Wednesday, September 4, 2013
Ronald H. Coase dies
Ronald H. Coase, the Nobel Prize of Economics in 1991, died on Monday September 2nd in Chicago, at the age of 102. He was born in England but spent most of his life in the USA. He was one of the most influential economists of the recent past, and probably one of the most used and abused ones. His contributions can be summarized probably as explaining the limits of both markets and government. In "The Nature of the Firm" he explained that it is often costly to use the market system, and that this is a reason for the existence of hierarchycal organizations such as firms. The key to the existence of one form of allocation mechanism or another was the presence of "transaction costs". In "The Problem of Social Cost" he explained that when people and firms behave in ways that harm others, government intervention is not necessarily the solution. If there are no transaction costs and property rights are well established, the parties in the economy can negotiate through free exchange to find an efficient solution. By this so-called "Coase Theorem" market efficiency was expanded even to the case of "externalities", which are considered a market failure in traditional economics. What many "abusers" of Coase have forgotten is that this result was established under very strong conditions (zero transaction costs and complete property rights), that are usually absent in the real world. Coase's objective was to try to direct attention to the presence of transaction costs and the need to find institutional solutions adapted to different types of transaction costs. Then Coase has been used to justify extreme privatization policies or more useful institutional innovations such as pollution permits or spectrum auctions. Besides his substantial contributions, he should also be remembered for his method of working and writing, always opposed to dogma, always mindful of institution and empirical details. This can be shown in his wonderful essay "The Lighthouse in Economics". I thank Prof. Vicente Salas for introducing Coase to me in the 1990s, I have always find it a key reference in the area between industrial organization and public economics.