how the economic system works. We cannot develop
such a theory without empirical foundations. A new integrative
theory of the actual economic dynamics will be more powerful (or
even possible) the more developed its empirical basis is. We should
move "from empirical observation of real dynamics towards that
theory; not in the opposite way."
In this regard, Professor Coase expressed another concern: the
reluctance of economic thought to accept new ideas outside its
mainstream. He described to me how the academic establishment of the
1960's had been very reluctant to accept his ideas in his article on
"The Federal Communications Commission". Even after he convinced
economists such as Aaron Director, George Stigler, and Milton
Friedman that his arguments were correct, it took economists in
general a long time to accept them even after seeing them presented
in "The Problem of Social Cost".
Such reluctance has also led to the non-permeability of economics to
other disciplines such as law, sociology, anthropology, and even
psychology: "The relationship has operated the other way round,
from economic theory toward those disciplines, while economic theory
has assimilated very little from those other sciences." Even if
much work in sociology and anthropology has difficulties, he argued
that economics still has a lot to learn from those disciplines.
Complex phenomena like the growth of China can be better explained
using the valuable insights that those disciplines can provide.
Final thoughts
Then, Professor Coase showed me a frontier: China and the
challenge it represents to understand how successful economic
transformation needs to be based on institutions that are themselves
grounded on previously existing rules of the game. "This country
poses a challenge to any social scientist interested in
understanding how institutions work." Its accelerated
transformation has not been totally understood yet. "In just a
matter of three years a rural town was transformed into a completely
new and vibrant city." He encouraged me to look for interesting
questions and their answers associated with this dynamic. With a
smile he added, "According to the statistics, I am not in the
situation to make long-term plans, but you are."
Finally he issued a challenge: "I wasn't able to change the way
economists think about economic dynamics. Maybe you could."
While I was writing this piece, one of my assignments in a course on
organizational theory was to reread "The Nature of the Firm." I
pondered, "What makes ideas last through time?" With
directness, simplicity, and passion, Ronald Coase had explained to
me how more than 70 years ago he came up with some of the ideas that
have changed and continue to change our understanding of economics.
Now I was reading his paper again. I felt very privileged.
Thank you so much, Professor Coase. And thanks to the faculty of
the Ronald Coase Institute for giving me the privilege of becoming
your alumnus.