[lbo-talk] Ronald Coase, transaction costs, socialism

Jim Farmelant farmelantj at juno.com
Tue Sep 26 17:38:17 PDT 2017

Over on my FB wall, someone remarked:

"I made it halfway through The Road to Serfdom (unabridged, with all the barbs directed at now forgotten supporters of social welfare in the UK left in to show it's a much more focused polemical work) before tossing it across the room. The straw that broke the camel's back was his contention that firms *internally* work like markets. I'm like, OK, he's never had to work for the private sector, and said fuck him."

I remarked that Hayek should have read some Ronald Coase. https://msuweb.montclair.edu/~lebelp/CoaseNatFirmEc1937.pdf

As Coase pointed out, firms internally DO NOT work like markets and Coase made the argument why that should be rational behavior on their part, and more importantly, why firms should exist in the first place within a market economy.

Also, it should be pointed out that when he wrote that, Coase was a socialist (he would later become a conservative). He was a close friend of Abba Lerner, and like Lerner, was at that time very much interested in the "socialist calculation" debate.

One of his concerns at that time was to show how to reconcile the apparent economic success of the Soviet Union with the neoclassical economics that he was committed to. His paper, "The Nature of the Firm" sketches out the kind of economic reasoning which could reconcile support for socialist economic planning with a commitment to neoclassical economic theory. For Coase, the key concept here was that of "transaction costs", which denoted the costs incurred by relying on the market and price system for organizing economic activity. It's precisely because transaction costs are often of significant size that people turn away from direct reliance upon the market and price system. Coase also used the concept of transaction costs in his famous 1960 paper, "The Problem of Social Cost", where he presented what has come to be known as "Coase's Theorem." http://bev.berkeley.edu/ipe/readings/The%20Problem%20of%20Social%20Cost.pdf

Coase's Theorem has often been taken as constituting some sort of refutation of Pigou's analysis of externalities. But Coase himself insisted that in most cases involving environmental pollution, and probably for most other kinds of externalities, the relevant transaction costs are of significant size, in which case, Pigou comes back into his own again. It is interesting to note that both Oskar Lange and Maurice Dobb used Pigou's analysis of externalities to make their cases for socialist economic planning. And the young Ronald Coase himself had been supportive of socialist economic planning precisely because he believed in the existence of high transaction costs.

And in his Nobel Lecture, Coase admitted as much concerning his own history:

"The view of the pricing system as a co-ordinating mechanism was clearly right but there were aspects of the argument which troubled me. Plant was opposed to all schemes, then very fashionable during the Great Depression, for the co-ordination of industrial production by some form of planning. Competition, according to Plant, acting through a system of prices, would do all the co-ordination necessary. And yet we had a factor of production, management, whose function was to co-ordinate. Why was it needed if the pricing system provided all the co-ordination necessary? The same problem presented itself to me at that time in another guise. The Russian Revolution had taken place only fourteen years earlier. We knew then very little about how planning would actually be carried out in a communist system. Lenin had said that the economic system in Russia would be run as one big factory. However, many economists in the West maintained that this was an impossibility. And yet there were factories in the West and some of them were extremely large. How did one reconcile the views expressed by economists on the role of the pricing system and the impossibility of successful central economic planning with the existence of management and of these apparently planned societies, firms, operating within our own economy?"


Jim Farmelant http://independent.academia.edu/JimFarmelant http://www.foxymath.com Learn or Review Basic Math

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