November 18, 2004
Vol. 24 No. 5

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    Coase discusses famous theorem, future of applying economics in today’s world

    By Peter Schuler
    News Office

    Ronald Coase moves rather slowly these days, but he can be forgiven. At 94, his mind is still as sharp as it no doubt was when, as a student, he began thinking about economics in ways that would reshape the entire field.

    Coase, who has spent most of his academic career at Chicago’s Law School, is the Clifton R. Musser Professor Emeritus of Economics and the 1991 winner of the Nobel Memorial Prize in Economics for idiosyncratically non-technical but extraordinarily influential essays, including The Nature of the Firm (1937), which offered groundbreaking insights about why firms exist, and The Problem of Social Cost (1960), which is generally credited as the seminal work in the field of law and economics.

    “I was never very successful at cards,” Coase said. “It didn’t matter whether I won or lost. ‘You deal cards as if you were handing out hymn books,’ a friend would say.” Coase’s approach to cards is appropriate for a gentle scholar who passionately believes that the incentives of private parties to resolve disputes in their own best interests—even if there needs to be adjudication by courts—should result in an efficient, mutually beneficial solution that is always preferable to government intervention.

    This is a very simple definition of Coase’s complex thinking on this subject, which economists have called the Coase Theorem. Coase has applied his theorem to such issues as the sale of rights to broadcast on portions of the electromagnetic spectrum and the problem of pollution, while countless other economists have applied it to virtually every area of human activity.

    From the very long view he holds, Coase surveys the field of economics and believes it has become a “theory-driven” subject that has moved into a paradigm in which conclusions take precedence over problems. “If you look at a page of a scientific journal like Nature,” he said, “every few weeks you have statements such as, ‘We’ll have to think it out again. These results aren’t going the way we thought they would.’ Well, in economics, the results always go the way we thought they would because we approach the problems in the same way, only asking certain questions.”

    Coase notes that one “could give a course on economics based on Adam Smith’s Wealth of Nations, but one could not give a course on any other subject, say physics, based on Newton or Galileo.”

    However, he believes economics has proved to be extraordinarily useful. “The concepts that have been developed—opportunity cost, the notions of supply and demand, and elasticity—you can apply them all over the place,” he said. “Someone like Gary Becker has marvelously applied them in the field of sociology. It’s extremely helpful. People who don’t have these concepts flounder around, and then the economist comes in with his notions and clears things up.” Coase concludes, however, that economics also “rarely changes the fundamental ways we look at the workings of the economic system.”

    Born in London when the lives of most women were tedious drudgery and the stench and piles of horse dung were essential elements of the urban landscape, Coase does firmly believe that the current free market economic system provides a better standard of living for more people than ever before in history.

    “Even if you’re the poorest person in Mexico, you’re a good deal better off than the poorest person in Mexico was 100 years ago, so there’s less suffering, and lives are generally improved and also far more interesting overall.”

    Coase said that “it’s very difficult to imagine a system that would work better than one with private property rights and a market: mechanisms that have proved themselves repeatedly against regimes where central authority is the dominant economic force. A private enterprise system with vigorous, competitive markets seems to function best because central authority cannot have all the diffused knowledge that is captured effectively by the workings of the market,” he said.

    Coase’s persistent smile and bright, blue eyes easily belie his nine decades of life, so it is surprising to hear him say he is a pessimist about the world: not because he believes the human condition has worsened, but because “as the 20th century has shown, we have such a capacity to mess things up, and even when we can do the obviously right thing, we so often choose the wrong one.”