Eulogy to an economic subversive

The career of Ronald Coase has been paradoxical. A winner of the Nobel prize with very limited formal training in his discipline; an Englishman more honoured in the United States than here; an economist who spent much of his working career at a law school and who has influenced legalscholarship in the United States probably as much as economic scholarship; a supporter of applied work who is best known for several papers of great originality which quintessentially conceptual and theoretical in nature; a critic of the over-use of mathematical techniques and theoretical abstraction whose eponymous Coase Theorem produced an outpouring of mathematical and theoretical comment; a scourge of government regulation whose work, when properly understood, is as capable of undermining an ideological fixation with the imposition of pure market forms as it is of destroying the case for central planning; these and other features of Coase's work mark him out as a special case.

Steven Medema has written a book which does more than merely set out Coase's contributions to the development of economics. He reveals the consistency of approach which underlies Coase's work and the challenge that it poses to economists. He considers its reception by the profession, the methodological problems it encounters and the prospect that it will be influential in the future.

Chapters 2 and 4 provide a detailed assessment of Coase's two most celebrated papers: the "Nature of the firm" (1937) and "The problem of social cost" (1960). At the heart of both papers was the simple proposition that institutional arrangements are important in determining economic behaviour and economic performance. Pursuing a project suggested by his teacher and mentor Sir Arnold Plant, Coase investigated in the early 1930s why some firms undertook a wide variety of tasks themselves while others remained more specialised and contracted in the market for the inputs of goods and services they required.

His answer was that the form of organisation would depend upon the cost of transacting. The main reason we do things within firms and do not rely exclusively on the market as a form of organisation "would appear to be that there is a cost of using the price mechanism".

In spite of Coase's hostility to government regulation it is interesting that Karl Marx himself could not have penned a sentence with greater subversive potential. Recognition of the costs of transacting has become a foundation stone for the modern economic approach to institutions and, as Medema emphasises, implies a radical reorientation of outlook on the part of economists.

Perhaps it was for this reason that Coase's 1937 paper lay dormant for so long to be re-awakened by the impact of the Problem of Social Cost. Here Coase argued that legal institutions have important economic effects in a world where transactions are costly. Coase made his point by showing that, were transactions costless, it would make no difference to the final outcome to whom the economic rights were initially assigned. It speaks volumes for the state of economics that it is this aspect of the paper which has been most debated rather than Coase's assertion of the importance of transactions costs to the understanding of all institutions including the law itself. Medema refers to Coase's frustration that economists often write of "a Coasian world" as one without transactions costs.

Medema does an excellent job in pointing out Coase's consistent emphasis on the importance of comparative institutional analysis and his distrust of "blackboard economics". Even those who have a detailed knowledge of Coase's main papers will improve their understanding of his thought processes by reading Medema's account of his early critique of marginal cost pricing in the public utilities (chapter 3) and his papers on the history of the British Broadcasting Corporation, the activities of the Federal Communications Commission and the operations of interest groups and regulatory bodies (chapter 5).

As ministers struggle with the consequences of "internal markets" in the National Health Service and as regulators study the provisions of contracts linking network owners with network users, train operators with track authorities and so forth, Coase's observation about the costs of using markets is likely to strike home with greater force than would have been the case a few years ago. But, as Medema is at pains to show, Coase's message is pragmatic, not ideological. Only detailed appraisals of realistic alternative institutional structures are of use in policy analysis including the much underrated option of leaving things as they are.

Martin Ricketts is professor of economic organisation, University of Buckingham.