Pat,
Your posting raises several important issues,
some of which go in a different direction from where I am headed.
Part of your discussion deals with the question
of whether the profession properly interpreted
Coase’s message in “The Problem of Social Cost.”
This is a complicated issues for a number of
reasons, not least of which is that Coase has
claimed in recent years that the whole Coase
theorem discussion is far removed from the main
point of his article (the need to do what one
might call benefit-cost analysis to compare the
various methods of dealing with social cost
issues, rather than assuming Pigovian remedies
are optimal). There is also the related question
of why Coase waited nearly four decades after the
publication of this article to weigh in
forcefully on this issue rather than trying to
derail the whole “theorem” debate early on. I
have written on these and related issues in the
past, at times with co-authors. Your post
suggests that there are a host of interesting
issues to deal with here, and I agree.
That said, what I am trying to get at in the
present paper has little (and likely nothing) to
do with Coase’s intentions in “PSC” and how the
professional response compares with this. Rather,
I am interested in looking at how the idea that
has come to be labeled “the Coase theorem” has
been treated in the textbook literature.
Your own take on the Coase theorem reflects one
facet of the larger set of issues with which I
plan to deal. You have put what one might call an
Austrian spin on this, placing the theorem in the
context of the entrepreneur and all that.
However, one could easily argue that no theory of
the entrepreneur is required for any of thisthat
the Coase theorem is a straightforward
application of Edgeworth Box analysis or that it
is a corollary of the First Fundamental Theorem
of Welfare Economics (which, without stating it
as such, is essentially what Stigler was saying
when he first named “the Coase theorem” in print
in the 1966 edition of his Price Theory text. So,
how did all of this play out in the textbook
literature? How did the various authors treat the
theorem? Did they ignore it? If they treated the
theorem, what form did this treatment take? Was
it presented as something applicable to actual
externality policy? Was it presented as a nice fiction? As garbage? Etc.
In fact, of course, there is no “Coase theorem.”
Rather, there are a number of versions of the
theorem running around out there, in both the
scholarly and textbook literatures, and the whole
thing has taken on a life of its own. I believe
that the Coase theorem discussion/controversy has
very interesting parallels to the discussion of
the invisible hand over the last two centuries.
Both the invisible hand and the ideas that have
come to be known as the Coase theorem have given
rise to enormous literatures, have been the
subject of multiple interpretations, have been
used in various different ways by various
individuals to promote or denigrate certain views
of the world, ... (And one could also argue that
the IH and the CT were very minor points for
Smith and for Coase that were blown up into
something far larger than each of them intended
by subsequent commentators, but that goes to the
whole authors intention issue, which I am not dealing with at this stage.)
All of this makes the Coase theorem (to me, at
least) a fascinating episode in the history of
economic ideas. It has had a profound impact on
scholarship in economics and in law, and so makes
for an interesting subject for the intellectual
historianas Roger Backhouse noted in his
response to Mason Gaffney’s post wondering why
one would care about all of this.
Steve Medema
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