Ronald Coase: One of a Kind

The news of Ronald Coase’s passing will doubtless bring forth well-deserved tributes for his massive contributions to the field of economics. I shall touch on them briefly here, but write primarily to tell something about the Ronald Coase whom I knew reasonably well for the past 41 years, since I first set foot in Chicago as a visiting associate professor in the fall of 1972.

Today, it might seem odd that I went through four years of legal education — at both Oxford and Yale, between the years 1964 and 1968 — and never once heard mention of the name Ronald Coase. The point, in retrospect, seems doubly odd because three of Coase’s greatest articles, The Nature of the Firm (1937), The Federal Communications Commission, and The Problem of Social Cost (1960) had been published before I entered law school, yet they were not part of the mainstream body of work to which the legal profession turned.

That ignorance did not remain for long. Shortly after I arrived at the University of Southern California in the summer of 1968, I ran into Michael Levine (who is now with me at NYU Law School) in Dean Dorothy Nelson’s office, and somehow the conversation turned to the year that he had just spent as a Law and Economics Fellow at the University of Chicago. Mention of Ronald brought forth a mention of the Coase Theorem and I remember my puzzled reaction to Levine’s insistence that this was an important piece of work that everyone had to take into account in dealing with legal institutions.

My reaction, I soon discovered, was similar to that of most other people who viewed this work.  Indeed, the famous story about Ronald was that when he first presented this paper to the fearless law and economics group at the University of Chicago everyone thought that he was wrong — only to be persuaded by the end of the hour that Ronald had indeed seen the world correctly. It was the first of many conversions that would break in his favor.

Why was Ronald so great? The answer is not because he was smart. In fact, I suspect that by the usual measures of intelligence Ronald would not do well against the types who excel in proving mathematical theorems or solving crossword puzzles. No, Ronald was not “smart.”  But he was brilliant. He could look at the most mundane facts of ordinary life and distill from them insights about how the world worked — and, indeed, had to work

To make the point more generally, the idea that social interactions took place in a frictional universe was not first discovered by Ronald. The point was in the background of virtually every discussion of the operation of the legal system from the beginning of legal history. But lawyers, in particular, are creatures of doctrine, and their first intuition was to look for elegant points of law over which to argue in the manner of great appellate lawyers and to ignore the inconspicuous substrate on which the entire system rested.

To put it otherwise, what he did was make friction the main event in all cases, not just a sideshow. He did it first when, in The Nature of the Firm, he asked the simple question of why individuals sometimes form firms to organize their business and on other occasions resort to the price system to exchange goods. No one before Ronald has put the point exactly in that way, and yet, once the question was made, his simple answer—namely, that it is costly to form a price system and costly to form a firm—started a huge rush of productive scholarship. No longer does one think of business entities as suspended in space. It is not possible to ask when the transaction costs are higher in the one direction than in the other, so that there is a kind of balance that explains why both types of arrangements are so commonplace.

From there, it turns out that the study of partnerships, corporations, lending agreements, joint ventures, and a host of other arrangements are all amenable to the transaction costs analysis. At each stage in the analysis, we are always sure that there has to be something more to the overall system. But in each case, supposed side constraints fit very well within the simple model that Ronald developed by asking the right question and then looking hard at the everyday facts of the world to see how it operates. 

What is obvious now was not obvious then, which is why Coase is not just a distinguished person, but the champion of a worldview—the Coasean worldview—which will rank up there, when all is said and done, with the Hobbesian, Lockean, and Humean views of human nature — and not just because he shares with them the inestimable advantage of a one-syllable name.

The same kind of analysis can be given of the two other Coase papers I mentioned. In dealing with the federal communication system, he proposed a property rights system for the spectrum. In answer to the question of why he would try such a novel scheme, Ronald replied, “Novel, since Adam Smith.” Indeed, the carryover of traditional property rights to the spectrum does have some difficulties that people do not ordinarily associate with property rights in land. But oddly enough, once the difficulties of interference across boundaries is evident with the spectrum, it becomes evident that this same question of low-level interferences can arise with land as well—where once again the proper solution depends on finding that system of entitlements of nuisance cases that minimizes the transactions cost needed to get to some optimal solution.

The Problem of Social Cost is, in a sense, a generalization of the earlier work, and from it I think that we can derive the sensible proposition that the way to maximize social welfare is not to engage in some Keynesian fantasy but to minimize the transaction costs that stand in the way of voluntary transactions. I make this point with special irony now because—honestly—the last paragraph I was writing on a paper on the Roman Law of pleading was devoted to explaining how a Coasean approach to transactions cost explained the in rem in personam distinction that is so central to the organization of the law of property, contracts, and torts.

The irony, however, is that Ronald may well have disapproved of this leap of logic.  Here are two pieces of evidence on the point.

Some years ago, Coase, James Buchanan, and I were invited to speak to a small group of scholars from the Liberty Fund about our contributions to legal and economic scholarship. The odd point about all this is that Ronald spent most of his time lamenting that the rest of the world had misunderstood his achievements: he thought that he was giving an explanation of some interesting 19th century English nuisance cases that had previously been misunderstood. 

Well, he certainly did that. But he could not quite grasp that he may well have done a great deal more. Indeed, it became clear that Coase took a very dim view of most of the scholarship that had come after he had retired from the University of Chicago around 1975, and he was sad that his name was used in so many contexts of which he did not approve.

The last two times that I saw Ronald were in the past 19 months, when we had lunch at his retirement home. Ronald moved with only great difficulty, but was both lucid and firm. He thought that the wave of the future involved understanding China and in starting a scholarly publication called “The Journal of Man,” which would be designed to rid economics of what he termed the  sins of “blackboard economics,” which did not draw its inspiration from the behavior of real individuals in concrete contexts. That said, he then concluded glumly that his life had been something of a failure. He had not done enough to develop his views in a profession that seemed to be moving away from him.

We should all be such failures. Coase was a peculiar mix of personal naiveté and unquestioned brilliance. It is not likely that we shall see one of his kind again any time soon. He is now again with his wife Marian, to whom he was married, without children, for over 75 years. Requiescat in pace.

  1. Todd

    Thanks for this Professor. 

  2. PJS

    Mr. Coase sat in with Russ Roberts for an episode of EconTalk.  He was obviously slowing down, but still bright and lucid.  I wish I had known more about him.  Thanks, Richard, for your lovely remembrance.

  3. x

    Beautiful professor.  Thanks.  I remember to this day the flash of recognition when I finally “got” the point of The Problem of Social Cost.  I was arguing with a torts professor.