EKIP– Expert Club for Economics and Politics A Different Opinion
On September 2, the great Ronald Coase died in Chicago at the age of 102. To the general public, Coase is best known for being awarded the Nobel Prize in Economics in 1991 for his contributions to understanding the importance of transaction costs and property rights for the institutional structure and functioning of the economy. Two publications formed the basis of this prize, both of which are required reading for any student of economics.
Petar Ganev, IME
The first was published in 1937 under the title “ The Nature of the Firm”. In it, Coase examines the question of why firms exist at all and what determines their size. It is here that the focus falls on transaction costs (although Coase did not introduce this term), that is, the costs that each party encounters while buying and selling in the market. Coase’s idea is that the emergence of firms is economically justified when they manage to reduce costs by carrying out certain activities within the firm itself, and not in the market. This theory can explain both the desire of large companies to develop vertically – for example, not to depend on external suppliers and to close the production process, and the desire of certain companies to outsource certain activities, some of which are purely administrative, such as calculating and paying salaries. Through the prism of transaction costs, we can explain the behavior of many firms in the market.
Ronald Coase's other famous publication is from 1960 and is entitled " The Problem of Social Cost". In it, Coase questions the idea that the only way to limit so-called "negative externalities" is through government regulation. Coase's argument is that clearly defined property rights would lead to a more efficient solution in which the parties concerned reach an agreement among themselves. Here, of course, there are also transaction costs, which practically predetermine which solution is efficient and which is not. But according to Coase, we must not forget that the solution to any problem, in this case negative externalities, inevitably carries costs and there is no reason to automatically seek government regulation simply because the problem is not perfectly solved in the market.
A very interesting publication by Coase from 1974, but perhaps not so widely known, examines the economics of lighthouses (“ The Lighthouse in Economics”). Again raising the question of the economic functions of the state, Coase takes lighthouses as an example and shows how the market can offer solutions that some economists reject theoretically. For example, Paul Samuelson, also a Nobel laureate in economics (1970) and author of a best-selling economics textbook, discussing the role of the state writes that the state provides certain invaluable public services without which the life of any community would be unthinkable and which cannot be provided by private initiative. One of Samuelson’s “obvious” examples is lighthouses. Lighthouses are extremely valuable, but their light is free, that is, anyone can use it without paying for it. The argument is that no one would set out to build a lighthouse, since there is no way to profit from it and therefore we have an obvious role for the state.
Ronald Coase's answer reveals a lot about his method. He is not looking for a theoretical answer, but simply decides to delve into the history of lighthouses in Britain and see what the truth is. It turns out that many of the lighthouses in Britain in the 18th and early 19th centuries were actually built by entrepreneurs who managed to collect fees and even make a profit. One of the conclusions of the publication, along with its significance for the debate about public goods, is that all the big names who have given the example of lighthouses in support of state intervention have done so by heart, that is, without having any idea how lighthouses even function or what their history is.
Recently, someone quoted Ronald Reagan as saying that an economist is someone who sees something working in practice and asks himself if it would work in theory. This may be a joke, but it is very similar to the method and work of Ronald Coase. Just a few months ago, Coase wrote an article entitled “ Saving Economics from the Economists.” A quote from that article seems quite fitting to conclude: “…Economics has become a convenient tool that the government uses to manage the economy, rather than a means for the public to understand how the economy works… Knowledge will come only when economics returns to the study of man, as he is and the economic system as it really exists.
The article is reprinted from the website of the Institute for Market Economics: http://ime.bg/bg/articles/v-pamet-na-ronald-kouz/
