----------------- HES POSTING ----------------- To John Womack's response: I cannot be sure about the Commons-Barnard-Simon connection (others surely can). But I will comment on the appeal of Coase. Recall that Coase (1960) was responding to Pigou's assessment of externalities (social costs) and in doing so he pointed out that Pigou had assumed that victims of external costs (smoke in this case) had a "right" to be free from smoke--hence the polluter should be taxed (the Pigovian tax) to force internalization of these external costs. Coase objected to this presumption of a "right" for the victim and said that the right should go to the most valuable use. He thought he was making judgments about rights assignments morally "neutral" by advocating the assignment that would produce the greatest net social dividend. Coase failed to recognize, as many economists do, that embedded in his own objective function (total value of production) lurks a particular moral commitment. But this moral commitment is agreeable to economists who imagine that there is nothing value laden in advocating greater value of production. Or, if they see it as value laden, it is a value that is widely shared within economics. As we know, Coase insisted that in a world of zero transaction costs, it does not matter who gets the initial rights assignment since they (rights) will move, via market exchange, to those who value them most highly. He certainly recognized that transactions costs are never zero, and so rights assignments do matter. In fact if they did not matter why do we see people constantly fighting over them? But his simple story was sufficiently compelling that it serves to underpin much of the work of the new institutional economics. That is, it was now safe ("scientific") to study institutions since they are simply alternative rights assignments, and as long as those assignments can move to the highest-valued use, all was well. In fact, Coase regarded rights as factors of production that are simply bought and sold in markets--and the role of government is to help reduce transaction costs so that bargains over rights will not be impeded by high transaction costs. This approach is highly compatible with the harmonious working out of mutual gains from trade that underpins how many economists see the market. This explains part of the popularity of new institutional economics. Commons, on the other hand, saw institutions not as something that are the result of bargaining transactions, but as the outcome of conflicts of interest between parties with quite opposing interests. His "managerial transactions" (inside of firms) and "rationing transactions" (what the courts and the legislature do) comprise the way that new "working rules" (institutions) emerge. Indeed bargaining transactions (what we tend to do in markets) are themselves defined by prior rationing and managerial transactions. Commons saw the transaction as the central unit of analysis. Most economists focus on prices and quantities. So, it seems to me that the new institutional economics finds the Coasean view (rights/institutions as factors of production--i.e. commodity like) a much more congenial starting point for much of its work than the Commons view of conflict, opposing interests, and institutional change emanating not from mutually beneficial "efficient" bargaining among atomistic agents but from the rulings, decrees, decisions, and actions of the courts and the legislature. Commons insisted that the U.S. Supreme Court "picked values." That is, in deciding which party to a conflict would prevail, the Court was ratifying one set of interests (and associated economic agenda) while simultaneously dismissing the other set of interests (and associated economic agenda). We may notice that in rendering decisions, the Court was (is) also ratifying one particular constellation of costs and prices. In that sense, legal decisions determine "values" in a market economy. To Commons the key was always a struggle for "reasonable values." What was "reasonable?" That which was worked out by conflicting interests of approximately equal negotiating power. And the Courts struggled with the same thing. This is not an approach that fits well into the predominant method of the new institutional economics. Dan Bromley ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]