Tuesday, December 28, 2010

Coase at 100

Ronald Coase turns 100 on the morrow. In a certain sense his "law" is the fundamental basis of individualism. Namely if the sole function of the Government is to protect property rights, and if people have and can retain and litigate such rights, then the need for overt Government mandates goes to zero. If I have a right to my property to ensure that my basement is dry and my neighbor builds a dam which floods my back yard, then the damage to me should be paid as a cot to my neighbor, old tort law and good enough for Coase.

The Economist has a good piece which is worth a read:

His central insight was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome. But if markets are so inefficient, why don’t firms go on getting bigger for ever? Mr Coase also pointed out that these little planned societies impose transaction costs of their own, which tend to rise as they grow bigger. The proper balance between hierarchies and markets is constantly recalibrated by the forces of competition: entrepreneurs may choose to lower transaction costs by forming firms but giant firms eventually become sluggish and uncompetitive.

The transaction costs are what gets us in the end.