Eventually it will be his birthday that will be an occasion for remembrance, but right now it’s his passing that’s noteworthy: Ronald Coase, more or less the founder of the field known as “law and economics” and one of the people I have respected most, died today at the age of 102.
He’s best known for his widely-cited and widely misunderstood article on “externalities,” which are a type of inefficiency that arises from incompletely specified property rights. I don’t think it’s much of an exaggeration to say that the consensus among economists and other public-policy analysts regarding the necessity of private property for prosperity derives largely from Coase’s body of work.
For those who try to perform economic analysis, Coase left an important message: the purpose of economic theory is to help us understand the facts before us. It is not the purpose of facts to illustrate propositions in economic theory. This may seem utterly trite, unless you consider the role of inadequate theory in the design of Obamacare. Having before them a model of the healthcare sector in which adverse selection is crippling, they designed an insurance system to solve that problem. Alas, they neglected to verify the actual extent of adverse selection, which Coase would have insisted that they do as a first step. If those social engineers had bothered to do that, they may not have given us the disastrous “reforms” whose terrible consequences continue to unfold.
As a young British academic, Coase determined that the proper way to study industrial structure was to study the productive processes of actual business firms. To that end, he set off to America and did just that. His initial academic appointment in the US was at the less-than-prestigious University of Buffalo (no offensive intended to any Bulls reading this). But eventually he found his way to the University of Virginia, where his academic work on the efficient allocation of the radio spectrum laid the first paving stones on the path to the cellular world we take for granted today. He wrote his celebrated paper on externalities mostly to expand the argument he had made about the regulation of the airwaves, but it transformed his career and an entire profession. The “Coase Theorem” traveled the path from “obviously incorrect” to “obvious” in remarkably little time, and won him an appointment to the faculty of the University of Chicago Law School several decades before its luster would be sullied by the hiring of an affirmative-action mediocrity to lecture on Con Law.
The importance of Coase’s work to the lives of ordinary people around the world is rivalled only by that of Milton Friedman. I am saddened by his passing, but not as much as I am inspired by his life.
Rest in peace, Professor Coase.