|WACO, September 11 - We recently lost a great thinker with the passing of Ronald Coase. This economist’s ideas have stood the test of time, and are as relevant today as they were when he first expressed them more than 75 years ago.
At the time of his death at 102, he was the oldest living Nobel Laureate in any discipline.
Ronald Coase was born in 1910 in London and received a degree in “commerce” from the London School of Economics. He was awarded a traveling scholarship which enabled him to tour the United States in 1931-32, during the worst of the Great Depression, interviewing U.S. businessmen. These conversations formed the basis of one of his groundbreaking articles, “The Nature of the Firm,” published in 1937. Though only in his 20s when writing the piece, Ronald Coase demonstrated a unique gift for sorting through complex relationships to identify the key pieces that really matter. In this instance, he pointed out that economists needed to account for both transaction and organizational costs in describing the workings of the marketplace. These ideas seem simple and commonplace today, but they have changed the way we think about business. In fact, much of current management theory is linked to optimizing aspects such as firm size to minimize these costs.
Following his sojourn in America, Mr. Coase later went on to teach in universities in the U.K. for several years, receiving a Doctor of Science in Economics from the University of London in 1951. During much of this time as World War II was raging, he also worked for the British government in various departments. He was struck by the petty problems and infighting within the bureaucracy even as the U.K. dealt with the massive effects of the war. This experience shaped his opinions and later work in the area of social costs.
In 1951, Dr. Coase moved to the United States and taught at the University of Buffalo and the University of Virginia before joining the faculty at the University of Chicago Law School. While we now accept the fact that there is a definite area of overlap between law and economics, Ronald Coase was one of the first to explore and develop this field.
In 1960, what is perhaps Dr. Coase’s most influential paper was published. “The Problem of Social Cost” deals with the treatment of what economists call “externalities,” which are costs that an economic action imposes on persons not involved in the action. For example, pollution from a factory may affect those who live nearby, even though they are not directly benefitting from the factory’s business. Rather than treating such externalities through regulation alone, Dr. Coase argued that it would be preferable to study what the effects on the situation would be “before” and “after” such a proposed regulation to see if it would really improve the outcome. Moreover, the incentives for the parties involved to resolve disputes in their own self-interest (even if a court is needed to adjudicate) would lead to a better and more efficient solution than government intervention. These original ideas have arguably been extended somewhat in what we now call the Coase Theorem, but the essential idea is that if affected parties can come to a mutually agreeable solution to the externality problem, they should be allowed to do so, and the result will likely be preferable to government intervention. A key aspect of his findings was that the assignment of property rights (irrespective of who gets them) will facilitate a “market” solution. It was one of the single most important ideas in Western intellectual history.
The “Social Cost” paper arose out of a dinner meeting and later discussion with an illustrious group of economists from the University of Chicago, who basically called the young Ronald in to defend a paper he had written. At the outset, all of the Chicago gang (which included Nobel laureates Milton Friedman and George Stigler) thought Dr. Coase was mistaken in his opinions. By the end of the night, all of them had changed their minds and were in agreement with him. Someone suggested he write a paper outlining the ideas they had exchanged, and the rest is history.
Ronald Coase was awarded the Alfred Nobel Memorial Prize in 1991. He continued to shed light on complex topics as late as last year, when his last book regarding the emergence of capitalism in China was published at the age of 101.
Looking back on his theories, they seem obvious. He once commented on the fact that he was surprised no one else had pointed out his observations, as they did seem simple to him. However, he was looking past the thinking of his day and delivering fresh insights which continue to shape our views of businesses and transactions even decades later. We need more people with the incredible gift which defined the work of Ronald Coase: simply brilliant.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.