Ronald Coase R.I.P.

Ronald Coase, the nobel prize winner who died on Monday at the age of a hundred and two, was the greatest economist you've probably never heard of.

He was awarded the Nobel Prize in economics because of his work on the theory of the firm. Amazingly, given the huge influence which modern corporations have on the economy, this had not been given the attention it deserves by economists before Coase put this right.

He was also the author of a theory of how, in a much more perfect world, the market might act to control pollution - a theory which unfortunately has often been quoted without Coase's reservations about how real world considerations in general, and transactions costs in particular, are likely to cause reality to differ from the theory.

The London-born economist who moved to America as a young man was also a successful advocate in that country of selling the radio spectrum by auction to potential radio operators rather than giving it to whoever the government approved of.

Ronald Coase had a knack for pointing out how the real world has an inconvenient habit of failing to confirm to the ideas of theorists including those on the right, left, centre and indeed himself.

I am indebted to the Washington Post "Wonkblog" for the following example of how Coase pointed out that one particular example which was often quoted in economic debates failed to reflect historical reality in his paper

"The Lighthouse in Economics."

For many years, when economists needed to name an example of a “public good” — that is, a good best provided by the government because  one person’s use of it doesn’t reduce any other person’s ability to use it and it’s impossible to block anyone from using it  — they would usually quote the lighthouse.

After all, a boat that uses a lighthouse to guide its way isn’t preventing any other boats from doing the same, and there was supposedly  no way to prevent boats from using a lighthouse once it’s in operation.

That led some to suggest that lighthouses, like many public goods, cannot be profitable for private firms to provide, as boats that haven’t paid for them can simply free-ride on the contributions of others. The lighthouse, thus, “is often used as an example of something which has to be provided by government rather than by private enterprise,” Coase wrote in this 1974 paper.


The only thing is, private enterprise, has sometimes provided lighthouses. As Coase showed, for many years in Britain some lighthouses were operated through the private sector, which worked largely because use of lighthouses was excludable — one could require that anyone using ports pay a fee to maintain them, making them a “club good” rather than a public good.

 “Shipowners and shippers could petition the Crown to allow a private individual to construct a lighthouse and to levy a (specified) toll on ships benefitting from it,” Coase explained. “The lighthouses were built, operated, financed and owned by private individuals, who could sell the lighthouse or dispose of it by bequest. The role of the government was limited to the establishment and enforcement of property rights in the lighthouse. The charges were collected at the ports by agents for the lighthouses. The problem of enforcement was no different for them than for other suppliers of goods and services to the shipowner.”

Coase’s point wasn’t that this system worked better than ones in which lighthouses are publicly owned, or, as was later the case in Britain, run by a private foundation for public benefit. His point was merely that economists should use better examples.

“This paper is not intended to settle the question of how lighthouse service ought to be organized and financed. This must await more detailed studies,” Coase concluded. “In the meantime, economists wishing to point to a service which is best provided by the government should use an example which has a more solid backing.”

He was a truly remarkable man whose ideas were always interesting, and a great loss to the discipline of Economics.

Rest in Peace.

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