Story by Sarah Galer
Main photo by Jason Smith
His latest ideas are in a new book that Coase co-wrote with Ning Wang, PhD’02, titled How China Became Capitalist. It is a fresh example of the intellectual approach that Coase first brought to the University as a visiting scholar more than half a century ago.
On that evening in 1960, Coase persuaded a room full of skeptical Chicago economists—including future Nobel laureates Milton Friedman and George Stigler—to take his point of view on an important question of law and economics. In the process of winning them over, Coase honed an economic theory that would later win him a Nobel Prize in 1991.
“They were very impressed that I had changed their views, but I wasn’t particularly impressed because all I was doing was stating the obvious,” recalls Coase, who joined the UChicago Law School faculty in 1964. He is now the Clifton R. Musser Professor Emeritus of Economics.
Celebrated for his groundbreaking work on the economics of the firm and in the area of law and economics—a field born at the UChicago Law School—Coase has turned his academic acumen to China, a country that fascinated him since he read about Marco Polo as a boy. His writing is finding eager audiences there, an indication of the far-reaching impact of Coase’s work.
“Anyone would be hard-pressed to find another economist that has shaped the direction of the field of law and economics as much as Prof. Coase,” says Wang, an assistant professor at Arizona State University’s School of Politics and Global Studies. “In China, Coase has profoundly influenced the way its market economy has evolved, particularly his emphasis on the delineation of property rights as the precondition for market transaction. He is probably the most well-known Western economist there.”
Coase often has upended widespread ideas about economic questions. That was the case in his 1960 talk, in which he argued that the incentives of private parties to resolve disputes in their own best interests, even if courts are involved, should result in an efficient, mutually beneficial solution that is always preferable to government intervention.
The workshop where Coase presented his views left a lasting impression on Stigler, PhD’38, who reminisced about it in his 1988 book, Memoirs of an Unregulated Economist: “In the course of two hours of argument, the vote went from 21 against and one for Coase to 21 for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”
Since the publication of “The Problem of Social Cost,” the article that resulted from that storied evening, other economists have applied its underlying idea, often called the Coase Theorem, to virtually every area of human activity. Notable recent applications of the idea have come in such issues as the sale of rights to broadcast on portions of the electromagnetic spectrum and the problem of pollution.
Coase himself disputes the origins and basis of the theorem, saying it is not actually based on his work, but was coined by Stigler.
“It is not about my work at all,” says Coase. “George Stigler, who was a very nice man, wanted to pay me a compliment so he invented the Coase Theorem, but he named it the Coase Theorem instead of the Stigler Theorem. He was being nice, but it was unfortunate.”
Coase says he took the position at the Law School to take over as editor of The Journal of Law and Economics, a position he held until 1982. “I used the journal to try to change views,” Coase says. “And I did it. It formed the field of law and economics.”
“It was the first law school, to my knowledge, that had an economist teaching full time,” said University Professor Gary Becker, the 1992 Nobel laureate in economics, at a luncheon in honor of Coase’s 100th birthday, according to The University of Chicago Magazine.
When Becker first met Coase in 1970, Coase “didn’t say a lot, but I began to realize that every time he did say something, it was really profound.”
Coase was born in a suburb of London in December 1910, the only child of a Post Office telegraph operator and his wife. He studied at the London School of Economics, where he met Sir Arnold Plant, who introduced Coase to Adam Smith’s “invisible hand” and to the idea that competitive economic systems could be coordinated by the pricing system.
He says his first landmark paper, “The Nature of the Firm,” was “little more than an undergraduate essay.” It stemmed from a scholarship that let him spend a year studying the structure of American industry and the question of why some work was performed inside firms and some by the marketplace. He later came to dispute his own finding that firms have diminishing rates of return as they grow bigger. The growth is a sociological problem, Coase now believes, not an economic problem.
“Ronald belongs to an era before economics was taken over by mathematicians,” says Douglas Baird, the Harry A. Bigelow Distinguished Service Professor of Law. “He thinks about economics in intuitive terms. He does not think that there are any important terms in economics that you cannot understand using words, descriptions, and arithmetic.
“Some people say that shows he is from a much earlier era. The better view is that there is something fundamentally healthy about his work that is too often lost on modern economists, who are sometimes so enchanted by mathematical models that they lose touch with planet Earth.”
How China Became Capitalist, Coase’s newest academic work, traces the market transformation China has experienced over the past 35 years. The book argues that the changes came not from deliberate actions taken by Chinese leadership, as often claimed by Beijing, but from “marginal revolutions.”
“China became capitalist while it was trying to modernize socialism,” write Coase and Wang. “The story of China is the quintessence of what Adam Ferguson called ‘the products of human action but not human design.’ A Chinese proverb puts it more poetically: ‘The flowers planted on purpose do not blossom; the willows no one cared for have grown into big shade trees.’”
Coase already has set his sights on his next project, one that speaks to the intuitive side of his approach to economics. He plans to launch a journal entitled Man and the Economy, for which he will serve as founding editor.
“We are going to do again for economics what I did with law & economics: We are going to establish a subject,” Coase says. “Economics has become a theory and math-driven subject, and I believe the approach should be empirical. You study the system as it is, understand why it works the way it does, and consider what changes could be made in order to improve the system.”
Coase says his main scholarly talent has been to identify solutions that were in plain sight.
“I’ve never done anything that wasn’t obvious, and I didn’t know why other people didn’t do it,” he says. “I’ve never thought the things I did were so extraordinary.”
Originally published on April 23, 2012.