Wednesday, December 2, 2009

Tyler Cowen's Pushing My Buttons

Over at Marginal Revolution.com, in an otherwise interesting post about foreign investment in African agriculture, Tyler Cowen makes the following assertion: "The Coase theorem is finally kicking in." This claim is both baffling and unfortunately common among economists who have failed to read or understand Coase.

As I recently explained in another post on so-called "Coasian bargaining," the unfortunately labeled "Coase theorem" posits that, when transaction costs are zero, entitlements to resources will move to their highest and best uses regardless of the initial allocation of property rights (and regardless of other legal rules). Coase posited the "Coase theorem" to describe the impoverished world of neoclassical economic theory, in which legal rules, including property rights, are irrelevant to the efficiency of outcomes. Coase wanted to amend that theory by explaining how legal rules can and do matter for economic efficiency. Specifically, the initial allocation of property rights can impede or facilitate efficient exchange in the real world because transaction costs are always positive and sometimes quite high. Since  transaction costs are ubiquitous in the real world, including in Africa, the Coase theorem, which presumes zero transaction costs, has no relevance.

Tyler may well be right that corrupt African politicians have decided that it is "more profitable, and more secure, to 'sell off' their countries rather oppress them in the traditional manner," but this has nothing to do with the Coase theorem.

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