Ronald Coase Research Paper

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Economist Ronald Harry Coase was born in Middlesex, Great Britain, in 1910. At the age of eighteen, Coase enrolled at the London School of Economics, studying for a bachelor of commerce degree. He passed his degree examinations in 1931, and “knew a little about economics as well as a little about law, accounting, and statistics” (Coase 1991a, p. 37). After graduating, he was awarded a traveling scholarship, which brought him to the United States to study the structure of American industry. In 1932 Coase started his academic career in Great Britain as an assistant lecturer at the Dundee School of Economics and Commerce, where he was a colleague of Duncan Black (1908–1991). Subsequently, Coase worked at the University of Liverpool (1934–1935) and the London School of Economics (1935–1951). In 1951 he moved to the United States, where he taught at the University of Buffalo (1951–1958) and the University of Virginia (1958–1964) before joining the economics faculty at the University of Chicago in 1964. He remained there until his retirement in 1981. While in Chicago, he also served as editor of the Journal of Law and Economics (1964–1982).

In 1991 Coase was awarded the Nobel Memorial Prize in Economics, primarily on the basis of his paper “The Nature of the Firm,” published in Economica in 1937. In this paper, Coase asks why there should be a coordinating organization “in view of the fact that it is usually argued that co-ordination will be done by the price mechanism?” (Coase 1937, p. 388). In addressing this question, Coase strikes gold when he introduces the concept of transaction cost: “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism” (p. 390). This explanation brings the firm and any other organization or institution within the economic domain. It creates neoinstitutional economics. Rereading his own paper years later, Coase claims to have been struck by its extreme simplicity (Coase 1991b, p. 52).

Another paper cited by the Swedish Academy when awarding Coase the Nobel Prize was “The Problem of Social Cost” (1960). This paper elaborates on a question posed in Coase’s earlier article “The Federal Communications Commission” (1959), a question similar to that posed in “The Nature of the Firm”: Why does etheric scarcity require government regulation, whereas for other scarce means, such as capital and labor, the price mechanism is used? Coase argues that the absence of property rights blocks the use of the price mechanism to allocate the etheric scarcity to its highest bidder. At the same time, in a zero-transaction-cost world, all welfare effects, side effects included, will be traded efficiently. This idea is what economist George Stigler (1911–1991) termed the Coase theorem (Stigler 1966, p. 113). Assignment of property rights may reduce transaction cost and induce trade, for example, in externalities.

Coase’s position is that a transaction cost is positive, underlining that this cost profiles economic transactions and their accompanying social arrangements. Otherwise, economic theory may result in “blackboard economics,” that is, formulating economic theory without taking account of information problems. Coase has a coherent view of the economic system, which he owes to his London School of Economics master Arnold Plant (1898–1978), who he claims “introduced me to Adam Smith’s ‘invisible hand.’” (Coase 1991d, p. 229). This view enabled Coase to formulate his seminal 1937 paper as “a young man who knew virtually no economics” (Coase 1991c, p. 62). Coase shows the normal working of the economic system in the light of transaction cost. The winning of the Nobel Prize induced Coase to remark: “It is a strange experience to be praised in my eighties for work I did in my twenties” (Coase 1991d, p. 231).

Bibliography:

  1. Coase, Ronald H. 1937. The Nature of the Firm. Economica 4 (n.s.): 386–405.
  2. Coase, Ronald H. 1959. The Federal Communications Commission. Journal of Law and Economics 2: 1–40.
  3. Coase, Ronald H. 1960. The Problem of Social Cost. Journal of Law and Economics 3: 1–44.
  4. Coase, Ronald H. 1988. The Firm, the Market, and the Law. Chicago: University of Chicago Press.
  5. Coase, Ronald H. 1991a. The Nature of the Firm: Origin. In The Nature of the Firm: Origins, Evolution, and Development, ed. Oliver E. Williamson and Sidney G. Winter, 34–47. New York: Oxford University Press.
  6. Coase, Ronald H. 1991b. The Nature of the Firm: Meaning. In The Nature of the Firm: Origins, Evolution, and Development, ed. Oliver E. Williamson and Sidney G. Winter, 48–60. New York: Oxford University Press.
  7. Coase, Ronald H. 1991c. The Nature of the Firm: Influence. In The Nature of the Firm: Origins, Evolution, and Development, ed. Oliver E. Williamson and Sidney G. Winter, 61–74. New York: Oxford University Press.
  8. Coase, Ronald H. 1991d. 1991 Nobel Lecture: The Institutional Structure of Production. In The Nature of the Firm: Origins, Evolution, and Development, ed. Oliver E. Williamson and Sidney G. Winter, 227–235. New York: Oxford University Press.
  9. Stigler, George J. 1966. The Theory of Price. 3rd ed. New York: Macmillan.
  10. Williamson, Oliver E., and Sidney G. Winter, eds. 1991. The Nature of the Firm: Origins, Evolution, and Development. New York: Oxford University Press.

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