Ronald Coase

https://en.wikipedia.org/wiki/Ronald_Coase

Ronald Harry Coase, born in 1910 and died in 2013, an English economist well known for his contribution to Institutional Economics. In fact, Coase wasn’t aiming to be an economist in the beginning of his academic life; He got his bachelor commerce degree when he attended the London School of Economics. In there, Coase was exposed to Economics for the very first time. His professor, Arnold Plant introduced Adam Smith’s invisible hand to Coase in a seminar. Professor Arnold showed Coase how a competitive economy uses pricing mechanism to achieve equilibrium. And it was the time Coase started thinking, what if the so-call invincible hand works so well, why there are abundant firms and organizations existing in markets? He wondered why don’t people just trade to each other as an independent.

In 1931, Coase received Sir Ernest Cassel Travelling Scholarship and visited University of Chicago. During his exchange in the United States, he studied American industrial structures and tried to answer the question: Why organizations exist? By observing famous companies at that time, such as Ford Motor Company and General Motors Company, he realized the concept of transaction costs, which are costs involve in buying or selling goods or services. Coase concluded that it is too costly to an independent to stay in market. An organization, instead, can hire independents or merge production lines vertically in return of producing goods or services at a relatively lower cost. In short, the existence of organizations is trying to avoid substantial transaction costs in markets.

Coase ended his exchange and went back to UK in 1932. He started teaching as an assistant lecturer at the Dundee School of Economics and Commerce and organizing what he found in USA. In 1937, Coase published one of his masterpieces “The Nature of the Firm”, which included topics related to transaction costs, reasons why organizations exist and decision makings of organizations’ scale. He stated that organizations can decide whether to enter the market or not based on transaction costs. For example, General Motors Company would not enter tires producing market since the overall costs are too high, the company rather buy tires from other companies. Subsequently, Coase published his second masterpiece, “The Problem of Social Cost”. In this article, Coase brought further discussion of transaction costs. He assumed that when transaction costs are zero and property rights are well defined, there is no need for governments’ interventions to solve the problem of externalities. Considering Coase’s dedication to the concept of transaction costs and the importance of defining property rights, he received the Nobel Prize in Economics in 1991.

Few anecdotes showed that Coase was not good at mathematics, which is quite different from my understanding of being an economist. He thought that most economists focus too much on studying unrealistic math problems and ignore the real problems in the market awaiting to be solved. He even used “blackboard economics” to call economics which uses too much math. As a student who isn’t good at math neither, I cannot agree with him more. In my opinion, a good economist like Coase can show people why economic concepts are important without math; economics should be a knowledge which is understandable to everyone. Still, I believe that math can be a strong langue to communicate or elaborate economic scenarios more precisely.

Either way, with or without math, Ronald Coase successfully brought people’s attention on connected economics with real-world issues and his contribution was profound.

References
https://en.wikipedia.org/wiki/Ronald_Coase
https://en.wikipedia.org/wiki/Coase_theorem
http://blog.udn.com/vchen123/2283342
https://buzzorange.com/techorange/2013/09/17/ronald-coase-ronald-h-coase-economist-who-won-a-nobel-prize-dies-at-102/
http://hk.apple.nextmedia.com/international/art/20130904/18407946

Comments

  1. Professor ArvanSeptember 6, 2017 at 6:52 AM

    Next Tuesday, we will consider Coase's contribution and, in particular, his seminal paper The Nature of the Firm. It's what got this area of research started.

    Too bad you don't like the math. You will be exposed to a fair amount of it in this course. In some cases I believe it is quite helpful in elucidating issues that otherwise would not be well understood.

    ReplyDelete

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