Ronald Coase: an appreciation.

• Author: Nye, John V.C.
• Position: In memoriam

The Mainstream Iconoclast

The death of Ronald Coase (1910-2013) at 102--almost certainly a record for any economist of note--put an end to one of the longest and most illustrious careers in academia. Not only had Coase received the highest accolades of the profession--headed by the Nobel Memorial Prize in Economics, of course, but also multiple honorary doctorates from leading universities, fellowships in the American Economic Association and the American Academy of Arts and Sciences, the first presidency of the International Society for New Institutional Economics, and more--but he was widely regarded as among the greatest and most influential economists of the past century. This was a stunning achievement, considering the fact that Coase had never received a doctorate in economics. Furthermore, Coase--whose work as a scholar and as a journal editor helped to establish the new legal discipline of law and economics--spent half of his life as an economist on the faculty of the University of Chicago Law School, not the Economics Department. Even a cursory examination of Coase's biography will underline how unorthodox his path to eminence was and how amazingly successful he was at unearthing the most profound truths while often marching out of lockstep with the profession and, indeed, the world at large. Though Coase's fame and influence were enormous, his reputation did not really peak until very late in his life. I can recall, just a year or two before he received the Nobel, a conversation I had with a distinguished economist who scoffed at the suggestion that Coase was a worthy future laureate. After all, hadn't Coase written only "two good papers"?

Such underestimation of Ronald Coase, both of his abilities and his accomplishments, seems to have been a marked aspect of much of his life.

As a youngster in England, he had suffered problems with his legs that caused him to be schooled at a boys' institute for "physical defectives." Coase quipped that it shared grounds with the school for "mental defectives" and, perhaps he thought, even some of the curriculum. Remarking on economists' frequent classroom use of basket weaving as an example of a low-skilled activity, Coase said, "I did study basket weaving. It's not simple at all. In fact, it's rather more complicated than economists expect."

As an undergraduate at the London School of Economics, Coase began the work that would eventually lead to "The Nature of the Firm" (1937)--one of the most highly cited papers in economics and the social sciences. Starting from the simple question "Why do firms exist?" Coase came up with the profound insight that although the market price mechanism is best at allocating resources, having to obtain market prices and make use of them is not costless, and therefore the existence of the firm owed much to the problem of transactions costs and the need even in the most highly developed, free-market economies for organizations to arise that can economize on such costs by producing some items within the firm through hierarchy and planning. At the time, economists had no answer to the conundrum that if the market pricing mechanism is so efficient and market economies so productive, why are all the leading-edge firms in the most successful and advanced industrial economies marked by hierarchy and command rather than by the use of internal prices? Coase was the first to claim explicitly that all firms have to balance the advantages and disadvantages of obtaining goods from an external market that might or might not exist for any given items against the advantages and disadvantages of producing those products internally. Because both the institutions of the firm and the legal and political institutions outside the firm condition many of the transactions costs that determine the scope of markets and hierarchies, the insight contained in Coase's earliest paper has served as a foundational idea for work in industrial organization, law and economics, and the new institutional economics.

In 1951, Coase first moved to the United States to teach at the University of Buffalo and then subsequently was hired away by the Jefferson Center at the University of Virginia (UVA), where he worked alongside such future luminaries as James Buchanan and Gordon Tullock from 1958 to 1964. While at UVA, Coase produced his famous papers "The Federal Communications Commission" (1959) and "The Problem of Social Cost" (1960), which established the ideas that George Stigler later christened the "Coase Theorem."

The Coase Theorem has been one of the most widely cited and most commonly misunderstood ideas in economics and the social sciences. In its simplest and most common version, it states that where property rights are well defined and transactions costs are negligible, the initial...