Thursday, December 20, 2012

On what Coase offers and what he doesn't offer

In a conversation with a facebook friend (who is largely on the same page on this), I had this to say and thought it was worth sharing here:

"The Walrasian auctioneer picture of the economy is OK, but it's a very incomplete view of how humans interact when it comes to allocation and production decisions. I think Coase does a great job filling in the blanks left by Walras. The problem comes in, I think, when Coase is treated not as a way of filling in Walras, but instead treated as a counter-argument to Pigou."

I would add that just because Coase is right, that doesn't mean that Walras is wrong. Often when we see an incomplete explanation economists have a tendency to turn their nose up at the simple version.

That's dumb, I think.

Walras is great. Neoclassicism is great. It's just not the whole story. It's wrong to think about some kind of institutionalist story as displacing them.

You see this with information theory too. People look at work by Stigler, Stiglitz, and people like that and say "Ha! They're only dealing with risk! I plumb the depths of fundamental uncertainty, etc. etc.". If you want to talk about fundamental uncertainty that's all well and good. Good luck (you'll need it!). But let's please not act like risk is some trivial thing to look into! Those risk-based investigations were still really hard to work out and major advances in our thinking, and they are very relevant to a lot of problems we deal with!


  1. Coase's great contribution was to elucidate on the nature of transaction costs. But, Coase isn't the end-all/be-all of transaction costs, and depending on who you ask Coasian solutions aren't always possible. By the way, Douglass North, who uses transaction costs heavily, argues that one of the roles of institutional and organizational change is to change uncertainty to risk.

  2. Wasn't it Coase himself who argued against Pigou in "The Problem of Social Cost"? After all, what he clearly did point out is the issue of reciprocity between parties when it comes to external costs - and that this issue had been recognized in law but not in economics:

    "Nevertheless it is clear from a cursory study that the courts have often recognized the economic implications of their decisions and are aware (as many economists are not) of the reciprocal nature of the problem. Furthermore, from time to time, they take these economic implications into account, along with other factors, in arriving at their decisions."

    His criticism of Pigou gets explicit in part XIII that it entirely dedicated to Pigou's treatment of the issue. IMHO, from what I read it was Coase himself who drew the contrast between himself and Pigou.

    Btw, Steven Landburg is actually once again raising exactly this (alleged or not) Pigou vs. Coase issue with regard to climate change (damage costs). I don't quite know what to think about this. There seems to be a near-consensus among economists to call for a carbon tax offsetting marginal damage costs as the first-best option, thus a Pigou tax. That is as long as you accept the validity of benefit-cost analyses as provided by integrated assessment models; I never quite understood what follows from catastrophic risk scenarios that invlidate CBA as specified by Weitzman - he doesn't specify any policy except perhaps some sort of catastrophic risk insurance with the caveat that it is not clear what that means. I guess it's just a carbon tax, too, but not one estimated from marginal damage costs and therefore not a Pigou tax. Does that sound about right?

    Anyway, this issue is confusing me for some time now, and your comment would be highly appreciated.

    1. Um, sorry for the youtube link - I wanted to link to the Coase paper (wrong tab!), but of course you know it anyway.


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