The awarding of the 1991 Nobel Prize in Economics to Ronald H. Coase shows how much economics has changed in the past 30 years. When Coase's famous article, The Problem of Social Cost, was published three decades ago, the academic Establishment was unable to find any merit in it-or in the work of Coase's colleagues in the innovative economics department at the University of Virginia, home of the "Virginia School" that subsequently produced two Nobel laureates.
Indeed, in 1964 Coase became the first victim of a secret plot hatched by the university administration to purge the "right-wing" economics department of its leadership, culminating in the resignation in 1968 of James M. Buchanan, winner of the 1986 Nobel Prize. Thus, Thomas Jefferson's academic village, which has never had a Nobel laureate, has the dubious distinction of having expelled two scholars who later won the prize.
The dismantling of the Virginia School shows that there is nothing new about the political correctness that stifles diversity of opinion in today's universities. A confidential 1963 study conducted behind the back of the economics department by a hostile university administration in Charlottesville described the outlook of Coase and Buchanan as "Nineteenth-Century Ultra-Conservatism." With unknowing irony, it accused what was then arguably the most innovative economics department in the world of "doctrinal rigidity" that was "a highly unfortunate handicap in the present race among Universities to build up strong staffs."
NO CACHET. The university administration chose to use promotion, tenure, and salary policy to "lose" crucial members of the economics department and brought in a new dean of faculty to do the job. The members of the Virginia School only learned the reasons for the dismantling of their department a decade later, when the secret report and dean's records fell by chance into the hands of a survivor of the purge.
In his 1968 resignation letter to university President Edgar F. Shannon Jr., who presided over this egregious assault on academic freedom, Buchanan expressed puzzlement at the series of actions that had "broken up a graduate-research-teaching concentration that was unique in social-science scholarship and one that was highly successful by any objective criteria." The editor of the American Economic Review had acknowledged the success of the Virginia School with his public statement that Virginia's economics graduate students were submitting more interesting manuscripts than those of any other institution in the country.
Perhaps the Administration's decision to purge the Virginia School originated in 1960-61, when Kermit Gordon, then head of the Ford Foundation's economics program and later president of the Brookings Institution, met with Shannon and members of the department. He questioned whether the economics faculty had the liberal cachet to receive Ford Foundation grants. Gordon took exception to a brochure produced by the economics faculty that expressed a commitment to "a social order based on individual liberty." He saw this as an expression of hostility to socialism and freedom of inquiry.
Gordon was disinclined to support the research that would revolutionize economics and result in the awarding of two Nobel Prizes. The reason is not hard to understand. Gordon was in lockstep with the conventional wisdom of the 1960s, and Professors Coase, Buchanan, and their colleagues were not. Indeed, they were raising fundamental challenges to an economics that was little more than a ramp for government intervention, and this did not sit well with those who saw more government as the hallmark of progress.
WORLD RECOGNITION. Before Coase, economists regarded air, water, and noise pollution, for example, as social costs inflicted on society by the market system. Producers were profiting by shifting costs to society in general. Economists believed that only increased government regulation could rectify these "market failures" and prevent capitalism from harming society. Coase undermined the conventional wisdom by arguing that social costs result from the absence of defined property rights, not from the failure of markets. The solution was to extend the market by defining rights. This would reduce "transaction costs" and permit private parties to find a solution without government intervention-an expensive cost itself-that could easily result in a net loss to society because of reduced output.
Together with Buchanan, who maintained that government fails because it serves private and not public interests, Coase discredited the economic theories that found the solution to every problem in larger government. Coase's work appeared in 1961, and Buchanan's in 1962, the same year that their Virginia colleague Warren Nutter published his monumental Growth of Industrial Production in the Soviet Union, which challenged economists' beliefs that central planning produced high economic-growth rates. The work of all three has stood the test of time and achieved world recognition, but in the 1960s it produced more controversy than a single economics department could survive.