Meeting Professor Ronald Coase

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.