Diane Coyle — Coase in theory and Coase in practice

Diane Coyle reviews Forever Contemporary - The Economics of Ronald Coase, edited by Cento Veljanovksi.

It starts with the Coase theorem: that when property rights are clearly assigned and there are no transactions costs (such as those involved in acquiring information, negotiating, monitoring compliance etc), then there are no externalities leading to a divergence between private and social costs: the parties involved will negotiate their way to the efficient outcome. ‘Externalities’ are symmetric, he argued: if you claim a right to clean air, you are costing me the opportunity to pollute. Who compensates whom will depend how the property rights are assigned. If you indeed have your clean air right, I will have to bargain with you to pay you for the pollution; if I have the right to produce emissions, you will have to pay me to desist.

Coase made it clear he took the existence of transaction costs very seriously, and argued that every situation had to be carefully assessed to determine the most welfare-enhancing course of action.…

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The useful bibliography of Coase’s work shows how seriously he took his own conclusion that you have to look in detail at each industry, its history and specificities before pontificating; as is well known, he described anything else as ‘blackboard economics’...

Case method instead of formal theory.

The Enlightened Economist
Coase in theory and Coase in practice
Diane Coyle | freelance economist and a former advisor to the UK Treasury. She is a member of the UK Competition Commission and is acting Chairman of the BBC Trust, the governing body of the British Broadcasting Corporation

Rumplestatskin — Thinking Like Coase, Not an Economist

I have often railed against the economic approach to social organisation problems which can be described as ‘assume first ask questions later’. There are too few good economists following more scientific methods of sound reasoning and the reliance on evidence in light of real world institutional structures.The first approach is often called ‘thinking like an economist’....

You will notice the strong links Coase makes to his descriptive model and ‘business practices’, a phrase you may never read in a whole economics degree.

Coase’s scepticism is so important today, when the dominant ‘economic way of thinking’ is to apply marginalist equilibrium models to ever more obscure situations (a la Gary Becker). Unless one can be certain that the model is capturing the important characteristics of this particular market or social institution, the results of some manipulation to the model will have no relevance to the realities one is trying to understand....

The Coase Theorem is actually the George Stigler Theorem and Coase rejected it.

Unfortunately, like his work on The Problem of Social Cost, Coase has been repeatedly misinterpreted by other economists. When you read about the Coase Theorem, you are probably reading about George Stigler’s interpretation of Coase’s discussions around social costs (externalities).... 

On his work about the Nature of the Firm, he recently noted that firm organisation is really a sociological problem, not an economic problem. Which seems so obvious since internal firm decisions are rarely priced, nor do they take place within an environment of market-style contracts. 

Rarely now do we see the type of common sense thinking that the ‘accidental economist’ Ronald Coase showed throughout his long career. In fact, I would be surprised if a Coase was beginning his career today that he would be able to break into the profession at all, given it’s obsession with formalisation of mathematical models, and disdain for verbal reason informed by real world conditions.

Naked Capitalism
Thinking Like Coase, Not an Economist

Rumplestatskin | Economist

David Glasner — Wicksteed on the Value of Paper Money

Finally, I’ll just mention that in the Wealth of Nations Adam Smith off-handedly mentioned acceptability in payment of taxes as a condition for inconvertible money not to be worthless.  So the lineage of the idea, despite its somewhat disreputable and unorthodox associations, is really quite impeccable.

Read it at Uneasy Money
Wicksteed on the Value of Paper Money
David Glasner | FTC economist

Expands on Nick Rowe's mention of Wicksteed's Chartalism. Extensive quotes on Wicksteed's Chartalism, as well as his anticipation of the Coase theorem.