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.
Ronald Coase was born on December 29, 1910 in London. In a paper describing his life that he wrote for the Nobel Prize committee, Coase writes charmingly of his youth. Because of a weakness in his legs he was sent to a school for physical defectives as a child where he was taught basket waving. Eventually he was able to study in earnest, and in 1932 he earned a bachelor’s degree from the London School of Economics, not in economics but in commerce. Later in life he made a point of the fact that he did not get his undergraduate degree in economics. He viewed this as an advantage, giving him a fresh perspective on the economic problems he encountered in his early research. Coase eventually received a Doctor of Science in Economics from the University of London in 1951.
When Coase finished his course work towards his bachelor’s degree, he was awarded a Cassel Travelling Scholarship, enabling him to travel in the United States in 1931-1932. This was a time of great foment in economics, when economists were debating how to confront the great depression and the merits or demerits of Russian economic planning. Coase’s conversations with the US businessmen he met during his trip shaped his views of these debates. It was during his travels in the US that Coase conceived the ideas that he presented in a lecture when he was only 21 and that resulted in the seminal article, “The Nature of the Firm” (later published in Economica in 1937). He often expressed his gratitude for the Cassel Scholarship, as well as his confidence in the capacity of young scholars to see things clearly, and the importance of empirical analysis that “changes the way we look at a problem.”
Coase went on to an academic career in the United Kingdom, teaching at the Dundee School of Economics and Commerce, the University of Liverpool and the London School of Economics. During the Second World War he served in the Central Statistical Office, Offices of the War Cabinet of the United Kingdom. This experience strongly influenced his thinking. He often talked about how he was impressed and depressed by the petty, rule-bound, and backbiting behavior of the bureaucracy even as the country was fighting for its survival. Seeing bureaucracy at its worst alerted Coase to the risks of government failure.
In 1951 Coase migrated to the US citing his “lack of faith in the future of Socialist Britain, a liking for life in America, and an admiration for American economics.” He served on the faculty of the University of Buffalo (1951-1958) and the University of Virginia (1958–1964), before moving to the University of Chicago Law School where he remained until he retired in 1981. He was awarded the Alfred Nobel Memorial Prize in Economic Sciences in 1991.
The Nobel Prize recognized one of Coase’s great insights: that firms exist because they economize on transaction costs. In theory, all trading could take place in the market, but there are costs to using the market, costs that Coase called transaction costs. Transaction costs are the costs of finding someone with whom to trade, of getting information on price and quality, of striking a bargain, and of enforcing a bargain. By replacing many individual transactions in the market with fewer transactions organized in a hierarchy, a firm can reduce these transaction costs under certain circumstances.
Coase developed this idea further in his most influential paper, “The Problem of Social Cost”, which was published in 1960. Social costs, which economists usually call externalities, are the costs that an economic activity imposes on other parties not involved in the activity. Pollution is the most commonly cited example of a social cost. Coase criticized the usual approach of economists, which is to treat noise, pollution, or other harmful effects as a deficiency in the system that should be remedied through regulation, taxation, or other government intervention. 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.”
Coase further suggested that, if transaction costs were zero, then it would not matter which of the affected parties were found to be legally liable for a social cost, since they could costlessly negotiate agreements to maximize their wealth; and the right to use property, make noise, or pollute would end up in the hands of the one who values the right the most. This idea, later called the Coase Theorem by George Stigler, was not central to Coase’s argument about social costs, but it has been extensively analyzed by economists, many of whom ignored or misinterpreted Coase’s point. Coase was not arguing that transaction costs or property rights are unimportant or that we should study a world of zero transaction costs, quite the reverse. He later 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.”
“The Problem of Social Cost” has been hugely influential, reshaping the way many scholars think about the workings of firms, markets, law, politics, and society. It inspired the burgeoning field of new institutional economics and helped spawn the field of law and economics. From 1964 to 1982 Coase nurtured and shaped the field of law and economics as the editor of the Journal of Law and Economics (founded in 1958 by Aaron Director). Coase was a proactive editor who sought out contributions and worked with authors to form and sharpen their arguments.
The “Nature of the Firm” and “The Problem of Social Cost” are Coase’s most famous papers, but they are by no means his only insightful and influential works. For example, in a 1959 paper he famously proposed that the Federal Communications Commission auction rights to the radio spectrum rather than allocate their use by administrative fiat. He argued that radio frequencies were not different from other industries in which scarce resources are allocated through the price mechanism and efficient usage is motivated through competition. The main reason for regulation is to prevent interference that occurs when several signals are transmitted simultaneously on a given frequency. But interference can occur with many scarce resources; (Coase gives the example of trying to use a piece of land simultaneously as a wheat field and a parking lot). It may be possible for the operators whose signals are being interfered with to negotiate a deal to reduce interference if they hold transferable rights to part of the spectrum. But Coase did not rule out regulation; he argued that if market solutions are too costly to be practical, it may be preferable to impose special regulation.
Most recently Coase co-authored with Ning Wang a book, How China Became Capitalist, that was published in 2012 when Ronald Coase was 102. The book argues that China’s reforms were not the result of a concerted attempt to create a capitalist economy. Rather “marginal revolutions”, grassroots reforms by actors marginalized in Mao’s socialist economy, introduced the market and entrepreneurship back to China. The book concludes with a warning that China’s enormous potential for further growth is clouded by the government’s monopoly of ideas and power, and calls for greater freedom in the market for ideas. The Chinese edition of How China Became Capitalist has been widely read and discussed in China; it sold about 40,000 copies in its first three months and has been widely reviewed and commented on by government officials, academics, and entrepreneurs. The book illustrates how Coase maintained his intellectual curiosity and his commitment to transformative ideas to the end of his life.
Coase was critical of economics for being static and preoccupied with formalizing concepts that date back to Adam Smith. He believed that the goal of economists should be to change fundamentally the way we view a problem. This goal was part of the inspiration behind the Ronald Coase Institute, which a group of scholars formed with Ronald Coase in 2000 to assist young scholars whose research has the potential to help transform their economies. Coase’s support for these young scholars was an act of generosity illustrative of a lifetime of scholarly generosity and confidence in the power of ideas. Ronald Coase himself was an outstanding example of an economist who changed fundamentally the way we think about problems, and the profound impact of his ideas is still felt today and will continue to be felt in the future.