David R. Henderson  

Coase on Regulating Goods and Ideas

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One of the articles by the late Ronald Coase that I highlighted in my recent Wall Street Journal encomium to him was his clever 1974 piece, "The Market for Goods and the Market for Ideas." I had remembered the highlights correctly but this morning I took time to read the whole thing. It's masterful.

Recall that he is challenging the way intellectuals generally think about government regulation of the market for goods and government regulation of the market for ideas. In the former case, most intellectuals want to give the government a fair amount of power; in the latter case, almost none.

Coase points out the contradiction. Some excerpts:

What is the general view that I will be examining? It is that, in the market for goods, government regulation is desirable whereas, in the market for ideas, government regulation is undesirable and should be strictly limited. In the market for goods, the government is commonly regarded as competent to regulate and properly motivated. Consumers lack the ability to make the appropriate choices. Producers often exercise monopolistic power and, in any case, without some form of government intervention, would not act in a way which promotes the public interest. In the market for ideas, the position is very different. The government, if it attempted to regulate, would be inefficient and its motives would, in general, be bad, so that, even if it were successful in achieving what it wanted to accomplish, the results would be undesirable. Consumers, on the other hand, if left free, exercise a fine discrimination in choosing between the alternative views placed before them, while producers, whether economically powerful or weak, who are found to be so unscrupulous in their behavior in other markets, can be trusted to act in the public interest, whether they publish or work for the New York Times, the Chicago Tribune or the Columbia Broadcasting System. Politicians, whose actions sometimes pain us, are in their utterances beyond reproach. It is an odd feature of this attitude that commercial advertising, which is often merely an expression of opinion and might, therefore, be thought to be protected by the First Amendment, is considered to be part of the market for goods. The result is that government action is regarded as desirable to regulate (or even suppress) the expression of an opinion in an advertisement which, if expressed in a book or article, would be completely beyond the reach of government regulation.

And:
The special characteristics of each market lead to the same factors having different weights, and the appropriate social arrangements will vary accordingly. It may not be sensible to have the same legal arrangements governing the supply of soap, housing, automobiles, oil, and books. My argument is that we should use the same approach for all markets when deciding on public policy. In fact, if we do this and use for the market for ideas the same approach which has commended itself to economists for the market for goods, it is apparent that the case for government intervention in the market for ideas is much stronger than it is, in general, in the market for goods. For example, economists usually call for government intervention, which may include direct government regulation, when the market does not operate properly--when, that is, there exist what are commonly referred to as neighborhood or spillover effects, or, to use that unfortunate word, "externalities." If we try to imagine the property rights system that would be required and the transactions that would have to be carried out to assure that anyone who propagated an idea or a proposal for reform received the value of the good it produced or had to pay compensation for the harm that resulted, it is easy to see that in practice there is likely to be a good deal of "market failure." Situations of this kind usually lead economists to call for extensive government intervention.

If you read his piece, don't miss his quotes from John Milton's Areopagitica, his famous defense of free speech. They're hilarious. My favorite:
"Let [truth] and falsehood grapple; who ever knew Truth put to the worse in a free and open encounter"


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CATEGORIES: Regulation



COMMENTS (11 to date)
Mike Linksvayer writes:

Near the end of the paper:

Nor do I doubt that detailed study would reveal other cases in which groups of practitioners in the market for ideas have supported government regulation and the restriction of competition when it would increase their incomes, just as we find similar behavior in the market for goods. But interest in monopolizing is likely to be less in the market for ideas.
No detailed study needed to reveal copyright; surprised it escapes mention.

ThomasH writes:

I do not see any correspondence in speech space of externalities in goods productions and exchange space.

David R. Henderson writes:

@ThomasH,
Think of Karl Marx's ideas.

BC writes:

Nowadays, it seems like many of the people favoring regulation in the market for goods and services do in fact also favor more government regulation of ideas, e.g., campus speech codes and political campaign contribution and spending limits.

David R. Henderson writes:

@BC,
Good point. Or look at Canada, which, with its restrictions on speech, imitates an American college campus.

Roger Sweeny writes:

The cynical explanation is that back when Coase was writing, people who wanted lots of government regulation in "economic" affairs felt that the good guys were in charge of that. However, their experience with "speech" regulation was that the bad guys were in charge of that. Prudes, "super-patriots," anti-black racists, etc. In the world view of most educated people, the left regulated the market for goods and the right regulated the market for ideas.

Now that the good guys often have the power to suppress ideas they don't like, many who want lots of government regulation are more consistent about applying it to speech also.

Don't forget the hilarious George Stigler send up of the idea; A Sketch of the History of Truth in Teaching;

This quiver of truth and safety-minded arrows was thrown for a time at perfectly appropriate targets business men accustomed to public abuse, who were naturally able to charge their customers for any amount of safety, frequent and successful lawsuits, and obloquy. But the arrows of reform pass through-if they hit at all-the targets at which they are aimed, and in 1973 they hit a professor. Evil day!

David Friedman told me that when he'd assign it to a class, about half the students thought it was serious.

Roger Sweeny writes:

Ann Althouse had an interesting post today about a Chinese law that criminalizes certain speech on the Internet and a Chinese blogger who made a public apology for things he had written. She has either read Coase's piece or the ideas have made it to her corner of the University of Wisconsin Law School. Near the end:

"Notice the idea that writing on the internet is an addiction, a mental problem that ought to be disparaged. The blogger is an egotist, who pours out verbiage to further inflate his own grandiosity. This isn't normal speech, but bad speech, and there's so much of it that what once might have been thought of as a 'marketplace of ideas' is flooded with so much tainted merchandise that the government acts wisely to step in with consumer protection measures."

http://althouse.blogspot.com/2013/09/chinese-state-television-on-sunday.html

Mack Ott writes:

I think that you’ve missed Coase’s point in his 1974 AER article, “The Market for Goods and the Market for Ideas.” I find it incomprehensible that he would be a proponent of regulating speech. Indeed , he is quite caustic about the regulation of advertising. Rather, he is holding up to ridicule the shortcomings of regulation in the market for goods by showing how the free market for ideas functions without regulation. Thus, he is critiquing the failures of regulating the market for goods by comparison the groping, competitive approach to truth in the market for ideas. This can be seen in three separate aspects of his argument in the 1974 piece:
1. The comparison of the regulatory failures of goods regulation;
2. His quotation of Aaron Director that free speech is “the only area where laissez-faire is
still respectable.”
3. The distinction that free speech is protected by a contractual (social) imposition—the Bill of Rights—which was a key to the ratification of the Constitution—an agreement that conditioned several states’ ratification of the Constitution.

But the biggest giveaway is that Coase, the beneficiary of a classic English education, did not quote the strongest proponent of free speech, J.S. Mill (On Liberty). Mill argued that Truth is often unknowable, a priori, and that the best approximation to finding it emerges from free and open competition—a prescription for logical positivism. His argument is strengthened by Thomas Kuhn’s argument about systems of investigation and theory—that often the stronger argument is impeded by the success of the accepted truth or conventional wisdom. Rather, as you note, he quoted John Milton whose moronic assertion—for someone who’d just lived through the English Civil War—that “…who ever knew Truth put the worse in a free and open encounter.” Thus, the response to Milton’s question would include at least the following three examples for which much time and scientific advance, (sustained by free speech) were required:
• Ptolemaic earth-centric was able to predict the positions of the planets and stars by an adjustment that was not necessary for its successor, the Copernican helio-centric system;
• Darwin’s theory of evolution was impeded by religious arguments that were irrelevant to its explanations and hypotheses;
• Newtonian mechanics was shown to be an approximation to the more general structure of Einstein’s relativistic structure.

So, I think that Coase was using an implicit argument against regulation, specifically of the regulation of goods markets, not advocating it for the market for ideas.

David R. Henderson writes:

@Mack Ott,
I have no idea, based on either my post above or my article in the Wall Street Journal, why you think I think Coase was in favor of regulating the market for ideas. I think his argument was more subtle than you give him credit for and, therefore, that he might have advocated a little more regulation of speech. But, like you, I think his main goal was to get intellectuals to be more open to not heavily regulating the market for goods.

Mack Ott writes:

I think that it is infeasible to separate the regulation of speech from their expression in the property rights of their ideas. An interesting example of this is entailed in a possible forthcoming appeal to the Supreme Court; the appeal addresses the convction for fraud by a publication of a result in a cancer cure that did not meet the standard 5% criterion (P-value). The scientist (published in a paper in the New England Journal of Medicine in January 2004) focused on sub-groups for which the protocol was effective (P%>5%), but selected from an overall experimental sample that did not achieve this; yet the sub-group/post experirmental selection was explicitly described in the published article. The proponent/chief scientist was prosecuted and convicted of fraud—he stood to gain from his ownership in a pharmaceutical company that owns the drug [The whole story is spun out in the Washington Post Health&Science section, Tuesday 24 September—David Brown, “The Jury Said Guilty, but What Did He Do?”].

This is an example illustrating that regulating speech—the law of fraud under which the scientist was convicted—also restricts ideas, the published experiments and reported results. I think that unlike physical property, where the bundle of rights can be sorted and some restricted—eg, zoning laws—that for ideas, the restriction of speech almost inevitably restricts the communication of the underlying ideas, thus impeding J.S. Mill’s process of competition—the groping for truth. Hence, such restriction is socially as well as economically inefficient.

BTW, in a perhaps unintentional irony, the lead article in today’s referenced Washington Post Health&Science section, is an article by a retired cardiologist whose brain tumor has been successfully treated by an experimental drug, not yet licensed—Fritz Anderson,” My Tumor, My Journey.”

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