Deirdre McCloskey wrote:
>
> 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 a challenging question, Dierdre, but I think that you
misunderstood "the Coase theorem," or, perhaps more accurately, the
research program that Coase's (very original) views in his 1960 paper
were to initiate. With this in mind, I would like to give what I believe
is a more complete answer to your question -- one that is more favorable
to Coase.
I think that the answer to this question is largely that by the time of
Coase's paper and lecture, microeconomics had become price theory rather
that a theory of a market economy. In price theory, the concept of
market failure is employed to deal with all deviations from the
perfectly competitive price. Marshall and Pigou's concepts of external
effects, or externality, fit well into this theory. The views of Knight
and Wicksteed, who as I recall Coase regarded as the major indirect
influences on his ideas, did not. Exactly why they did not, however,
remained to be discovered, I would argue.
If I understand you correctly, your version of the Coase theorem can be
found in Wicksteed's 1914 paper and is evident in Davenport's notion of
a reservation price and Knight's treatment of social cost. But this
version is not up to the task of describing the research program that
Coase's 1960 paper was to initiate.
As you presumably know from reading the last few pages of Coase's
article, Coase was not writing about the exchange of things, but about
the exchange of legal rights to control actions. Once Coase defined a
factor of production as a legal right to control actions, as opposed to
a material thing that acquires a price through some sort of pricing
mechanism, the question had to be asked about how a legal right
originates and, of course, why a legal right exists or is attenuated
more so in some cases than in others. The so-called "system of natural
liberty," which Sidgwick used as the basis for his economic theory,
provides little help in finding the answer. A theory of production and
distribution that begins with the exchange of promises of future
behavior, such as that envisioned by Harold Demsetz (1967), is the
proper starting point.
With this starting point, one is quite prepared to ask the crucial
pollution permit question: what if a government permits only a limited
number or extent of actions that impose externally harmful effects on
others and then allows individuals to exchange the legal rights to
perform these actions? Without this starting point, this question may
never occur. Similar reasoning may apply to Friedman. Friedman had
presumably mastered the theory of perfect competition, monopoly, and
Pigovian external effects but had apparently not reflected extensively
on the sensitivity of these theories to the assumption of a complete set
of private property rights -- i.e., rights to control actions that have
external effects.
In short, I would argue that the Coase theorem is even more subtle than
you suggest it is.
Davenport, H. (1914) Economics of Enterprise. New York: Macmillan.
Demsetz, Harold.(1967) "Toward a Theory of Property Rights." American
Economic Review. 57: 347-73.
Knight, F. H. (1924) "Some Fallacies in the Interpretation of Social
Cost." Quarterly Journal of Economics. Reprinted in Knight. (1935) The
Ethics of Competition and Other Essays. University of Chicago Press.
Wicksteed, Philip H., "The Scope and Method of Political Economy in the
Light of the `Marginal' Theory of Value and Distribution," Economic
Journal, March 1914.
Pat Gunning
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