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Coase's valuable insights into market economies

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Monday, Sept. 9, 2013, 9:00 p.m.

The English-born Ronald H. Coase published his first major article in 1937. He published his last book in 2012. Over those 75 years, Coase — who died on Sept. 2 at the age of 102 — gave to the world some of the most path-breaking insights ever to emerge from the mind of an economist.

Yet even more remarkable than the length and fertility of Coase's scholarly career is the fact that he wrote exclusively in prose. Coase's work features no mathematical equations or other faux-scientific decorations designed to impress graduate students and to intimidate non-economists. Coase understood that world-class economics is best done by asking in plain language probing questions about everyday matters — matters so familiar that most people take them for granted.

The probing questions Coase asked led him to expose brilliantly so many previously hidden vistas of economic reality that he won the 1991 Nobel Prize in Economic Science.

Consider Coase's first influential article, his 1937 essay “The Nature of the Firm.” The existence of business firms — organizations in which owners or managers consciously tell workers what to do — was simply taken for granted. But Coase pointed out that much of what goes on in firms could occur without firms.

Safeway hires some workers to drive trucks from warehouses to its retail stores. It hires other workers to stock fruits and vegetables, and yet other workers to operate cash registers so customers can buy those fruits and vegetables. But why? Coase noted that, say, each individual farmer could sell his broccoli to an independent trucker who could then resell that broccoli to an independent merchant in the city who, in turn, could do nothing but sell broccoli at retail from a stall on a city street.

Why, then, does one firm do many of these tasks? And why does Safeway sell not just broccoli but also oranges and garlic and pet food and detergent?

It's a key question for anyone interested in understanding market economies.

Coase's answer to the question was “transaction costs.”

An individual consumer could, say, drive to farms to directly buy food for the family table. But the costs of transacting in that way are high. Even beyond the expense of gasoline, the time required to get food in this way is simply too great for most consumers. Coase argued that firms exist to keep to a minimum the costs of transacting to get goods and services from their raw-material stages into the hands of their consumers.

As with all sound economic scholarship, Coase's pioneering article on the firm offered not a final answer but, rather, a new and creative way of thinking about some economic phenomenon. Since the publication of Coase's article on the firm, countless scholars have built on — and refined — Coase's pioneering insight. That insight continues to inspire valuable research on the existence and operation of business firms.

More important, though, than Coase's theory of the firm is his set of insights into the nature and role of property rights. Those insights proved downright revolutionary.

Coase's efforts in the 1950s to better understand the law of property revealed totally surprising ways that private property rights outperform judges and bureaucrats at ensuring that resources are used efficiently. In my next column, I will explain Coase's stunning and brilliant insight.

Donald J. Boudreaux is a professor of economics and Getchell Chair at George Mason University in Fairfax, Va. His column appears twice monthly.

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