Tuesday, September 3, 2013

Three quick thoughts on the "nobody understands the Coase Theorem" meme

1. I hear "nobody understands the Coase theorem" way more often than I hear that a Coasean world is one with zero transaction costs (in fact I can't remember when I've heard that one, although I'm sure I have somewhere along the line). That has to say something for the validity of the first statement.

2. The naïve Coase theorem and the actual Coase theorem seem like corollaries to me. So all you're really saying is that Coase thought the latter was more interesting. That seems to deflate the meme considerably.

3. I only ever seem to hear the meme from people who like to expound upon misunderstood traditions in economics. That also seems like it says something about the validity of the meme.

12 comments:

  1. Uh, so by #2 in this very post, we can now cite Daniel Kuehn as an example of #1?

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    1. Depends on what we are calling the naive Coase theorem I suppose.

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  2. I was taking "naive Coase theorem" to be "Externalities won't lead to Pareto-inferior outcomes, because people will make side payments, something the Pigovian analysis omits." Is that not what you are talking about?

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    1. Yes, but with the addition of "in a zero transaction cost world". I take the "naive view" to be the view that a zero transaction cost world is a "Coasean" world (indeed this is the view that Coase himself complained about somewhere.

      So really there's nothing wrong with talking about the efficiency of market solutions in a world with no transaction costs. In a lot of ways that's the corollary of the alternative where there ARE transaction costs, right? No big deal in saying that. The real discussion is over what we care about. Do we care who is harming who? Do we simply find the transaction cost world more interesting than the non-transaction cost world? These questions are meatier questions to disagree about. This is where the real debate begins. The simple claim about the efficiency of a zero transaction cost world is kind of a boring truism, isn't it? And it's just a corollary of what a lot of people agree is the more interesting question.

      Then again some people may not find it to be the most interesting question. I'm interested in the dynamics of markets with short-run inelasticity and long-run elasticity. I think it raises neat bottleneck questions and occupational choice questions. Since I find those pressures and dynamics interesting I don't need to spend too much time thinking about transaction costs (although I do think about institutions often enough). And that's OK.

      But that's just me saying that the question of transaction costs is less interesting to me than other questions out there to explore. Coase may disagree with me on that (he's entitled to making up his own research agenda), but the fact that I often think in a zero transaction cost world isn't logically suspect for one thing and it also doesn't mean I don't understand the importance of transaction costs for answering different questions.

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    2. In a nutshell, even if some people did think a Coasean world was a zero transaction cost world, there's nothing especially wrong with a statement of the efficiencies of a zero transaction cost world. The only error is in misdiagnosing Coase's REAL interest. His real interest was the corollary.

      Or to quote Medema: "In spite of the often heavily ideological overtones of the Coase theorem debate, the theorem is simply a positive proposition".

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  3. Medema is one of those people who says the Coase theorem is regularly misunderstood. In fact, he is writing a book to show how frequently and regularly it is misunderstood.

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    1. Right - I cite him in another comment section here.

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  4. "that a Coasean world is one with zero transaction costs..."

    And it seems you misunderstand what the typical misunderstanding is!

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    1. Coase himself called this a common misunderstanding, Gene.

      So... no.

      There are a couple, which is why I said at 11:43 that it depends on exactly what naive Coase theorem we're talking about.

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    2. Oh, and by the way, now that I see your comment above MEDEMA has noted this as a common misunderstanding!! If you'd like I can dig it up for you.

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    3. Steve Medema received a grant from the Institute for New Economic Thinking a few years ago to do research on the Coase Theorem.

      http://ineteconomics.org/video/30-ways-be-economist/steven-medema-coase-theorem-fiction

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  5. It occurs to me - hopefully this is implicit but probably worth saying - I have little insights into how lawyers talk about Coase. This is all dealing with economists.

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