Wednesday, September 4, 2013

Ronald Coase

Photo Credit: Steve Kagan for The New York Times
Nobel Prize-winning economist Ronald H. Coase passed away at the age of 102 on Monday.  As usual, the New York Times does an excellent job with his obituary in explaining why, even among Nobel prize winners, his influence is larger than most.

[As an aside, obituaries for persons who managed to reach triple digits are interesting things to encounter for there is an absence of the usual melancholy of a life cut short - rather there is a feeling of satisfaction that this was a life lived to the fullest extent, but I digress]

Most economics students know his name because of the 'Coase Theorem' which explains how well-defined property rights leads to market solutions to externalities that are efficient. This idea is very simple and seemingly obvious once it is explained to you, but of course it is only obvious once it is explained.  This is the way with some of the very best Nobel winning ideas including Akerlof's market for lemons, Nash's equilibrium concept in non-cooperative games, etc.  But what is particularly profound about this idea is the magnitude of its impact among regulators and especially the judiciary. In fact, Coase thought of himself more as a law scholar than an economist.

Fewer people will have heard about his theory of the firm but it is as impactful within economics as is his theorem.  Another simple idea: why do firms do what they do?  For example why do some firms keep R&D and HR and other functions within the firm and others contract them out?  His idea was that it is all about transactions costs.  There are costs to contracting out, it takes time and energy to design and execute a contract, to make sure the outside firm is doing what you want it to and so on.  There are also costs to doing things in house: you have to monitor, manage and add complexity to do so.  The resolution of these tensions, Coase's theory states, explains the limits of the firm.

For a field that is often math-intensive, it is surprisingly often that the simple yet elegant ideas that are the most influential and generally the things that got me and other graduate students the most excited.  Unfortunately, these days, someone like Coase would have a hard time making it in economics which tends to reward technique more than ideas.

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