Coase in theory and Coase in practice

While out and about yesterday, I read a little book from the IEA that I’d only dipped into before, Forever Contemporary: The economics of Ronald Coase, edited by Cento Veljanovski. It’s a useful introduction to Coase (although he wrote so clearly that there’s no excuse for not tackling his classic papers, The Nature of the Firm and The Problem of Social Cost.)

The book has chapters providing a biography and a general overview, and then several looking at the applications of Coaseian thinking in different areas such as water, environmental protection, public goods provision, financial markets and even the sharing economy. It starts with the Coase theorem: that when property rights are clearly assigned and there are no transactions costs (such as those involved in acquiring information, negotiating, monitoring compliance etc), then there are no externalities leading to a divergence between private and social costs: the parties involved will negotiate their way to the efficient outcome. ‘Externalities’ are symmetric, he argued: if you claim a right to clean air, you are costing me the opportunity to pollute. Who compensates whom will depend how the property rights are assigned. If you indeed have your clean air right, I will have to bargain with you to pay you for the pollution; if I have the right to produce emissions, you will have to pay me to desist.

Coase made it clear he took the existence of transaction costs very seriously, and argued that every situation had to be carefully assessed to determine the most welfare-enhancing course of action. He certainly challenged the market failure framework established by Pigou, still used to consider the rationale for public policy interventions. Coase has often been taken to say more generally that it’s always best to leave it to the market, because people can bargain their way to solutions – and that is certainly the interpretation this volume puts on him, as you would perhaps expect from the IEA.

I think one has instead to take Coase at face value, and in each situation look at the incentives people face and the transaction costs involved in private bargaining and in the public sector alike – this determined empiricism is why I like Coase so much. As the essay here by Stephen Davies notes: “The boundaries of what is possible in this regard have shifted over time.” The useful bibliography of Coase’s work shows how seriously he took his own conclusion that you have to look in detail at each industry, its history and specificities before pontificating; as is well known, he described anything else as ‘blackboard economics’. Indeed, the people who arguably took him most seriously were the later Nobel winners, Elinor Ostrom and Oliver Williamson, who each in their won way focused on the detail of the institutions that exist to co-ordinate individual actions.

In a nice case study, Davies looks at how turnpike roads – toll roads- were the common means to expand Britain’s main road network in the late 18th and early 19th century. They were an example of club goods – non-rival in consumption, but excludable. Later of course in the UK roads came to be considered a pure public good to be provided by the state. Now we have one toll motorway, and some talk of more. Other countries, including statist France, have many toll roads. There is no right answer.

The book ends with a chapter on the sharing economy, a very interesting essay on the implications of a large decline in certain transactions costs.

There won’t be much here that is new to people who are already familiar with Coase, but – with the caution about its free market slant – it is a clear and accessible guide for students. And available free online as a pdf.

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Capitalism and the law

My previous post – the ten books a well-educated social science student ought to have read – generated a lot of terrific comments with other suggestions, which I’ll mull over and compile into an alternative list at the weekend.

Meanwhile, I’ve read The Great Leveler: Capitalism and Competition in the Court of Law by Brett Christophers. I greatly admired his previous book, Banking Across Boundaries, and this new one has the same compelling combination of analysis and historical detail. The theme this time is capitalism as a constant balance between competitive markets and market power, these two forces applied by laws and their enforcement. Anti-trust laws are enacted or enforced with greater rigour when monopoly power gets out of hand. Intellectual property laws are strengthened after periods of cut-throat competition. In contrast to those – often Marxist – writers who have seen a single direction of travel toward ever-greater monopoly power, Christophers argues here that there is a cycle. He cites Kalecki, but also Marx’s dialectics: “Monopoly produces competition, competition produces monopoly,” Christophers quotes Marx as writing in a letter of 1846.

The book starts with three chapters setting out Christophers’ analytical framework and explaining in more detail the dynamic to and fro between more and less market power for businesses. It is very interesting to see an analysis of this kind in terms of the legal framework. While law has hardly been ignored by economists, this big picture, historical perspective provides much food for thought. As Christophers puts it in the introduction, modern political economy has tended to focus more on the sphere of production, whereas competition and IP law concern the sphere of exchange. Yet many of the flash points in public policy today concern exactly competition and intellectual property, precisely because the basic productive structure of the economy is being changed by technology. The two spheres meet.

This means The Great Leveler is an important contribution to understanding some of the most acute modern policy – and political – questions. The analysis of the first half is followed by two chapters looking at the historical experience of the US and UK from the late 19th century, and a final chapter on 21st century monopoly. Recent decades have seen the phase of the cycle where enforcement of competition diminishes and enforcement of IP protection increases. Christophers links this to the Chicago School of economics, with its powerful impact on public policy on both sides of the Atlantic. He sees little sign that this has changed even now: “Post-Chicago developments have certainly entailed meaningful changes in antitrust thinking and practice, but such changes ultimately amount to small beer compared to the changes that the Chicago revolution itself heralded.” The ‘post-Chicago’ work of economists such as Jean Tirole, Christophers argues, have concerned specific business practices or mergers rather than the framework of competition law as a whole.

As for policy approaches to intellectual property, there is little sign of any recent redressing of the balance, for all the forceful concerns many people – academics and regulators – have voiced about excessive protection, from the TRIPS clauses to copyright madness. Indeed, this chapter argues that strong IP protection was deemed pro-competitive by Chicago-flavoured thinkers (I’m afraid Christophers does use the adjective ‘neoliberal’, although it obscures rather than clarifies matters, given that so many non-economists use it to describe all economists, as if there were no differences of opinion or political philosophy in my professsion). He underlines the irony that ‘pro-market’ can mean either pro-competition (citing early Mont Pelerin economists such as Lionel Robbins) or ‘pro-business’ (ie anti-competition), as – he argues – many law-and-economics  ‘neoliberals’ are today.

The book concludes: “Political economy never sits still.” This is a terrifically interesting book, one for anybody interested in political economy, or just in the narrower canvas of law and economics.

There’s no doubt the plates are shifting again now, although who knows where they will take us – the political and economic forces undermining the post-1980s structure are powerful, yet there is no alternative intellectual framework, in contrast to the preparedness of the early Chicago School in the mid to late 20th century. I was much struck by Daniel Stedman Jones’s account in Masters of the Universe of the systematic preparation of that earlier generation of economists to change the public philosophy – decades-worth of research and influencing. It’s clear – especially after reading The Great Leveler – that the balance ought to tilt back now away from monopoly protection toward competition enforcement, as the dominant model of capitalism is self-undermining. But who knows how or whether that will come about? Christophers ends with Lenin’s prediction that the future is capitalist monopoly on the international stage, monopoly imperialism. I have more confidence in self-correcting mechanisms. We will see.

PS. Christopher May, much cited in The Great Leveler, is the author of The Rule of Law: The Common Sense of Global Politics, published in paperback last year. I haven’t read it, but it offers an explanation of why global politics so often seems to turn on legal issues. “In accessible terms, Christopher May argues that we can no longer merely use the idea of the rule of law without question but rather must appreciate its multifaceted and contested character if we are to begin to understand how and why it is now seen as a ‘good thing’ across the political spectrum,” according to the blurb.

What should the well-educated student read?

My interest was caught by this Quartz article about a new database of the set texts at top US colleges, revealing which texts are the most-frequently set for different universities and subjects. The most often observed are Plato, Hobbes and Machiavelli. Interesting.

It set me thinking about a somewhat different challenge, one that turned out to be much harder than selecting my eight pieces of music for Desert Island Discs (or, my variant, the top ten foods I would have to have on the desert island). What ten books would you absolutely want a young person to read – whatever their subject – to be well-rounded? The idea is a kind of summer reading list for someone about to go to university – what kind of broad mental hinterland should they have before arriving to start a social science degree?

Any selection is bound to reveal cultural bias as well as personal interests, but here is my list for starters, divided into three categories. It’s European rather than American. I’m very disappointed that I couldn’t in all honesty include more female authors.

Needless to say, other lists or additions are welcome.

Understanding how the world is:

On the Origin of Species – Charles Darwin

An Enquiry Concerning Human UnderstandingDavid Hume

Thinking Fast and Slow – Daniel Kahneman

Postwar: A History of Europe since 1945 – Tony Judt

How the world ought and ought not to be:

The Idea of Justice – Amartya Sen

The Second Sex – Simone de Beauvoir

L’Etranger – Albert Camus

Making the world better:

Seeing Like A State – James Scott

Reinventing the Bazaar – John McMillan (or maybe Al Roth’s Who Gets What and Why)

Cities and the Wealth of Nations – Jane Jacobs

M Train

This is off-topic, but I *loved* Patti Smith’s new book, M Train. Why?

Because ‘Horses’. Just because.

Because of the way she travels, steered by ideas and whims, embracing both the interest in other people and places and the combined pleasure and melancholy of being alone in a strange hotel. Reminds me of – in different ways – both Rebecca Solnit and Geert Mak.

 

Because surely nobody could drink so much coffee?

Because it is a very moving testament to her love for her husband, far more so than Joan Didion’s much-feted The Year of Magical Thinking.

Because in my alternative life, I too would have spent much of my time sitting in cafes, writing ideas down in notebooks.

 

Bad habits, hard choices

They’ve arrived! My copies of David Fell’s new book in the Perspectives series on how to design and implement a smarter tax system.

Bad Habits, Hard Choices

Bad Habits, Hard Choices

I wrote about it yesterday, and one comment on the post observed that surely taxing unhealthy foods more and healthy foods less is regressive, because people with not much income have unhealthier diets.

Yes indeed, if you assume people’s behaviour does not change at all in response to either price incentives or other incentives. David argues in the book that the present structure is unfair exactly because it harms the health of people with lower incomes. He draws also on behavioural economics to discuss how being nudged not only by post-tax prices but also by packaging information etc could encourage people to make healthier choices. Koen’s comment also argued that we don’t know which foods are unhealthy and this might not be inherent – as indeed has been said in the context of the sugar tax debate. A little is ok, it’s eating/drinking a lot that’s the problem. The book does also address this in its discussion of implementation, strongly advocating some trial and error.

I have reservations about behavioural economics and paternalism, or rather about the gung-ho enthusiasm with which economists are wielding this new tool in our toybox, but I do think Bad Habits, Hard Choices makes a strong case for restructuring VAT. And this is surely a good moment to be thinking seriously about the tax system as a whole and whether it’s helping or harming society.