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THE PARADOX OF COASE AS A DEFENDER OF FREE MARKETS

THE PARADOX OF COASE AS A DEFENDER OF FREE MARKETS

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Published by Mises Fan
Mention "free market advocate" or "defender of private property rights" and the name Ronald Coase is certain to be included in the top ten list of virtually all cognoscenti of such matters. Nor can it be denied that there are numerous good and sufficient reasons for this assessment. Nevertheless, it is the contention of the present paper that this characterization is unjustified with respect to his most famous publication on social costs. Here, in sharp contrast to most of his otherwork, we argue that Coase is better interpreted in the very opposite manner: as an intellectual enemyof free enterprise and capitalism.
Mention "free market advocate" or "defender of private property rights" and the name Ronald Coase is certain to be included in the top ten list of virtually all cognoscenti of such matters. Nor can it be denied that there are numerous good and sufficient reasons for this assessment. Nevertheless, it is the contention of the present paper that this characterization is unjustified with respect to his most famous publication on social costs. Here, in sharp contrast to most of his otherwork, we argue that Coase is better interpreted in the very opposite manner: as an intellectual enemyof free enterprise and capitalism.

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r
NYU
JOURNAL
OF
LAw
Be
LIBERTY
THE
PARADOX
OF
COASEAS
A
DEFENDER
OFFREE
MARKETS
by
WilliamBarnettII,Ph.D.,J.D.,
*
Dr.WalterBlock,Ph.D.,+andGene
Callahan"
Mention
"free
market
advocate"
or
"defender
ofprivatepropertyrights"andthename
Ronald
Coase
is
certain
tobeincludedinthetoptenlistofvirtuallyall
cognoscenti
ofsuch
matters.
Nor
can
itbe
denied
that
thereare
numerous
good
andsufficient
reasons
forthis
assessment.Neverthe-
less,
itisthecontentionofthe
present
paper
thatthis
characterization
is
unjustifiedwith
respect
tohismost
famouspublication
on
socialcosts.
Here,
in
sharp
contrasttomostofhisother
work,
we
argue
that
Coase
is
better
interpretedinthevery
oppositemanner:
asanintellectualenemyoffree
enterprise
and
capitalism.
Introduction
TheRonaldCoaseof
The
Problem
of
Social
Cost]
isviewedbyvirtuallyalleconomistsasastaunchdefenderoffreemarkets.Partofthereasonforthismightbethefactthatinhisotherworkshe
did
indeedtakethisposition.Forexample,notonly
did
Coaseclaim
that
lighthouses
had
beenprivatelyrun,2he
was
happy
topre-
.ChaseDistinguishedProfessorofInternationalBusiness
and
ProfessorofEconomics,Joseph
A.
Butt,5.].CollegeofBusinessAdministration,LoyolaUniversityNewOrleans.
+
HaroldE.WirthEminentScholar
Endowed
ChairandProfessorofEconomics,Joseph
A.
Butt,S.].CollegeofBusinessAdministration,LoyolaUniversityNewOrleans.SeniorFellow,LudwigvonMisesInstitute.AdjunctScholar,
Ludwig
vonMisesInstitute.
1
RonaldH.Coase,
The
Problem
of
Social
Cost,
3
].L.
&
ECON.
1(1960)
[hereinafterCoase,
SocialCost].
2
RonaldH.Coase,
TIle
Lighthouse
in
Economics,
17
].L.&
ECON.
357,363-64(1974).
1075
 
1076Barnett,Block
&
Callahan2005sentitinthis
manner.>
And
thisfreeenterpriseperspectiveapplies,too,tohisanalysesof
radio
frequencies-
and
histreatmentofadvertising>tosaynothingofhisanalysisofthe
post
office.s
Further,his
workwas
aringingendorsementoffreespeech,"Butthis
notion
that
Coasein
The
Problem
of
Social
Cost
may
becountedasa
supporter
of
themarket
has
not
goneunchallenged.CriticsofCoaseonthese
grounds
include
Block,"Cordato.?Krecke.!?
North,"
and
Rothbard.l?Inthepresent
paper,
we
challengethis
mainstream
Cease-as-free-enterpriserviewbyconsideringseveralcasesinpoint.InsectionI
we
explore
why
it
is
that
the
Coasetheoremisoften
and
mistakenlytakentobea
pro-market
argument;section
II
is
devoted
tomakingthecase
that
Coaseis
worse
than
Pigouin
terms
of
both
adherencetofreemarketprinciples
and
maximizationofwealth;
the
themeofsection
III
istoanalyzetheCoaseanfocusontransactioncosts;
we
concludeinsectionIV
with
ananalysisofthetort-liabilitycrisis,theintellectualunderpinningsofwhichhiswritingsformasubstantialpart.
I.
The
Coase
Theorem
is
often
and
mistakenly
taken
tobea
pro-market
argu
ment
The
Problem
of
SocialCost,
themostcitedeconomicsarticleinhistory.Pisfamousfor
what
hascometobecalled
"The
CoaseTheorem."WhytheCoase
Theo-
3
Id.
at
375-76;
butsee
David
E.
VanZandt,
The
Lessons
ofthe
Lighthouse:
'Government'or'Private'
Provision
of
Goods,
22
J.
LEGALSTUD.
47(1993)
(responding
to
this
claim);
William
BarnettII&
Walter
Block,Coase
andVan
Zandton
Lighthouses
(2002)
(unpublishedmanuscript,
onfile
withthe
NYUJournalof
Law
&Liberty).
4
See
generally
Ronald
H.
Cease,
The
Federal
Communications
Commission,
2
J.L.&EeON.
1(1959);
Ronald
H.
Coase.
Evaluation
ofPublic
Policy
Relatingto
Radio
and
TelevisionBroadcasting:
Social
and
Economic
Issues,
41
LAND
EeON.
161(1965);
Ronald
H.Coase,
The
Economics
of
Broadcasting
andGovernment
Policy,
56
AM.EeON.
REV.
440(1966);
Ronald
H.Coase,
Payola
in
Radio
and
Television
Broadcasting,
22
J.L.&EeON.
269(1979);
Ronald
H.
Coase
&
Nicholas
Jonson,
Shouldthe
Federal
Communications
Commission
Be
Abolished],
in
REGUL<\TION,
ECONOMICS,
AND
THE
LAW
41
(Bernard
H.
Sieganed..
1979).
5
Ronald
H.
Coase,
Advertisingin
Free
Speech,
6
J.
LEGALSTUD.
1(1977).
6
Ronald
H.
Coase,
The
Postal
Monopoly
inGreat
Britain:
An
Historical
Survey,in
ECONOMIC
ESSAYS
IN
COMMEMORATION
OF
THE
DUNDEE
SCHOOL
OF
ECONOMICS,
1931-5525
(J.
K
Easthamed.
1955);
Ronald
H.Coase,
TheBritishPostOfficeandthe
Messenger
Companies,
4
J.L.&EeON.
12(1961).
7
Ronald
H,Coase,
TheMarketfor
Goods
andtheMarketfor
Ideas,
64AM.EeON.REV.
384(1974).
8
Walter
Block,
Coase
andDemsetzon
PrivateProperty
Rights,
1
J.
LIBERTARIANSTUD.
111(1977)
[hereinafterBlock,
Coase
and
Demsetz];
Walter
Block,
Ethics,Efficiency,
Coasean
PropertyRightsand
Psychic
Income:
AReplyto
Harold
Demsetz,
8
REV.
AUSTRIAN
EeON.
61(1995)
[hereinafterBlock,
Psychic
Income];
Walter
Block,
0.].'
s
Defense:
AReductioAdAbsurdumofthe
Economics
ofRonald
Coase
and
Richard
Posner,
3EuR.J.L.&EeON.
265(1996)
[hereinafterBlock,
OI's
Defense];
Walter
Block,
Private
Property
Rights,
Erroneous
Interpretations,
Moralityand
Economics:
ReplytoDemseiz,
3
Q.J.
AUSTRIAN
EeON.
63(2000).
9
Roy
E.
CORDATO,WELFAREECONOMICSAND
EXTERNALITIES
INAN
OPEN-ENDED
UNIVERSE:
A
MODERNAUSTRIANPERSPECTIVE
(1992);
RoyE.
Cordato,
Subjective
Value,
Time
Passage,
andthe
Economics
ofHarmful
Effects,
12
HAMLINE
L.
REV.
229(1989);
RoyE.
Cordato,
Time
Passage
andthe
Economics
of
Coming
tothe
Nuisance:
Reassessing
the
Coasean
Perspective,
20
CAMPBELL
L.
REV.
273(1997-1998).
10
ElisabethKrecke,
LawandtheMarket
Order:
AnAustrian
Critique
ofthe
Economic
Analysisof
Law,
7
JOURNAL
DES
EeONOMISTES
ET
DES
ETUDES
HUMAINES
19(1996).
11
GARY
NORTH,
THE
COASETHEOREM
(1992).
12
Murray
N.
Rothbard,
Law,
Property
Rights,andAirPollution,in
ECONOMICS
AND
THE
ENVIRONMENT:
A
RECONCILIATION
233
(Walter
Blocked.,
1990).
13
Fred
R.
Shapiro,
TheMost-CitedLawReviewArticlesRevisited,
71CHI.-KENTL.
REV.
751,767(19%).
Vol.1
NYU
JournalofLaw
&
Liberty
No.3
 
TheParadox
ofCoase1077
rem
is
taken
tobe
supportive
offree
markets
isa
riddle
wrapped
in
an
enigma
foldedintoa
paradox,
with
apologiesto
Winston
Churchill.J
4
It
may
be
stated
asfollows:
the
initial
assignment
of
therights
toa
good
or
resource
is
irrelevant
to
the
efficient
use
thereof,
provided
thatthe
transactionscosts
are
zero,orsufficientlylow,
andthat
there
are
no
inhibiting
wealth"
effects.Letus
examinethis
concept.The
fundamentalidea
is
that
if
individual
A
values
the
rights
to
good
or
resource
X
more
than
anyone
else,
then
if
A
were
as-
signed
the
rights
to
X
initially,no
otherindividual
would
bewillingtooffer
A
enough
for
A
to
part
with
his
rights
to
X
and
therefore,
X
would
be
used
inits
most
highly
valued
use
as
determined
by
A.
That
is,
the
efficientallocation,i.e.,
the
allocationof
X
toits
mosthighlyvalued
use,willprevail.Alternatively,if
someindividual.
B,
other
than
A
wereassignedtherights
to
X
initially,
A
would
bewill-
ing
tooffer
B
more
for
the
rightsto
X
than
anyone
else
would,and
thisofferwillbesufficientto
induce
B
to
transfer
voluntarily
to
A
the
rights
to
X.
Therefore,inthiscasealso,
the
efficientallocationof
the
rightsto
X,
that
is,
the
allocation
thereof
to
A,
who
values
X
more
than
anyone
else,willoccur.
There
are,
however,
inthislat-
ter
case
where
B
is
the
initial
rightsowner,
two
potentialfliesin
theointment
ofefficientallocation.First,
the
transactionscosts16
involved
ineffecting
the
transferofrights
from
B
to
A
may
exceed
the
expected
gain
in
valuefromthe
shift,in
which
case
the
rights
wouldnot
be
conveyed
from
B
to
A.
Second,
although
A
might
bewillingtooffer
B
sufficient
inducement
toeffectuate
the
transfer,A
may
be
unable
to
do
soforlackofsufficientwealth.
That
is,
A
may
bewilling
but
unable,"?
in
which
case
therights
wouldnot
migrate
from
B
to
A.
Therefore,
thereare
cases
in
which
if
therights
arenot
initially
assigned
to
theone
who
values
them
most
highly,
they
will
not
subsequently
be
transferred
to
him,
in
which
cases
there
willbea
continuing
misallocationof
goods/resources;
i.e.,
they
willbeallocatedto
suboptimal
uses,
and
there
willbe
noway
forthesesituationsto
be
corrected
through
thevoluntary
actionsof
theindividuals
involved.
An
inefficientallocationofre-sourceswillprevail.
The
Coase
theorem
inanutshell:
thepro-market
part
ofhisfindingsis
thatpropertyrightsallownegotiators
totake
advantage
of"particularcircumstancesof
time
and
place"18in
ways
not
availableto
regulators
(evenif
one
justifies
private
14
Churchillactuallysaid:"I
cannot
forecastto
you
theactionofRussia.
It
isariddle,
wrapped
in
amys-tery,insideanenigma."
BARTLETT'SFAMILIARQUOTATIONS,
745(Justin
Kaplan
ed.,2002).
IS
Block,
Coase
andDemsetz,supra
note8,at112(criticizingCease'sfailureto
make
this
assumption
about
wealth).
1"
Transactionscosts
are
thoseinvolvedineffectuatingthetransferofrights:thecostsofsearch,bargain-ing,
and
enforcementofcontracts.
17
Indiscussing
demand
inafirstcourseineconomicsitisexplainedto
studentsthat
foranofferto
buy
to
count
as
part
ofthe
demand
foragoodorresource,thepotential
buyer
must
be"willing
and
able"todeliver
thatwhich
heoffers.Certainly,anofferbythe
presentauthors
to
pay
$1,000,000,000for,say,Z,
would
notconstitute
part
ofthe
demand
forZ,aswedonot
have
$1,000,000,000.
18
FRIEDRICH
A.
HAYEK,
TheUseofKnowledgeinSociety,in
NmVlDlJALISM
ANDECONOMICORDER
77,80
(1948).
Vol.1
NYU
Journal
of
Law
&
Liberty
No.3

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