"In my youth it was said that what was too silly to be said may be
sung. In modern economics it may be put into mathematics."
- Ronald Coase, 1988
The oldest living Nobel Prize winner died last night at 102.
Ronald Coase won his Nobel Prize for ideas in economics he developed when he was an undergraduate in the 1930s at the London School of Economics, studying under Arnold Plant and a young Friedrich Hayek. And he got it for essays that were short, concise, and eminently readable—ideas that hit the calcifying economics profession with all the intellectual power of a hand grenade.
In the 28 pages The Problem of Social Cost, Coase linked property rights and value theory. He identified that when transaction costs remain low, private agreements can resolve many otherwise gnarly issues of trespass and nuisance, and rights in property generally end up in the hands of those who value them the most. (Read here a bar owner’s neat use of the Coase Theorem by to flout anti-smoking laws.)
The 13 pages of The Nature of the Firm became the most cited economics article ever. In it, Coase identified the limits to the firm and to the previous thinking about the firm by economists—who, he said, had built up a theory while omitting to examine the foundations. Unlike those economists, Coase looked at real firms not economic models of “representative firms,” identifying why there was an optimum size for any firm. Transactions within firms exist outside the coordinating mechanism of the price system. Why? Because transactions between firms attract costs which transactions inside the firm don’t. But why don’t firms keep growing until there are not external transactions at all? Because the bigger they get, the bigger the “calculation problem” and agency difficulties become.
Never, perhaps, has an economics Nobel Prize been given for so few pages of such clear prose. And as Peter Klein notes,
Coase did all these things despite — or because of? — not holding a PhD in economics, not doing any math or statistics, and not, for much of his career, working in an economics department.
Coase remained sharp to the end, and still in some ways considered himself an outsider in the profession. Here he is last year, at 101, still trenchant.
And here’s an entertaining podcast interview (complete with transcript) with Russ Roberts from 2012, when he was still a young man of 100.
PS: Paul Walker at the University of Canterbury, who I think would call himself a Coaseian, has a good bio of the great man. Says Paul, “the world of economics has lost the greatest economist of the 20th century.” And if you head over there now, Paul’s sidebar is fully loaded with Coase obituaries and tributes, the best of which is Peter Boettke’s (from which I pinched the Coase quotes).
PPS: This was Coase’s latest book, out last year:
How China Became Capitalist details the extraordinary, and often accidental, journey that China has taken over the past thirty years in transforming itself from a closed agrarian socialist economy to an indomitable force in the international arena.
How China Became Capitalist – Ronald Coase, AMAZON
“Economics, over the years, has become more and more abstract and divorced
from events in the real world. Economists, by and large, do not study the
workings of the actual economic system. They theorise about it. As Ely
Devons, an English economist, once said at a meeting, "If economists
wished to study the horse, they wouldn’t go and look at horses. They’d sit
in their studies and say to themselves, ‘What would I do if I were a horse?’
And they would soon discover that they would maximize their utilities."”
- Ronald Coase, 1999