Wednesday, 4 September 2013

Ronald Coase, 1910-2013

"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.

imagePS: 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

21 comments:

  1. Thanks for this tribute Peter. When I heard the news I was deeply saddened for while he lived a long and good life we have lost a great advocate of freedom and one of world's great economists.

    Julian

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  2. @Julian: And thanks for introducing me to his ideas.

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  3. The oldest living Nobel Prize winner died last night at 102.

    No they didn't. There is no Nobel prize in Economics.

    I find it extremely annoying to hear people conflate Alfred Nobel's prizes with the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" as his prizes are very interesting artifacts of history and his personality - and they do not include other peoples interest in economics.

    It is especially annoying to read from people who at other times will argue points with insistence on accuracy and veracity in statements.

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  4. @Fentx, this is a distinction without a difference.

    And do you think anyone would read on if I started a post like this: "The oldest living winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel died last night at 102"?

    Besides, I was always confident someone would pop up to point out my perfidy.

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  5. ...distinction without a difference.

    Only when you don't care about the distinction.

    It isn't of great import - there's no important argument hinging on it's being an accurate assertion, it merely happens to matter to me.

    Although I think one does a one's self a disservice arguing inaccuracy is forgivable when it attracts more readers.

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  6. I think its fair to say I am much influenced by Coase. As a theory of the firm type its difficult not to be. I agree about the Boettke comment, I too thought it excellent. As to the Nobel you're right it is "a distinction without a difference". The prize is awarded by Royal Swedish Academy of Sciences who also award the chemistry and physics prizes. The award is designed to be given according to the same principles and rules as the five original Nobel prizes - Physics, Chemistry, Physiology or Medicine, Literature and Peace. The prizes reward specific achievements rather than "outstanding persons". Indeed the statutes prescribe that "the Prize shall be awarded annually to a person who has carried out work in economic science of the eminent significance expressed in the Will of Alfred Nobel drawn up on November 27, 1895". So in reality only the name is different.

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  7. PS: I'm glad to see you got a picture of Coase and not Oliver Williamson!!!

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  8. So in reality only the name is different.

    No it isn't.

    It may not be if you're only interested in the prizes as an award given in Sweden by their Royal Academy as a recognition of something they find excellent, but if you're interested in them as Alfred Nobels bequeathing of rewards to people for benefiting humanity in the specific fields he cared about the post facto conflation of other peoples interest in economics with his specific intentions is annoying.

    And if the name isn't important, why resist getting it right?

    Clearly the will to conflate them means something to people who having been educated of the inaccuracy choose to mislead.

    Again I think it reveals a sleight hypocrisy among individuals who often decry poor arguments by others as not respecting reality and accuracy.

    It's not a big thing, I know it's a personal bugbear of my own, but it is a truth I choose to emphasise.

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  9. @Fentex: Perhaps you could tell us why you think it's so important?

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  10. @ Peter Cresswell You ask a good question Pete. As to the question "And if the name isn't important, why resist getting it right?", simple, the actually name is just too damn long.

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  11. I simply find it annoying to hear a prize not created by Alfred Nobel, not funded by Alfred Nobel, not known to Alfred Nobel, of unknowning relevance, interest or meaning to the long dead Alfred Nobel deliberately presented as if one with his intentions and personal rewards he gifts to fields he personally appreciated.

    And beside misrepresenting Alfred Nobel it hangs an award on the coat tails of the reputations of others by purposefully being presented to be conflated with them.

    I find it deeply dishonest.

    And if one cared for the truth but finds it's full name irritating then call it the Swedish Central Banks Award for Economics.

    That's not overly long while remaining accurate.

    Knowing the truth why resist it?

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  12. But many abbreviations aren't "correct". As an example, how often do you see references to the LSE or the London School of Economics. The truth is the name of the institution is "The London School of Economics and Political Science" but is anyone anal enough to get upset with the abbreviation, no. Why because we all know what is being referred to when we see the LSE. Same here, everybody know what is being referred to. And it saves a lot of typing.

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  13. I think you are mistaken. I think calling the Swedish Central Banks Prize for Economics a Nobel Prize is in no way an abbreviation - it is a misnomer.

    And that is very different from a shorthand.

    I also think it's a deliberate misnomer intended to mislead people into conflating two separate things.

    A person might not care, as I do, but I don't think a person can honestly argue that there is no distinction once it is demonstrated.

    I think many people who value the study of economics like the idea of a prestigious prize associated with the reputation of Nobel's long standing awards and enjoy the conflation of an unrelated award with them.

    And I find it dishonest.

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  14. You seem to be the only person upset and confused by the use of abbreviation "Nobel Prize in Economics" to mean "The Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel". Like I said, it just saves a lot of typing and people seem to get it.

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  15. @Paul "people seem to get it"? I had no idea there was a difference until I read through these comments. Fentex is completely correct. It's one thing to conflate two different awards out of ignorance of the difference between them. It's entirely a different thing to continue to claim they are the same thing after it has been explained very well why they are NOT the same.

    If you had set up a Paul Walker Prize for, say, excellence in mathematics, how upset do you think your estate would be to find it being also issued after your death, but in your name for excellence in the field of, say, promoting socialist ideals?

    The name distinction is important to show that one is dedicated to the memory of Alfred Nobel, and the others were directly set up by Alfred Nobel.

    It's simple enough to change it, and who would be made unhappy by doing so?

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  16. Back on topic now, and not wanting to speak ill of the dead, but I'm surprised nobody has brought up that it was Coase who gave us the horror that is carbon credits trading.

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  17. Greg. No one has claimed they are the same thing. The point made is simply that a shorthand is often used to no great loss. But in the most important ways they are the same. As already noted "The prize is awarded by Royal Swedish Academy of Sciences who also award the chemistry and physics prizes. The award is designed to be given according to the same principles and rules as the five original Nobel prizes - Physics, Chemistry, Physiology or Medicine, Literature and Peace. The prizes reward specific achievements rather than "outstanding persons". Indeed the statutes prescribe that "the Prize shall be awarded annually to a person who has carried out work in economic science of the eminent significance expressed in the Will of Alfred Nobel drawn up on November 27, 1895". So in reality only the name is different." Also the amount of the awards are the same. The major difference is who supplies the money. Also a few moment though would suggest it is very unlikely that Nobel would have set up an econ award given that in his time econ wasn't a separate well developed independent subject. As to how happy Nobel would be with what the Nobel Foundation has done, who knows? But this problem holds true for all foundations set up at the time of a person's death. They are no longer around to say what they think. Do you think Henry Ford would be happy with everything the Ford Foundation does these days, would Andrew Carnegie be happy with the activities of the Carnegie Foundation and the Carnegie Corporation etc? This kind of thing is a problem with all incomplete contracts, something Coase would have understood.

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  18. Fentex/Greig:
    One of the greatest economists ever has died, a person whose ideas have improved the lives of millions and not one word from you recognising his amazing contribution to the science of economics and to our lives.

    As PC said, he was confident someone would point out his perfidy, and you did, so move on and let this thread celebrate the contributions of a great man.

    Julian

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  19. @Julian: I didn't realise the choir needed me to sing with it at all times? ;) Take it as read that I agree with the main thrust of this post. He has enriched us all.

    I'm interested in your thoughts on my point above, re: carbon credits trading.

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  20. I don't think Coase worked or commented on carbon credits trading and I don't see anything in his work that would say that it is always the best (or least bad) answer.

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  21. @Paul Now I've read a little deeper, I see you're correct. I apologise, I had my facts wrong. That was how I first came across Coase, with the fact that his models were used to implement carbon credit trading, and so I made the unfounded assumption that he directly applied it to that when it seems that was the work of others.

    I'll STFU now! ;)

    *red faced*

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