Ronald Coase

• 1. Introduction

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  Ronald Harry Coase was born on the 29th of December 1910 in Willesden, a suburb of London, and he would live to the age of 102 - long enough to see ideas he developed in the 1930s and 1960s reshape how lawyers, economists, and policymakers think about markets and the law. Both his parents worked as telegraphists for the post office before his mother's marriage. As a child, Coase wore leg-irons because of a weakness in his legs, which meant he attended a school for physical defectives. At 12, he won a scholarship to Kilburn Grammar School. Nobody who watched that boy navigate the school yard on iron-braced legs could have predicted he would one day deliver a lecture at the University of Chicago that one senior colleague would later describe as a paradigm-shifting moment in the genesis of an entire academic subfield. What drew a trained economist so deeply into the study of law? Why did he argue that firms exist because markets are actually expensive to use? And why, in 1990, did he write that he feared his most famous paper had been widely misunderstood?

• 2. A Scholar's Formation

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  Arnold Plant's seminar at the London School of Economics in 1931 was the moment Coase later identified as the first serious challenge to his socialist beliefs. Plant introduced him to Adam Smith's invisible hand and to the advantages of a competitive system. Coase had entered LSE as an internal student after earlier external studies, and he earned his Bachelor of Commerce degree there in 1932. Before finishing that degree, he received the Sir Ernest Cassel Travelling Scholarship, which took him to the University of Chicago in 1931-1932 to study with Frank Knight and Jacob Viner. When Coase returned to Chicago decades later, his colleagues there admitted they did not remember that first visit at all. After graduating, Coase held posts as an assistant lecturer at the Dundee School of Economics and Commerce, then at the University of Liverpool, before returning to LSE as a member of staff until 1951, the year the University of London awarded him an earned doctorate in economics. He crossed the Atlantic in the 1950s, keeping his British citizenship, and spent time at the University at Buffalo and then the University of Virginia before eventually settling at the University of Chicago in 1964.

• 3. Why Firms Exist

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  "The Nature of the Firm," published in 1937, posed a question that standard economic theory at the time simply could not answer. If markets are efficient and the best providers of every good and service are already providing them at the lowest price, why would anyone ever hire an employee rather than just contracting out every task? Coase pointed to what he called transaction costs - the costs of obtaining a good or service through the market exceed the sticker price of that good. Search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs all add to what it actually takes to procure something from another party. Firms, on Coase's account, exist because they can pull production inside their own walls and avoid those costs. There is a natural limit, however. Coase identified what he called decreasing returns to the entrepreneur function: overhead rises, and managers overwhelmed by scale begin making more mistakes in allocating resources. These countervailing pressures determine how large any firm will grow. Coase also noted that technology changes affecting the cost of organising transactions across distance could shift that limit outward; the telephone and cheap air travel were examples he gave of innovations that would be expected to increase firm size. Oliver Williamson would later re-introduce and extend this transaction-costs framework in the field of organizational economics, placing Coase's 1937 essay at the foundation of an entirely new branch of inquiry.

• 4. The Night He Changed Chicago

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  In 1959, Coase published an article on the Federal Communications Commission, and the reaction from the University of Chicago faculty was hostile. His conclusions appeared to conflict with the analysis of A.C. Pigou, and the Chicago economists concluded that Coase must therefore be wrong. What happened next has become something of a legend. Coase was invited to present his argument at a seminar in Chicago in 1960, facing twenty senior economists including George Stigler and Milton Friedman. He gradually won the room over. Stigler would later name the insight that emerged from that evening the Coase theorem, a label that stuck. The article that followed, "The Problem of Social Cost," appeared in the Journal of Law and Economics in 1960 while Coase was still at the University of Virginia. Its central insight was that the question of who is to blame for an externality is less clear than economists had assumed. Coase illustrated this with a rancher whose cattle stray onto a neighboring farmer's cropland. The rancher is harmed if forced to restrict his cattle; the farmer is harmed if the cattle roam freely. Without transaction costs, he argued, the initial assignment of property rights does not determine whether the parties reach an efficient outcome - whoever ends up paying for the fence, the fence gets built if it is cheaper than the crop damage. With significant transaction costs, however, the initial assignment of rights matters for both fairness and efficiency. Coase joined the Chicago faculty four years after that pivotal seminar.

• 5. Accidentally Into Law

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  Coase described his entry into the field of law and economics as accidental. In his Simons Lecture on "Law and Economics at Chicago," he said he had not intended "The Problem of Social Cost" to influence legal scholarship at all. The essay was aimed at economists. Law entered it because, in a world where transaction costs are positive, the character of the law becomes one of the main factors determining how well the economy performs. He made a point of noting that judges in their opinions often seemed to grasp economic problems more clearly than many economists did, though he said he raised this not to praise the judges but to shame economists. What drew him to Chicago in 1964 was not purely the faculty but the chance to become co-editor of the Journal of Law and Economics alongside Aaron Director. Coase later said it was probable that without the Journal he would not have come to Chicago at all. He used the editorship to encourage exactly the kind of research he had advocated in his 1960 article. In his Simons Lecture, he acknowledged contributions to law and economics made elsewhere - by Guido Calabresi at Yale and Donald Turner at Harvard - while still crediting Chicago with playing a very significant part in the field's emergence. Guido Calabresi, for his part, wrote that Coase's focus on transaction costs in "The Nature of the Firm" was itself the product of Coase's early socialist beliefs, a suggestion Coase found plausible, writing that "for all I know he may well be right."

• 6. Politics and a Long Life

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  Coase described his early politics plainly: as a young man, he was a socialist. That began to shift when Arnold Plant's seminar in 1931 introduced him to Adam Smith's competitive system. The shift accelerated in 1935 when LSE assigned him to teach the Economics of Public Utilities. Studying the historical record of British water, gas, electricity, and broadcasting industries, he found that very little was actually known about them, and he spent years making historical studies of each. Those researches taught him the defects of government operation of industries, whether through municipal ownership or nationalisation. The process was also shaped by wartime service, first briefly in the Forestry Commission and then for the rest of the war in the Central Statistical Office, one of the War Cabinet offices. He noted that, despite the leadership of Winston Churchill and the country facing mortal danger, government departments often seemed more concerned to defend their own interests than those of the country. When asked later in life what his politics were, Coase said he really did not know, adding that he would not reject any policy without considering what its results are. He married Marian Ruth Hartung of Chicago, Illinois, in Willesden, England, on the 7th of August 1937. They were married 75 years until her death on the 17th of October 2012. Approaching his hundredth birthday, Coase was working on a book about the rise of the Chinese and Vietnamese economies, which became "How China Became Capitalist," co-authored with Ning Wang in 2012. Coase himself died in Chicago on the 2nd of September 2013. He and Marian are both buried at Graceland Cemetery in Chicago.