Journal Files A.A.S

Coase or Bastardized Coase?

There is a continual war for our minds. Some read Coase to say,

Property rights make no difference as long as there are markets. This left the market as the supreme institution and gave a meaning to free markets-- free of govt. interference. Markets could internalize externalities without government action other than fully defining rights.

In his 1991 Nobel acceptance speech Coase made it clear that transaction costs are everywhere and thus property rights always make a difference. But he never bothered to emphasize this point before. WHY? Too busy. Too convenient. Would Coase have been so widely quoted if he had earlier made the following statements??

"...in a regime of positive transaction costs, the character of the law becomes one of the main factors determining the performance of the economy." Coase 1993, 251

"...the rights which individuals possess, with their duties and privileges, will be to a large extent, what the law determines. As a result, the legal system will have a profound effect on the working of the economic system and may in certain respects be said to control it." Coase, 1994, 11

Even then in his Nobel speech he said apropos of Stigler's creation of "the infamous Coase Theorem," that "I do not disagree with Stigler. However, I tend to regard the Coase Theorem as a stepping stone on the way to an analysis of an economy with positive transaction costs. The significance to me of the Coase Theorem is that it undermines the Pigovian system. Since standard economic theory assumes transaction costs to be zero, the Coase Theorem demonstrates that the Pigovian solutions are unnecessary in these circumstances. Of course, it does not imply, when transaction costs are positive, that government actions ... could not produce a better result than relying on negotiations between individuals in the market. " Coase 1994, 10-11 What did Pigou do wrong in Coase's eyes? Pigou is a symbol of "government activism." It is the basis for such statements as "government should correct externalities and equate social and private costs." If Coase denies that his message is to let markets work, what is his beef with Pigou? Perhaps it is the generalized ideological thrust of reform. So then if Coase also rejects the ideological thrust of status quo in the Bastardized Coase Rule, where does that leave him? His language is that no generalized ideological conclusion is justified, but rather that each case must be pragmatically judged on its own merits.

What if Coase followed the above by saying that his analysis points to the central place of moral judgment in working out conflicts in the political process? Ah, that will be the day PPPC becomes mainstream!

(The above is inspired by Steven Medema and Warren Samuels, "Ronald Coase and Coasean Economics: Some Questions, Conjectures and Implications," in Samuels, et.al. The Economy As A Process of Valuation, Elgar, 1996.)

JF AAS. Nov. 6, 1996 \810-JF\coase

If you have any questions or comments, please email schmid@pilot.msu.edu

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