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Coase and the Austrians

Coase and the Austrians

Ronald Coase passed away yesterday at the age of 102.  Coase is one of the most influential economists of the twentieth century, perhaps of all time. Here is an official notice from the University of Chicago law school; here are comments from Lynne Kiesling, Mike SykutaPete  Boettke, Josh Gans, and me.  Much will be written in the coming days on Coase and his contributions, so let me just highlight a few points about his relationship with the Austrian school.

Coase was no Austrian, but was friendly with many Austrian economists, was deeply critical of modern positivism and instrumentalism, and was skeptical of most regulations. Austrians have generally rejected Coase’s approach to property rights, externalities, and liability (see Block, 1977Rothbard 1982, and Cordato, 1992, for examples of a large literature). However, Coase’s insight that legal entitlements are often traded, and that trading partners can often “contract around” legal and regulatory barriers, is important and useful, even if contemporary law-and-economics scholarship has drawn the mistaken implication that judges can somehow use this insight to determine the “optimal” allocation of property rights.

Coase’s approach to the firm has both its supporters and detractors within the Austrian literature. My own work fits mostly within the “Coasean” tradition in which the firm and market are regarded as alternative resource-allocation mechanisms, and in which legal and contractual issues, rather than knowledge or spontaneous order, are central to the theory of the firm. Quoting from a piece I wrote on Oliver Williamson:

Some Austrians have argued, following Alchian and Demsetz (1972), that Coase and Williamson wrongly claim that firms are not part of the market, that entrepreneurs substitute coercion for voluntary consent, and that corporate hierarchies are somehow inconsistent with the free market (e.g., Minkler, 1993Langlois, 1995Cowen and Parker, 1997; Matthews, 1998). I think this is a misreading of Coase and of Williamson. It is true that Coase speaks of firms “superseding” the market and entrepreneurs “suppressing” the price mechanism, while Williamson says firms emerge to overcome “market failure.” But they do not mean that the firm is outside the market in some general sense, that the market system as a whole is inefficient relative to government planning, or anything of the sort.

Coase was certainly familiar with Mises’s and Hayek’s arguments about central planning, having learned them directly from Hayek. In an entry on Hayek for the Elgar Companion to Transaction Cost Economics, I wrote:

Coase was a student at the LSE in the late 1920s and early 1930s. Coase reports that Hayek’s concept of the time-structure of capital, or ‘structure of production’, was ‘the subject which dominated the discussion of economics at LSE’ (Coase, 1988, p. 7). Coase’s own interest lay on a related, but distinct concept, the ‘organizational structure of production’ (Coase, 1988, p. 7). His main influences were his teacher Arnold Plant and a fellow student, Ronald Fowler (Coase, 1988). Coase was familiar, however, with Mises’s and Hayek’s arguments in the socialist calculation debate, and cites Hayek’s ‘Trend of Economic Thinking’ (1933b) when describing, in his own work ‘The Nature of the Firm’ (1937), the idea of ‘the economic system as being coordinated by the price mechanism,’ making society ‘not an organisation but an organism’ (Coase, 1937, p. 387). ‘Indeed,’ he adds, again citing Hayek, ‘it is often considered to be an objection to economic planning that it merely tries to do what is already done by the price mechanism’ (Coase, 1937, p. 387). . . .
Hayek’s ‘Economics and Knowledge’ appeared in 1937, the same year as Coase’s ‘The Nature of the Firm’, and there are obvious connections between Coase’s and Hayek’s understandings of the market. Kirzner (1992, p. 162), for example, describes Coase’s argument in Hayekian terms: ‘In a free market, any advantages that may be derived from “central planning” . . . are purchased at the price of an enhanced knowledge problem. We may expect firms to spontaneously expand to the point where additional advantages of ‘central’ planning are just offset by the incremental knowledge difficulties that stem from dispersed information.’

I once asked Coase directly what he thought of the Austrians. He said he respected Hayek, but didn’t understand Austrian business-cycle theory (which was Hayek’s main interest when Coase was at LSE). And he seems to have bought into Friedman’s canard that Mises was “intolerant.” At least, he didn’t understand Mises’s approach to economics.

Which brings us to methodology. While rejecting Friedmanite positivism, Coase embraced a kind of pragmatist, inductive approach that worked for him, but not necessarily for others. In an interesting 1978 article, “Economics and the Contiguous Disciplines,” he rejects Robbins’s praxeological approach, but -- in my reading -- because he associates it with “modern” law and economics as practiced by Richard Posner. I.e., Coase is uncomfortable with the neoclassical form of economic imperialism (Becker, Posner, James Coleman, etc.), probably for the same reason that many of us reject “Freakonomics” -- because it’s shallow, arid, not useful, etc. On the other hand, there are many problems with Coase’s own approach. As I wrote last year:

Coase decries the irrelevance of contemporary economic theory, condemning economics for “giving up the real-world economy as its subject matter.” He also provides a killer quote: “Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates.”
I’m sure that’s true for many economists and for some branches of the field, such as Keynesian macroeconomics. But Coase seems to reject economic theorizing altogether, even the “causal-realist” approach popular in these parts. To be useful, he argues, economics should provide practical guidance for the businessperson. However, “[s]ince economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions.”
Well, that sounds about right to me. Economics provides general principles, or laws, about human action and interaction, mostly stated as “if-then” propositions. Applying the principles to concrete, historical cases requires Verstehen, and is the task of economic historians (as analysts) and entrepreneurs (as actors), not economic theorists. Deductive theory does not replace judgment. Without deductive theory, however, we’d have no principles to apply, and nothing to contribute to our understanding of the economy except — to quote Coase’s own critique of the Old Institutionalists — “a mass of descriptive material waiting for a theory, or a fire.” To be sure, Coase’s own inductive method has led to several brilliant insights. Coase himself has a knack for intuiting general principles from concrete cases (e.g., theorizing about transaction costs from observing automobile plants, or about property rights from studying the history of spectrum allocation), though not perfectly. But, as I noted before, Coase himself is probably the exception that proves the rule — namely that induction is a mess.
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