The Good Sense of Ronald Coase

by Mario Rizzo  

Ronald Coase was recently interviewed by Wang Ning on the occasion of Coase’s 100th birthday and to discuss the Ronald Coase Society in China. There is a good deal that is interesting about the interview, especially to those interested in China. However, here I’d like to point to a number of statements Coase makes of more general interest.

1.RC: The bad or wrong economics is what I called the “blackboard economics”. It does not study the real world economy. Instead, its efforts are on an imaginary world that exists only in the mind of economists, for example, the zero-transaction cost world. Ideas and imaginations are terribly important in economic research or any pursuit of science. But the subject of study has to be real.

I think this makes it clear that Coase intended the zero-transactions cost analysis (aka “the Coase Theorem”) to be an analytical tool or mental construct and not a description of reality or even, I should venture, a normative standard.  

2. WN: So the question is how we can learn from experiments at minimal cost. Or, how could we structure our economy and society in such a way that collective learning can be facilitated at a bearable price?

RC: That’s right. Hayek made a good point that knowledge was diffused in society and that made central planning impossible.

This is interesting in itself and because at another point in the interview Coase recognizes the trial and error aspect of institutional evolution and that property rights in China may not look like property rights in the West.  

3. RC: One way for the Society to advance the right kind of economics to China, and encourage Chinese economists to do the right kind of work, is to have a journal of its own. When I was editor of the Journal of Law and Economics, I was very active. I would attend seminars and conferences and talk to people to see what kind of research they were doing. I would solicit their articles if I thought they were good ones. And frequently, I would talk to people and encourage them to conduct certain studies with the promise to publish their article.

WN: This is indeed very different from the way journals are run now.

RC: I do not believe any other journal was run the same way then. Most journal editors wait for submitted articles and use external reviewers to select the articles for publication. This was not the way I worked. I knew what kind of articles I would like to publish, and I went around to find people to write them.

Of course, this is a very time-consuming way to run a journal. It does, however, make a good deal of sense. Coase was fortunate that he had a journal at a prestigious university to work with. Nevertheless, the journal attracted attention and respect by the quality of the work that appeared in it.  

4. WN: Based on your experience, what should the Society do if it launches a new journal?

RC: You should have a clear view of what you want to accomplish, what articles you want to publish and what kind of research you want to encourage. You shall not worry about how other people think about your views. You cannot control what other people think. You will not monopolize the whole field. If you believe in your view, you have to be strong to defend it and promote it in the market for ideas until you are convinced that it is proved wrong. This is the only way to be independent.

I think this is good advice for those of us who are in the intellectual minority today. We often spend too much time worrying (about all sorts of stuff!).  

5. RC: … I think deference to authority is a bad trait of the Chinese. What Chinese economists should do is to develop their own thinking based on a careful and systematic investigation of the working of the Chinese market economy. My work, “The Nature of the Firm” or “The Problem of Social Cost”, does not provide an answer to questions that the Chinese economists should tackle. The most my work or the work of anyone else can do is to suggest possible directions to tackle the problems.

On deference to authority, Coase makes a point that could be heeded by economists of all approaches in the US. Before the reader thinks of pointing to the Austrians as especially guilty in this regard, he should observe the “cowardice” of students at top universities in departing from the mainline views. On the other point about the suggestiveness of his work, Coase makes clear that what he tried to provide is a framework for analysis and not a set of conclusions. Research is open-ended.  

6. RC: I never doubted that Steve [Cheung] would do great work no matter where he was. And good economics will attract good economists. But if he stayed in Chicago, he could have done much more.

WN: You are probably right. If Steve stayed, the Coase-Cheung team would last for more than a decade at Chicago even before Steve went back to Hong Kong. Given your character, you would not be aggressive enough to push your vision of economics at Chicago. But if you were teamed up with Steve, what you called good economics probably would have prevailed in Chicago.

RC: That’s right.

Coase does say elsewhere in the interview that he did not feel any pressure from the dominant figures at Chicago to repress his intellectual independence. He may, however, be underestimating the influence he did have on them.  

Finally, on a personal note Coase makes clear that living long has its costs:

RC: I am now 100 years old. At my stage, life requires a constant effort. As I told you many times, do not get old. But I have no doubt that Chinese economists will do the right kind of work, and make their contribution to advance economics. This hope keeps me happy and I thank them.

Coase is a brilliant man and the interview is well-worth reading in its entirety (it is not long).

(HT: Tyler Cowen)

4 thoughts on “The Good Sense of Ronald Coase

  1. Extremely interesting! Reinforces the idea that Austrian and NIE economics ought to merge, both for strategic (NIE is better known) and theoretical reasons. The strength of NIE is property rights, transaction costs, and institutional analysis, while the strength of Austrianism is entrepreneurial processes, capital structures, and real time. Combining the two seems to be the most promising alternative to the mainstream (also because AE and NIE are the only two “paradigms” that do not throw out the baby with the neoclassical bathwater)

  2. Points 1 and 2 in particular characterized UCLA in the Alchian era. Perfect competition and 0-transaction costs were a foil, used to understand the effects of their absence.

  3. the link to the original interview doesn’t seem to be working. I live in Beijing and am interested in the society and perhaps connecting with like minded individuals.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s