Dears,

I've always wondered why anyone found the So-Called Coase Theorem 
surprising, and am amazed that it took people like Friedman and Gregg 
[Lewis, not Louis, if you please] two hours to grasp it.  It just says 
that some thing the laws backed by the state define as "property" is. . 
. property, and with zero transactions costs will find itself in the 
hands of she who values it the most.  This is Adam Smith's Theorem, or 
at latest Edgeworth's.  It's like transport costs: with zero transport 
costs the coal in Colorado will find its way into the person who values 
it most, regardless of where on the planet she was located.  And if the 
moon was made of green cheese the astronauts could save money on 
provisions.  It's not much a proposition, nor a surprise. 

Stigler's account was disastrously misleading.  He was capable of gross 
misreadings, such as his conflation of Mandeville and Smith.  Stigler 
wanted Coase to be making a radical libertarian assertion that 
everything is for the best in the best of all possible worlds.  So he 
said he was, despite what Coase said over and over, early and late, that 
it's the mechanical character of Pigou/Samuelson's "solution" that is 
its mistake.

The Actual Coase Theorem, as Ronald has said repeatedly but not as 
loudly as Stigler's campaign (which won: you'll find stupified 
expressions of wonder at the So-Called Coase Theorem in almost all the 
textbooks, when you don't find attacks on it which assume it is an 
empirical proposition), is that in the presence of transactions costs, 
costs that Ronald spent his career trying to get economists and 
regulators to take seriously, it does matter to whom rights are assigned 
initially---the factory spewing smoke, say, or the local breathers of 
the air.  That was his criticism of Pigou/Samuelson.  Imposing a tax in 
the presence of transaction costs does not correctly solve 
externalities.  It just slaps away at whoever in some thoughtless 
definition of "cause" is "causing" the pollution.  Anyone who read the 
last few pages of "The Problem of Social Cost" should be able to 
understand that Coase was putting in question the non-economic notion of 
cause.

But no wonder even someone as clever as Sidgwick didn't get it if 
economic thinkers of the calibre of Harberger and Director didn't, and 
if younger ones of the calibre of Cooter, Ulen, Posner, and others have 
swallowed Stigler's version!

Regards,

Deirdre McCloskey