Ronald Coase: Lessons for Researchers
Mary M. Shirley *
Mary M. Shirley *
It is entirely fitting that we are gathered here today at Xiamen University, one of China’s most important research universities, to honor Ronald Coase. Coase believed that the transformation of China was one of the most significant developments of our time and one of the most important subjects for economic research. Coase’s last publication was How China Became Capitalist (2012), his book with Ning Wang, and he was planning a trip to China when he died last September.
Ronald Coase was one of the world’s most influential economists. His work has had a profound and lasting impact on public policy, on the study of economics and of law, and on social scientists throughout the world. There have been many tributes published since his death, and they all mention his influential publications: “The Nature of the Firm” (1937), “The Federal Communications Commission” (1959), “The Problem of Social Costs” (1960), etc. But today I want to focus instead on the lessons from his life and his approach to research. I will talk about five lessons in particular:
Ask questions; be curious.
Strive for accuracy.
Strive for realism.
Be useful, but don’t advocate in your research.
Be generous, help others.
Let’s consider each in turn.
1. Ask questions – be curious
Ronald Coase asked questions which other economists were not asking. Young scholars sometimes challenge conventional wisdom just to get recognized, but Coase did not. He was genuinely curious about how world operated.
For example, consider his story about why wrote “The Nature of the Firm.” His teacher at the London School of Economics, Arnold Plant, often criticized schemes to coordinate production through planning, which at that time were seen by many people as solutions to the Great Depression. Yet Coase realized that we have one factor of production – management—whose function is to coordinate. Why should we need management, he wondered, if the pricing system provided all the coordination necessary? His answer was that there must be costs to using the pricing mechanism. It was this curiosity that led him to discover transaction costs, the costs of transacting through the market, and the realization that firms emerge to economize on transaction costs.
2. Strive for accuracy
A striking characteristic of all of Ronald Coase’s scholarship is his commitment to accuracy. This has two aspects.
First: Read what you cite. Misinterpretations and misunderstandings are perpetuated in the economics literature by scholars repeating statements by other scholars about a work that no one read carefully in the first place.
A good example of this is the Coase Theorem, which has been so often misunderstood. The Coase Theorem arose in “The Problem of Social Cost,” which presents cases where one actor’s economic activity causes a social cost (such as pollution) to another actor. When transaction costs are zero (under the assumption of perfect competition standard to economic theory – perfect information, frictionless bargaining, rational actors, etc.), the two parties can negotiate a bargain that allocates rights in a way that will maximize production regardless of the initial assignment of those rights. George Stigler, in the third edition of his textbook Theory of Price (1966), labeled this idea the Coase Theorem: “under perfect competition, private and social costs are equal and the assignment of liability does not matter” (pp. 113-114).
In “The Problem of Social Cost” Coase labeled the assumption of zero transaction costs as “very unrealistic” (p. 15). Indeed, the bulk of “The Problem of Social Costs” deals with the case of positive transaction costs, where the delineation of legal rights does matter and where the cost of rearranging rights through the market to reach an efficient solution may outweigh the gains.
Coase’s position about the Coase Theorem has been widely misunderstood. Butler and Garnett, 2003 surveyed 45 textbooks and found that 80% of them misrepresented Coase’s arguments. Yalcintas, 2010, surveyed 40 of the most cited and most recent articles on the Coase Theorem and concluded that 75% of them misrepresented Coase’s viewpoint.
It’s no wonder that he believed that scholars should carefully read what they cite.
Second, know your facts.
A good example of why scholars should know their facts can be found in Coase 1974 article, “The Lighthouse in Economics.” Lighthouses are often cited by economists as the classic example of a public good, an activity for which cannot the private sector cannot charge, and which government should provide for free because it has social benefits. In particular Samuleson’s textbook (1964) cited the lighthouse as a public good. Lighthouses save lives & money, but there is no way to solve the free rider problem, and governments should therefore provide lighthouses for free (p. 151). Ronald Coase investigated the facts and discovered that in fact most lighthouses in Britain were once built and maintained by private persons, financed by tolls charged whenever ships put into port.
3. Strive for realism
Coase was always critical of what he termed “blackboard economics,” the sort of economics whereby all information is assumed to be known and the teacher fixes prices, imposes taxes, and distributes subsidies on the blackboard so as to promote general welfare. In the real world, Coase argued, there is much information that is not known and we should not lose sight of reality when drawing graphs on the blackboard. Coase was also concerned that economics’ focus on technique may blind economists to reality.
Some critics (notably Posner) found this position to be anti-theoretical, but it stemmed from Coase’s belief that theory should arise from realistic assessments of problems and be applicable to real world situations. He lamented that economists if asked to analyze the elephant would sit in a room imagining an elephant instead of going into the world to study an elephant.
Similarly, he criticized economists for their sterile studies of zero transaction costs. He stated that the insights gained from studying a world of zero transaction costs are “without value except as steps on the way to the analysis of the real world of positive transaction costs. We do not do well to devote ourselves to a detailed study of the world of zero transaction costs, like augurs divining the future by the minute inspection of the entrails of a goose.” (1981, page 187)
Coase compared economics unfavorably to biology, asserting that if Darwin returned to life he would be surprised by all the new discoveries in biology, while if Adam Smith returned, he would be surprised by how little economics have progressed beyond invisible hand.
4. Be useful, but don’t advocate in your research
Young scholars are sometimes confused about Coase’s views on policy because he argued that economists should not advocate policy positions. Coase’s concern was that prior policy perspectives would bias researchers, who would slant data and select facts to make a case that supports their preferred policy.
Ronald Coase’s own research exemplified his commitment to avoiding advocacy in his research. Some think Coase was antigovernment because he often found market solutions to be superior to government interventions. For example, his paper on the Federal Communications Commission argued that there were important reasons for governments to auction radio spectrum rather than assign it to users (chief among these reasons was to prevent government control over speech). But Coase argued that he was never anti-government (1996). In his youth he was a socialist, but his studies of British utilities and the papers he read as editor of the Journal of Law and Economics made him more skeptical of government intervention. Later he said, “my views on government intervention have changed over my life but they have always been driven by factual investigation” (1996, p.108). He felt that economists had a responsibility “to find out when state action does improve the situation.”
A good example of his approach towards policy is “The Problem of Social Cost.” In that article Coase criticized the usual approach of economists, which is to treat noise, air pollution, or other harmful effects as a deficiency in the system that should be remedied through regulation, taxation, or other government intervention. However, Coase did not argue that government intervention should never be advocated. Rather Coase argued that a better approach would be to analyze closely the actual situation, examine the effects of a proposed policy change, and “attempt to decide whether the new situation would be, in total, better or worse than the original one” (p.43).
Ronald Coase firmly believed and often stated that economics should be useful. That it should shed light on real world problems. That it should help change the way people – including policy makers -- view a problem.
5. Be Generous, help others
Coase was not only a brilliant thinker but also a generous scholar who supported other researchers throughout his life. For example, as editor of the Journal of Law and Economics he invited articles and worked closely with authors to nurture the new field of law and economics. In 1987, at the age of 87, when a group of us asked him to be the first president of the International Society for New Institutional Economics, ISNIE, he did not hesitate. He was pleased to help support the new field of new institutional economics. And in 2000, when Ronald Coase was 90, he became one of the founders and a major supporter of the Ronald Coase Institute, which helps young scholars study institutional problems so that obstacles to markets can be identified and overcome, reducing poverty and improving people’s opportunities to better their own lives.
Ronald Coase left us a dual legacy: 1) the profound insights from his scholarly work, and 2) new fields of research (law and economics, institutional economics) that he helped institutionalize. Generations of scholars benefited from his generosity.
Ronald Coase set an important example, one that we should all strive to emulate. He will live on in our memories – not only for his profound insights, but also for the kind of researcher and man that he was. He is truly immortal.
Butler, Michael R. and Robert F. Garnett. 2003. “Teaching the Coase Theorem: Are We Getting it Right?” American Economic Journal, 31(2) June, 133-145.
Coase, Ronald H. 1937. "The Nature of the Firm" Economica, 4 (16) new series. November, 386-405.
______. 1959. "The Federal Communications Commission." The Journal of Law and Economics, 2. October, 1-40.
______. 1960. “The Problem of Social Cost.” The Journal of Law and Economics 3. October, 1-44.
______. 1974. “The Lighthouse in Economics” Journal of Law and Economics. 17:357-376.
______.1981. “The Coase Theorem and the Empty Core: A Comment.” The Journal of Law and Economics 24: 183-187.
______.1992. “The Institutional Structure of Production,” The American Economic Review 82 (4): 713-719.
______. 1996. “Law and Economics and A.W. Brian Simpson.” The Journal of Legal Studies. 25(1). January, 103-119.
Ronald Coase and Ning Wang. 2012. How China Became Capitalist. Palgrave Macmillan.
Samuelson, Paul A. 1966. Economics: An Introductory Analysis, 6th ed. New York: McGraw-Hill.
Stigler, George J. 1966. The Theory of Price, 3rd Edition. New York: Macmillan Co.
Yalcintas, Altug. 2010. “The ‘Coase Theorem’ vs. Coase Theorem Proper: How an Error Emerged and Why it Remained Uncorrected So Long.” MPRA Paper #37936. Http://mpra.ub.uni-muenchen.de/37936/
*President, Ronald Coase Institute.
Presented at Xiamen University, “Ronald Coase: An Inspiration for Research” on December 11, 2013.