Ronald Coase

Ronald Harry Coase was born in Willesden, a suburb of London, in 1910, the only child of two post office employees. A weakness in his legs required him to wear iron braces as a boy, and he was first sent to a school for children with physical defects. He entered the London School of Economics to study commerce and came under the influence of Arnold Plant, who introduced him to the workings of real businesses rather than the abstractions of economic theory.¹

In 1931, a traveling scholarship sent the twenty-year-old Coase to the United States, where he visited factories and offices, including the plants of Ford and General Motors, to study how American industry was organized. The trip produced a question that economics had never seriously asked. If the price system coordinated economic activity as efficiently as theory claimed, why did firms exist at all? Why were there islands of central planning, run by managers giving orders, floating in an ocean of market transactions?²

Coase worked out his answer at twenty-one and published it at twenty-six. "The Nature of the Firm," which appeared in the journal Economica in 1937, argued that using the market is not free. Discovering prices, negotiating contracts, and enforcing agreements all carry costs, which he called transaction costs. Firms exist because it is sometimes cheaper to organize work inside one organization, under direction, than to coordinate it through thousands of separate market exchanges.³

The argument carried a quiet implication about size. A firm expands until the cost of organizing one more transaction inside it equals the cost of conducting that transaction in the open market. The boundary of every company, in other words, is set by a comparison of coordination costs, and when those costs change, the boundary moves.³

For decades, almost nothing happened. The article was acknowledged and set aside, and Coase later described it as "much cited and little used."⁴

20 to 1, the vote against Coase's argument at the start of a 1960 dinner of Chicago economists. By the end of the evening, the vote was unanimous in his favor.

His second landmark, "The Problem of Social Cost," appeared in the Journal of Law and Economics in 1960 and became one of the most cited articles in the history of both law and economics. Before publication, a group of University of Chicago economists, including Milton Friedman and George Stigler, gathered at the home of Aaron Director to talk Coase out of what they considered an obvious error. A straw vote at the beginning of the evening ran twenty against Coase and one, his own, in favor. Two hours of argument later, the room had converted entirely.⁵

Coase joined the University of Chicago Law School in 1964 and edited the Journal of Law and Economics for nearly two decades, building the field that came to be called law and economics. His transaction cost framework was later developed by Oliver Williamson into a full theory of why some activities are organized inside firms and others through markets, work that earned Williamson his own Nobel Prize in 2009.⁶

Coase received the Nobel Memorial Prize in Economic Sciences in 1991, cited for clarifying the significance of transaction costs and property rights for the structure and functioning of the economy.⁷ He remained productive into a second century of life, publishing How China Became Capitalist, written with Ning Wang, at the age of 101. He died in Chicago in 2013 at 102.⁸

Timeline

• 1937, "The Nature of the Firm" appears in Economica, asking why firms exist and answering with transaction costs.
• 1960, "The Problem of Social Cost" is published after Coase converts a room of Chicago economists in a single evening.
• 1991, Coase receives the Nobel Memorial Prize in Economic Sciences at the age of eighty.
• 2012, At 101, he publishes How China Became Capitalist with Ning Wang.

Endnotes

1. Ronald H. Coase, "Biographical," Nobel Prize in Economic Sciences 1991, nobelprize.org.
2. R.H. Coase, "The Nature of the Firm: Origin," Journal of Law, Economics, and Organization 4, no. 1 (1988): 3-17.
3. R.H. Coase, "The Nature of the Firm," Economica 4, no. 16 (1937): 386-405.
4. R.H. Coase, "The Nature of the Firm: Influence," Journal of Law, Economics, and Organization 4, no. 1 (1988): 33-47.
5. George J. Stigler, Memoirs of an Unregulated Economist (New York: Basic Books, 1988).
6. Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: Free Press, 1975).
7. Nobel Prize Committee, "Ronald H. Coase: Prize in Economic Sciences 1991," nobelprize.org.
8. Ronald Coase and Ning Wang, How China Became Capitalist (Basingstoke: Palgrave Macmillan, 2012).