Wednesday, December 29, 2010

Happy 100th Birthday Ronald Coase

I've recently started noting historical events instead of celebrating birthdays, but I had to make an exception for Professor Coase, especially on his 100th birthday. His birthday is, in reality, an important historical event because of Coase's stature in both economics and legal studies. Two of his seminal articles - "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960) are among the most widely cited works in both fields. Unfortunately, the later article is too more often cited for the wrong reasons, as both economists and legal scholars continue to misunderstand not only Coase's intention but his analysis (do not read the Wikipedia entry about Coase, unless you want a complete misunderstanding of his work).

Coase was and remains the central figure in the modern Law & Economics movement because he explained why legal rules are such an important component of the economy. The law would not matter if it were costless to use the price system, that is, if transaction costs were zero, because individuals would simply bargain their way around all disputes over entitlements to resources. The reason the law does matter for  economic exchange is that transacting in the market is not costless. Transaction costs are always positive and often quite high. This central insight, while lost on many self-proclaimed "Coasians," who continually cite the "Coase theorem" (so named by George Stigler) and refer to "Coasian bargaining," was the most important combined legal and economic insight of the 20th century.

By the way, the 100-year-old Coase has a new book coming out (co-authored) by Ning Wang, entitled How China Became Capitalist. It will be published by Palgrave Macmillan in June 2011. I wonder how many centenarians have ever published new books?

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