David R. Henderson  

Henderson on Coase

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My op/ed on Ronald Coase's work was published in today's Wall Street Journal. Here's an ungated version published by the Hoover Institution.

While, of course, I discussed the two articles that were most responsible for his winning the Nobel Prize, I'm highlighting below some of his other contributions that received less attention:

Another famous Coase article, "The Lighthouse in Economics," was published in 1974. Economists often use lighthouses as an example of a public good that only government can provide. But Coase showed, with a detailed look at history, that lighthouses in 19th-century Britain were privately provided and that ships were charged for their use when they came into port. There were ships that didn't come into port, but enough did to make lighthouses a paying proposition.

Coase's investigation undermined economists' previous view that the free-rider problem would put the kibosh on for-profit lighthouses. It also strengthened his view that economists needed to study real markets rather than settling for blackboard economics.

In 1959, Coase wrote that the Federal Communications Commission was unnecessary; electromagnetic spectrum could be bought and sold in a free market. There was nothing special about the scarcity of spectrum, since all economic goods are scarce. This view was derided at the time, but is now almost standard fare among economists.

As editor of the Journal of Law and Economics from 1964 to 1982, Coase published articles that were critical of government regulation. Not, Coase emphasized, because regulation could not work but because, in virtually all the cases examined in that journal, regulation did not work. Regulation led either to cartels or to other negative effects.

Coase made many intellectuals uncomfortable by pointing out an obvious implication of their belief in government regulation: If regulation works so well in the market for goods, then it should work even better in the market for ideas.

Why? As Coase said in a 1997 Reason interview, "It's easier for people to discover that they have a bad can of peaches than it is for them to discover that they have a bad idea." Many intellectuals thought Coase was arguing for government regulation of ideas. He wasn't. His point was to get intellectuals to see that their case for regulating goods is weak.


These last two paragraphs were about a famous article he wrote in the early 1970s, "The Market for Goods and the Market for Ideas." I remember at the time, by the way, how upset Ayn Rand got at this article. She denounced Coase without, as I recall, understanding his point.

Not that I thought their judgment off, because the Wall Street Journal editors did have to cut, but one of my favorite fun sentences that was cut was this one:

Not one to rest on his laureate, Coase authored, along with Ning Wang, How China Became Capitalist.

More seriously, and this reflects on my judgment, not the Journal's, as economist John Palmer has pointed out, I should have given credit to Harold Demsetz for emphasizing the more-subtle aspects of the famous Coase Theorem.

BTW, I thought the Washington Post's Dylan Matthews's choice of the Coase articles to look at was excellent. In my WSJ op/ed I managed to cover 4 out of the 5 of his choices and I agree with the 5th. I wish I had had room to talk about the 5th, "Durability and Monopoly," in which Coase shows that a monopolist that sells a durable good is constrained by the products it has already sold.

Had I had room, I would have quoted a question that my former University of Rochester colleague, Ron Schmidt, a master teacher, posed in about 1976 and that I got the wrong answer to. The question: "What is General Motors's biggest competitor?" [Remember that this was before the Japanese producers were a large part of the market.] My (wrong) answer: "Ford." Ron Schmidt's answer: "The used car market."


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COMMENTS (2 to date)
Thomas DeMeo writes:

I took a look at that Reason interview. They went over an example where "even if the railroad possessed the right to pollute, the farmer could pay it not to."

Isn't it fairer to characterize this as smarter regulation? The government would still need to establish and monitor appropriate pollution limits, sell the pollution credits and enforce the adherence to those rights.

Bravo! Thank you.

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