What Coase Actually Believed

It’s remarkable how often people are remembered for believing or doing things that they in fact opposed. Professor David Ball recently passed along this gem from the famous economist Ronald Coase.

The world of zero transaction costs has often been described as a Coasian world. Nothing could be further from the truth. It is the world of modern economic theory, one which I was hoping to persuade economists to leave.

Source: The Firm, the Market and the Law, University of Chicago Press, Chicago, 1988. p.174.

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College Lonon. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over ten thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

2 thoughts on “What Coase Actually Believed”

  1. Maybe it's a quantum thing: when an economist has two crucially important insights, you're not allowed to apply them both at the same time.

  2. Similarly, Miller and Modigliani are often remembered for suggesting that a firm's capital structure (ratio of debt to equity) is completely irrelevant. Far from it! The Miller-Modigliani model showed that capital structure was completely irrelevant under 6 specific assumptions. They believed (and were probably right) that for 3 of those assumptions the real world was pretty close to the simplified model. But for the other 3 of those assumptions the real world was most certainly not, at least when considered for a wide range of potential capital structures.

    The value of the M-M model is that by proving that capital structure is irrelevant under those 6 assumptions, they effectively and fairly conclusively proved that no other explanation (other than a violation of those 6 assumptions) for why a given capital structure was better than any other was valid. And many such (specious) explanation were routinely offered for why companies should take on more or less debt than they currently hold were advanced in the years before M&M did their work. And given the strong circumstantial evidence that 3 of the 6 are more or less right, we are left with 3 possible questions – no more and no less – that are relevant in asking whether or not a firm should take on more debt or pay down its existing debt.

    Or for another example, Richard Thaler and the various "behavioral economists" are often assumed to be advocating for more government regulation of the economy, given their work showing that people are not perfectly rational decision makers, which is the position of many pro free-market commentors. Not so! Thaler has pointed out that the same cognitive biases that plague ordinary people also plague government officials and other technocrats, and that increasing levels of education and professional competence do not mitigate those biases much if at all. Or on other words, the fact that people are irrational, biased and short-sighted does not, by itself, solve the question of whether the economy should be more tightly or less tightly regulated.

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