Plain Speaking Takes The Nobel LaurelsBy
Some seeds take a long time to bloom. This year's recipient of the Nobel Memorial Prize in Economic Science, Ronald H. Coase of the University of Chicago, published his first important paper in 1937. Back then, he was asking questions that no other economist would touch. What should enterprises do, and how big should they be? When are markets the best way to organize economic activity? Now, over a half-century later, events in Eastern Europe, the Soviet Union, and even in the U. S. are making his work more relevant than ever. And the 80-year-old Coase is gaining long-overdue recognition. "I can't think of a more qualified prize winner," says Oliver E. Williamson, an economist at the University of California at Berkeley.
Few economists can match Coase's intellectual impact. His early work helped create the modern economic theory of the business enterprise. His pioneering application of economic reasoning to legal problems inspired the law-and-economics movement, which revolutionized antitrust and other areas of the law over the past 20 years. And several recent policy innovations, such as the use of pollution permits for controlling acid rain, can also be traced back to Coase's influence. Without Coase, observes Frank H. Easterbrook, a Federal appeals court judge, "much of what has been done in the economic analysis of law might never have taken place."
HAGGLING COSTS. Like his plain-spoken prose, Coase's insights are deceptively simple. In his 1937 paper, The Nature of the Firm, he noted that businesses could either buy goods and services on the open market or produce them internally. The problem with buying from outside, argued Coase, was that negotiating over price and writing enforceable contracts were costly in both time and money. If these "transaction costs," as they came to be known, are too high, the company should produce its own goods or services. If not, it should look outside. Those ideas gave economists their first set of tools for analyzing the limits of corporate growth and judging what was a productive use of assets. Indeed, the work of Coase and those who followed him is taking on new importance today as hard-pressed U. S. companies restructure, keeping some operations, spinning off others, and forging links with competitors and vendors.
Coase's other great contribution came in 1960, more than two decades later. He observed that from an economic perspective, some rules for assigning liability for harm were preferable to others. For example, forcing a polluting factory to shut down might not make sense if the goods and jobs generated by
the factory were large compared with the harm it caused. "Coase called into question the 'polluter pays' principle," says William M. Landes, an economist at the University of Chicago Law School.
RULES FOR LAW. Coase's theories also implied that in many cases, markets could take the place of legal remedies. Indeed, his ideas were used by some law professors and judges to argue that some forms of regulation were misguided and unnecessary. "The appropriate role of government is to establish the laws that make it possible for markets to operate," argues Coase, who was vacationing in Carthage, Tunisia, when the Nobel prize was announced.
But Coase is no starry-eyed market enthusiast. "The market isn't something that's easy to create, and they're finding that in Eastern Europe," says Coase. The problem, he notes, is that those countries don't have any of the other institutions, such as corporations or legal systems, that make a market possible. Unlike Coase, most economists are uncomfortable with the idea that markets alone are not omnipotent. But in a world where institutions are under new scrutiny everywhere, Coase's brand of economics is looking better every day.
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