9 Coase on the nature and assessment of

social institutions
Stephen Pratten1

1.INTRODUCTION

Does Coase develop a sustainable conception of social institutions and an

adequate framework for assessing alternative institutional arrangements?
He seems intent on making the institution a central category within eco-
nomics. When considering the state of modern mainstream economics
Coase sees its neglect of institutions as especially problematic. According
to Coase, the methodological approach adopted by mainstream theory
makes it incapable of satisfactorily addressing essential aspects of the
phenomena it sets out to study. Persuading economists of the need to take
institutions seriously is a central task Coase sets himself.
Given the prominence he attaches to institutions it may reasonably
have been anticipated that he would provide a detailed elaboration of this
central category. Yet Coase does not elaborate on this category in a sus-
tained fashion. This is a significant gap in his work. Without such elabora-
tion it is difficult to assess the degree of continuity between his treatment
of institutions and that offered by others or explain why mainstream
contributions fail to adequately address institutional phenomena. Can a
coherent, if largely implicit, account of the nature of social institutions
nevertheless be discerned in his work? Coase, of course, has much to say
about the firm, public corporation and market. Does a coherent account
of the broader category of the social institution emerge from his theoreti-
cal and concrete treatments of these social entities? If so how sustainable
is this account of the institution and specifically is it consistent with our
best contemporary accounts of social reality? And further, if a coherent
account of institutions can be uncovered, does he develop an adequate
framework for assessing alternative institutional arrangments? Coase does
not naively insist upon the promotion of market relations in all contexts
but rather (and seemingly in a highly pragmatic fashion) recommends the
even handed empirical evaluation of alternative institutional responses
to the problems of co-ordination. Yet on what basis are these empirical
assessments to be made and what presuppositions are in play when Coase
forwards them?

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I argue that in order to answer these questions it is necessary to clarify

what Coase jettisons from mainstream economics and what he retains.
I show that there exists a tension between Coases vision of a relevant
institutional economics and his retention of certain components of the
mainstream approach. Coase is interesting and unusual because what
he retains from the mainstream is not a modelling orientation and the
blanket application of mathematical techniques but rather a certain way
of framing questions (i.e., a particular conception of what constitutes an
economic problem) and a set of intuitions regarding the properties of the
competitive process (which he takes as established by economic theory).
I argue that ultimately these inherited positions, despite the highly crea-
tive way Coase deploys them, constitute a restricted basis from which to
develop an account of the nature of institutions. At the level of institu-
tional assessment I show that although Coase at times accepts the need for
a broad assessment of alternative institutional forms the evaluations he
offers are informed by a largely implicit, merely assumed and ultimately
unsustainable account of human nature.
Coase criticizes the current mainstream for its failure to provide an
adequate account of institutions and argues that economics as a discipline
is in need of substantial reform. He even provides a partial explanation for
the current problems of the discipline or at least its mainstream modelling
wing. Coase forwards the New Institutional Economics as a programme
seeking to replace the mainstream with an approach that is more relevant
for the analysis of institutions and economic policy. Despite this, Coases
contributions remain situated within a particular context. His own frame-
work for analysing issues of institutional development and design are
structured around certain propositions and substantive results which he
regards as central to economics properly understood. The argument here
is that it is precisely these inherited positions which prevent him from
developing a powerful and policy relevant institutional economics.

2.REORIENTING ECONOMICS: COASES

INSTITUTIONAL AGENDA
In his address to the International Society of New Institutional Economics,
Coase suggests that

we are a society with a mission and that mission is to transform econom-

ics. When I speak of economics, I have in mind mainstream economics as
expounded in countries in the West and particularly what is called microeco-
nomics or price theory. Our mission is to replace the current analysis with
something better, the New Institutional Economics. (1999b: 3)

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For Coase the discipline is in urgent need of substantial transformation

and he suggests there may currently be support for such a change precisely
because of the growing recognition of the inadequacies of mainstream
economics:

If we have some sort of illness or disease or problem, you get along with it, you
accept it, and then it gets so bad that you feel you ought to do something about
it. Now I think that in economics people are now beginning to think that things
have got so bad that one ought to do something about it. (1999a: 8)

Coase clearly identifies what is problematic about the state of modern

economics: that there is both a glaring neglect of obviously important
institutions and a broader disengagement of economics from real world
phenomena. In his view, mainstream economics has traditionally failed
to consider significant aspects of the economic realm. Specifically with
regard the firm, Coase argues that Why firms exist, what determines the
number of firms, what determines what firms do (the inputs a firm buys
and the output it sells) are not questions of interest to most economists
(1988: 56). Not only are significant features of the firm neglected but the
market too is barely addressed within mainstream economics. Coase notes
that while economists claim to study the working of the market in modern
economic theory the market itself has an even more shadowy role than
the firm (ibid.: 7). He critically notes that when economists do speak of
market structure it has nothing to do with the market as an institution but
refers to such things as the number of firms, product differentiation and
the like, the influence of social institutions which facilitate exchange being
completely ignored (ibid.: 8). For Coase both the firm and the market
within mainstream theory appear by name but they lack any substance
(1992 [1994]: 45).
Coase provides a partial explanation for this state of affairs. Two
aspects of modern economics are especially highlighted:

The concentration on the determination of prices has led to a narrowing of

focus which has had as a result the neglect of other aspects of the economic
system ... This neglect of other aspects of the system has been made easier
by ... the growing abstraction of the analysis, which does not seem to call for
detailed knowledge of the actual economic system, or at any rate, has managed
to proceed without it. (1992 [1994]: 45)

Although referring to abstraction, what Coase is critical of here is the way

in which mainstream economists, in formalizing their analysis,2 proceed by
assuming as a starting point a transparently fictitious world that is totally
different from the one in which we live or could possibly live. Coase repeat-
edly refers to the artificial or fictional nature of much economic theorizing:

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 Coase on the nature and assessment of social institutions113

when economists find that they are unable to analyse what is happening in
the real world, they invent an imaginary world which they are capable of
handling (1988: 8). Coase insists that he is not against abstraction per se.
He suggests that The right degree of abstraction depends on the problem
that is being analysed (1993: 97). Coase recognizes that abstraction is as
essential to economics as it is to all science. He also appears to be deploy-
ing a traditional notion of abstraction as meaning focussing upon certain
aspects of something to the momentary neglect of others. Abstraction, so
understood, indicates that an analysis is necessarily partial, what it does
not imply is that analysis necessitates a reliance on claims or conceptions
we already believe to be fictitious. What Coase objects to is mindless
abstraction or the kind of abstraction which does not help us to under-
stand the working of the economic system (ibid.: 97).3
The failure to adequately address the role of institutions and the fic-
tional nature of much economic theorizing has meant it has become
largely devoid of policy relevance:

Until comparatively recently economists tended to devise their proposals for

economic reform by comparing what is actually done with what would happen
in an ideal state. Such a procedure is pointless. We can carry out the operations
required to bring about the ideal state on a blackboard but they have no coun-
terpart in real life. In the real world, to influence economic policy, we set up or
abolish an agency, amend the law, change the personnel and so on; we work
through institutions. The choice in economic policy is a choice of institutions.
(1984: 23031).

If Coase highlights the limitations of mainstream theory and provides

a partial account of why these problems have arisen he is equally keen
to suggest strategies that can be adopted to improve the situation. He
insists that realism in our assumptions is needed if our theories are ever
to help us understand why the system works in the way it does. Realism in
assumptions forces us to analyse the world that exists, not some imaginary
world that does not (1982 [1994]: 18). More concretely he writes:

I believe that there is an economic system, that it is within this system that
people earn their incomes and spend them and that its performance is deter-
mined by the character of the institutions that make up the system, institutions
whose influence is largely absent from mainstream economic theory. To me,
what we should study is something very real whose operations we can observe
in microeconomics, the operation of firms and markets. (1995: 45)

In trying to provide a more adequate account of institutions Coase, of

course, insists that it is necessary to acknowledge the existence of transac-
tion costs i.e., the costs of co-ordinating economic activity. Transaction

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costs are inexorable; they are always present in empirical markets and
indeed in any alternative institutional arrangements. Coase calls for the
explanation of particular markets and competing co-ordinating systems
(firms, public organizations) as specific social institutions. What is espe-
cially required currently is detailed case study work. Coase in fact suggests
that this is work that is at last beginning to be undertaken albeit not within
economics departments (see Coase, 1995: 5).

3.COASE ON INSTITUTIONAL DEVELOPMENT

AND INTERVENTION

Coase, despite his criticisms of mainstream economics, does not suggest

that economics cannot adequately address institutions but advocates
a particular kind of economic analysis of institutions. In attempting to
redress the analytical neglect of institutions he, of course, remains situated
within a particular theoretical context.4 The emergence and transforma-
tion of institutions and evaluation of policy initiatives that influence insti-
tutions are all issues Coase frames in a particular manner. Moreover he
uses certain results which he views as having already been established by
economic theory to consider these questions. Thus despite his reservations
Coase writes:

What differentiates [my writings] is not that they reject existing economic
theory, which ... is of wide applicability, but that they employ this theory to
examine the role that the firm, the market and the law play in the working of
the economic system. (1988: 5)

By clarifying how his analysis of institutional development and evalua-

tions of institutional interventions are framed and informed by positions
he inherits from economic theory, the coherent, if ultimately constrained,
account of social institutions underpinning Coases contributions can be
discerned.
For Coase the economic task is paradigmatically that of allocating
resources so as to match, over the widest possible range, outputs to agents
wants, or those wants backed by the ability to pay. In a situation charac-
terized by scarce resources, for any option chosen there are other options
and associated goods that are forgone. Given the conflict between options,
it becomes necessary to compare the alternative really possible scenarios
available. Coase assumes that the rational resolution of such practical
conflicts requires a common measure through which different options
can be compared and the appropriate supply of each good calculated.
Following Marshall he suggests that money and market values provide the

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means for such a calculation. Coases view of the nature of the economic
problem is neatly illustrated in his remarks regarding pollution:

Like other economic problems, whether it is concerned with the supply of

potatoes or houses or education, the supply of clean air or clean rivers or lakes
is simply one of deciding what amount ought to be supplied, and this turns
ultimately on whether what has to be given up to secure the additional supply is
worth more or less than the additional supply of the commodity under discus-
sion which it will procure. It is a matter of calculation, and it is quite possible
that when the calculations are made, in general, they will show that it is better
to have air, rivers, and lakes which are dirtier rather than cleaner. (1972: 313)

This conception of the central focus of economics carries important impli-

cations for the scope of economic policy. Coase writes:

The aim of economic policy is to ensure that people, when deciding which
course of action to take, choose that which brings about the best outcome for
the system as a whole. As a first step, I have assumed that this is equivalent to
maximizing the value of total production. (1988: 27)

A first approximation for the best outcome for society, for Coase, is that
which maximizes the value of production, with comparisons undertaken
on the basis of market valuations. Given this, the aim of economic policy
can only be in the first instance to ensure that the value of output is
maximized.
Coase expresses his frustration with commentators and policy makers
who refuse to acknowledge the economic nature of problems they address.
Thus, in a passage reflecting upon the 1962 Pilkington report on broad-
casting in the UK, he notes:

It is I think apparent that these passages, full of sound and fury, do not give
us any criteria by which to decide whether any particular program should be
transmitted... . If the resources devoted to broadcasting are limited it follows
that the provision of programs which are liked by one group will have deprived
some other group of programs that they would have liked. According to what
principle is it to be decided which demands are to be satisfied? The Committee
never tells us this. (1966: 43)

Not only does Coase inherit a particular conception of the central issues
of economics but he accepts that it has been established that the market
has certain important advantages over other institutional arrangements
in ensuring that consumers have their wants satisfied. Coase sees the
competitive process, or the price system, as a basis for ensuring that social
solidarity is established and maintained. Market price constitutes a social
compromise between the competing agendas of wants and a means by

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which producers and consumers orient themselves. The market provides

the means through which agents can compare a vast range of different
possible courses of action and represents an information system through
which individual decisions are communicated to producers. The market
operates so as to ensure that the products produced correspond effectively
to the expressed wants of consumers. According to Coase these insights
can be traced back to Adam Smith:

Adam Smith told us that in his day to be able to have even a very modest stand-
ard of living required the co-operation of thousands in many different trades
in different places ... How is this co-operation to be secured and maintained?
And how is this to be done in such a way as to make sure that resources are
employed in the most valuable way? Adam Smiths answer was that the actions
of all the participants in production in the economic system are co-ordinated
through the operation of the pricing system, the invisible hand, and that this
operates in such a way as to maximize the value of production. (1995: 2)5

When Coase writes that the Pilkington Committee provides a discussion

of an economic problem without the benefit of economics (1966: 442) he
means that it refuses to see the task as one of allocating resources so as to
maximize the value of production and fails to acknowledge the established
benefits of market type co-ordination.
How have these inherited positions impacted on Coases institutional
economics and specifically his account of the firm?

3.1 Institutional Development in a Competitive Context

Coase himself sees The Nature of the Firm as bridging a gap in eco-
nomic theory.6 He argues that usually economic analysis leaves no room
for firms. For Coase, it is not simply that traditional economic theory
ignores the firm, rather the implication behind much of the prevalent
economic theory was that the firm when interpreted as a co-ordinating
mechanism ought not to exist. In the firm we have not the price mechanism
but the authority of the entrepreneur as the co-ordinating force. Thus
Coase argues that there are two co-ordinating systems operative within
contemporary capitalist economies. The co-ordination of activities within
the firm is seen as being distinct from that brought about via the market.
Outside the firm price determines the allocation of resources and their use
is co-ordinated through a series of exchange transactions on the market.
Coase suggests that the firm be characterized precisely by the supersession
of the price mechanism and its replacement by an administrative structure.
Recognizing, however, that the price mechanism alone could be used to
ensure co-ordination, and that the degree to which the price mechanism

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is superseded varies across industries and firms, the inevitable question

is why co-ordination is the work of the price mechanism in one case and
of the entrepreneur in another. As we have seen for Coase a central result
from economic theory was precisely that the market had certain gener-
ally beneficial attributes. If markets have these important and beneficial
attributes then why should the firm as an economic institution exist at all?
Coase, of course, suggests that although co-ordination could be achieved
in a completely decentralized way by means of contracts, this does not
occur because it would be associated with the absorption of a consider-
able part of the available resources by the arrangements necessary for the
required contracts. Coases insight is that the use of the price mechanism
is not costless. As Coase writes:

The main reason why it is profitable to establish a firm would seem to be that
there is a cost of using the price mechanism. The most obvious cost of organiz-
ing production through the price mechanism is that of discovering what are the
relevant prices ... The costs of negotiating and concluding a separate contract
for each exchange transaction which takes place on a market must also be taken
into account. (1937 [1988]: 389)

Coase suggests that while the existence of the firm does not eliminate
the need for contracts and the transaction costs associated with them, it
does greatly reduce the number of necessary contracts vis--vis the price
mechanism, and in the process reduces transaction costs. Coase, in the
following passage, explained why it seemed reasonable that the difference
in the costs of co-ordinating activity via an administrative structure as
opposed to through market transactions would often be sufficiently large
to promote the emergence of the firm:

A factor of production (or owner thereof) does not have to make a series of
contracts with the factors of production with whom he is co-operating within
the firm, as would be necessary, of course, if this co-operation were a direct
result of the working of the price mechanism. For this series of contracts is sub-
stituted one. At this stage, it is important to note the character of the contract
into which a factor enters that is employed within a firm. The contract is one
whereby the factor for a certain remuneration ... agrees to obey the directions
of an entrepreneur within certain limits. The essence of the contract is that it
should only state the limits of the powers of the entrepreneur. Within these
limits, he can therefore direct the other factors of production. (Ibid.: 39)

Having established that internal organization eliminates certain costs and

thereby lowers the costs of co-ordination, Coase turns his initial ques-
tion on its head and asks why ... are there any market transactions at
all? Why is not all production carried on by one big firm? (ibid.: 423).
Here Coase notes that there are costs associated with using the firm as a

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co-ordinating mechanism as well as with using the price mechanism. He

also highlights that it may be possible for other entrepreneurs to organize
a given set of transactions at a lower cost than achieved within the firm
focussed on. The result is that a firm will tend to expand until the costs of
organizing an extra transaction within the firm become equal to the costs
of carrying out the same transaction by means of an exchange on the open
market or the costs of organizing in another firm (ibid.: 44).
For Coase the secret of the emergence of the firm, and the factor which
determines whether activities are co-ordinated through the market or
within a firm, is to be found in the relation between the costs of carrying
out transactions on the market and the costs of organizing the same activi-
ties within that firm which can perform this task at the lowest cost vis--vis
other firms. Thus, he recognizes that whether activities are co-ordinated
via the market or through authority relations within the firm transaction
costs are inevitably incurred.
The inheritance Coase receives from conventional economics can be
seen in terms of the way he frames the question of institutional develop-
ment. This is an issue that for Coase comes down to the supply of alter-
native forms of institutions capable of co-ordinating economic activity.
Just as the supply of potatoes can be approached from the perspective of
the resources used to secure their provision and the alternatives foregone,
Coase is suggesting that the extent of market type co-ordination versus the
degree of firm type co-ordination can be considered in exactly the same
way. Moreover, Coase suggests that the basic result dating from the work
of Adam Smith which holds that the competitive process operates so as to
maximize the value of production applies at the level of institutions just as
much as the supply of commodities. Coase says in his Nobel Prize lecture:
In The Nature of the Firm I suggested that in a competitive system there would
be an optimum of planning since a firm, that little planned society, could only
continue to exist if it performed its coordination function at a lower cost than
would be incurred if coordination were achieved by means of market transac-
tions and also at a lower cost than this same function could be performed by
another firm. To have an efficient economic system it is necessary not only to
have markets but also areas of planning within organizations of the appropriate
size. What this mix should be we find as a result of competition. (1992 [1994]: 8)

Coase projects the competitive process onto an institutional level. In a

competitive environment those institutional forms we observe are seen
as efficient. Just as competition will ensure that we get the right supply
of potatoes so as to maximize the value of production it also ensures the
efficient supply of different forms of co-ordination. What is striking from
an ontological perspective is how thin Coases account of the nature of the
firm as developed within this framework remains.7

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3.2 Institutional Interventions

Coases institutional programme extends not only to the analysis of insti-

tutional development in a competitive environment but also to the evalu-
ation of alternative institutional initiatives and interventions. In order to
appreciate Coases views here reference can usefully be made to his criti-
cisms of the Pigouvian framework and the conventional treatment of the
problem of externalities set out in The Problem of Social Cost.
For Pigou, state intervention was viewed as appropriate as a substitute
for market transactions in cases where market failure occurred due to
what were later dubbed externalities. From the Pigouvian perspective
divergences between private and social costs should be addressed through
appropriately specified taxes, subsidies or regulations. As Medema (1999)
shows, Coases criticism of the Pigouvian approach can be broken up
into two steps. Firstly, Coase shows that, under the standard assump-
tions regarding the operation of markets, the Pigouvian remedies con-
sidered essential for the efficient resolution of externality problems are
unnecessary.
Coase noted that the cause of externality related market failures is
fundamentally the absence of rights over the externality related activity.
Coases ideas here can be clarified by considering their evolution in his
earlier paper on The Federal Communications Commission where he
examines the possibility of using markets to allocate broadcast frequen-
cies. Coase considers a prominent concern of defenders of the FCCs
regulation of the spectrum. The worry was that in the absence of FCC reg-
ulation, there would arise technical interference between the users of radio
signals. Coase points out that if property rights could be established in the
spectrum then assuming the market operated as it was typically depicted
as functioning in traditional economic theory (i.e. perfectly without trans-
action costs) then the market would allocate frequencies to their highest
valued uses. Under such conditions there would be no need for the regula-
tory initiatives assumed essential. It was a generalized version of this point
that Coase was initially aiming to establish in The Problem of Social Cost
and it was this argument which forms the basis of the Coase Theorem. This
effectively represents an internal critique showing that given the fictional
account of the market accepted within mainstream theory Pigouvian rem-
edies for externality problems are unnecessary.
For Coase this was not the most significant part of his analysis in The
Problem of Social Cost. Coase writes: I regard the Coase Theorem as a
stepping stone on the way to an analysis of an economy with positive trans-
action costs (1992 [1994]:11). Once it is recognized that transaction costs
are inexorable then the limited significance of the Coase Theorem becomes

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apparent. Coase suggests that transaction costs must be acknowledged

and it is not appropriate to base analysis of institutional interventions
upon transparently fictional accounts of either the market or government
regulation. The Pigouvian approach was shown to be not only theoreti-
cally incoherent but also insufficiently aware of the need for fine-grained
empirical analysis of alternative institutional forms. The Pigouvian analy-
sis Coase suggested typically failed to analyse the actual working of state
institutions and regulatory interventions but rather proceeded by assum-
ing the existence of almost perfectly functioning public bodies. The appro-
priate policy response to market failure, according to Coase, requires the
assessment of whether the market failure is more or less severe than the
government failure that would likely accompany any attempt to respond
to it. The evaluation of institutional initiatives can only be undertaken on
the basis of case by case comparative institutional analysis.
Coases own careful case study accounts of broadcasting institutions,
postal services, lighthouse provision and so on are examples of the kind
of historically sensitive and empirically rich research he is recommend-
ing.8 Coase recognizes that his advocacy of fine-grained empirical work
on institutional forms goes very much against the trend in contemporary
economics (1995:3). However in terms of the basis on which the evaluation
of alternative institutional forms is to be made he accepts the conventional
efficiency framework. Alternative institutional forms are to be assessed at
least initially in efficiency terms specifically against the criteria of maximiz-
ing the value of production. Thus in The Problem of Social Cost he notes:

Economists who study problems of the firm habitually use an opportunity-cost

approach to compare the receipts obtained from a given combination of factors
with alternative business arrangements. It would seem desirable to use a similar
approach when dealing with questions of economic policy and to compare the
total product yielded by alternative social arrangements. In this article, the
analysis has been confined, as is usual in this part of economics, to comparisons
of the value of production, as measured by the market. (1960 [1988]: 154)

Coase goes on to suggest that, given this conventional criterion for assess-
ment, at a more substantive level where these concrete analyses of govern-
ment sponsored institutional interventions have been undertaken (and he
had actively encouraged these sorts of studies as editor of the Journal of
Law and Economics) a strikingly consistent result emerges:

The result of such studies was to suggest that such regulation was commonly
ineffective, in that it left the situation essentially unchanged or where it made a
difference, that this was often to make things worse, in that prices were higher
and the product was less well adapted to the wants of consumers than would
have been the case without regulation. (1995: 3)

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4.COASES CONSTRAINED ACCOUNT OF THE

NATURE AND EVALUATION OF SOCIAL
INSTITUTIONS

Coase, while recognizing the limitations of the contemporary main-

stream project in economics, addresses social institutions by drawing on
certain aspects of conventional economics. What are the implications
of approaching institutions in this manner? Does Coases institutional
economics provide a fruitful framework through which institutions
can be incorporated within an explanatory powerful and relevant
economics?
Coase, as we have seen, conceives of institutional development and
specifically the emergence of the firm as an economic problem. The issue
reduces to the supply of different types of co-ordination and the competi-
tive process, if allowed to operate freely, is seen as ensuring that just that
amount of firm type co-ordination will be supplied so as to maximize the
value of production. In terms of the evaluation of institutional interven-
tions Coase recommends their comparative assessment in terms of the
efficiency criteria of maximizing the value of production. On this view the
design of social institutions should be aimed at, or at least carefully con-
sider, the reduction of transaction costs.
To conceive of institutional development and design in these terms
implies that transaction costs constitutes a very broad category indeed. As
Campbell notes:

The negotiating, information gathering, organizing, etc., within which trans-

actions take place are not only costs, they are also social relations which are
essentially facilitative of the transaction. Negotiation is a cost, but what con-
tract could be made without language? Information gathering is a cost, but
what contract could be made in complete ignorance? All action, including all
transactions, can take place only within constitutive social relations... . If one
really took away all the costs of exchanging, the exchange would not take place
cost free, it would not take place at all. (1996: 506)

Outside of the framework inherited from conventional economics does it

make sense to collapse all these different aspects of social reality (those
aspects necessary to achieve co-ordination) into a single category and con-
ceive of them as costs to be minimized either by the competitive process
or by careful regulation? Coases approach encourages a rather minimalist
treatment of institutions the nature of the firm for example is reduced
to organized co-ordination of resources and production via direction.
Moreover, his framework leaves the dynamic evolution of institutional
forms as a rather mysterious process. To conceive of the competitive

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process as capable of generating an efficient equilibrium mix between

various forms of co-ordination is ultimately to fall back on a type of
unwarranted functionalism.
Now, at least at times, Coase acknowledges that a broader view has to
be adopted when assessing competing institutional arrangements:

It is, of course, desirable that the choice among different social arrangements
for the solution of economic problems should be carried out in broader terms
than this [maximizing the value of production] and that the total effect of
these arrangements in all spheres of life should be taken into account. (1960
[1988]:154)

At a more concrete level, when writing on advertising he notes: We have

to judge an activity such as advertising, which influences tastes, by decid-
ing whether it tends to produce good people and a good society or at any
rate, better people and a better society (1977: 10).
Coases argument appears to be that economic criteria summarized by
the goal of maximizing the value of production constitute but one part
of an overall evaluation of institutions. In one breath, he seems to claim
that policy is a matter of valuation with the basis of the calculation being
whether the range over which outputs and wants correspond is increased.
In the next breath he concedes that other values or criteria are important,
seemingly accepting the need for a broader conception of what is necessary
for human well being.
Coase makes very limited progress in providing an account of how such
values and criteria could be restored to, and incorporated within, a guid-
ance system for policy and institutional evaluation. Even as Coase accepts
the need for a broader evaluation his implicit presuppositions constrain
the basis upon which any such assessment takes place. He presupposes
that the price system is in fact the one institution that addresses a common
human interest: The one general interest which all members of society
do share, ... [is], in the maintenance of a competitive, private enterprise
system (1972: 314). Apart from this common interest he appears to doubt
the existence of common needs and interests. For Coase subjective wants
or preferences are all there are and the individual is better informed than
any central institution could ever be as to what his or her wants happen to
be. This is a position explicitly reflected in some of his case study work on
broadcasting:

Most people are more dedicated to themselves than they are to anything else.
And I believe that they will act in the way that you and I would act if we were
in their position, neither better nor worse. On the whole, we have our views and
try to further them; we have our own interests and try to further them. Thats
all. (1968: 173)

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 Coase on the nature and assessment of social institutions123

A great advantage of the market according to Coase is that it operates

without the need for any centralized information gathering body. For
Coase:

It is one of the advantages of the pricing system that, for its efficient working,
the only person who needs to know about how any given user would use radio
frequencies is the user himself. He has to decide how much it is worth his while
to offer for a certain radio frequency; whether he obtains it depends on what
others are willing to offer. (1962: 43)

The presumption that there are no real interests shared by all is question-
able. Indeed, if there are no shared human objectives, i.e. real interests,
needs, motives, if society reduces to competing individuals, with needs
which are merely subjective with the possibility of their being irreconcil-
ably opposed, then progressive change of any sort seems ruled out from
the start. However Coases position here is merely assumed rather than
investigated.
Once adequate attention is paid to the nature of human beings we can
see that it is premature to adopt this reductionist position. In opposition to
Coase, it is possible to defend a perspective that recognizes both our inter-
connectedness and our uniqueness. It may be that whatever their momen-
tary manifest wants, human beings may also have real shared needs and
interests, needs which may indeed be out of phase with many wants. To
elaborate (see Lawson 1999) human nature when viewed from one aspect,
or at a high level of abstraction, can be accepted as a common human
attribute, one grounded in our genetic constitution and manifest in certain
species wide needs and capacities or powers. Any such nature common to
all human beings can only ever be expressed in inherently socialized, more
or less historically, geographically and culturally specific and very highly
differentiated forms. Human nature, viewed under a different aspect, or a
lower level of abstraction, can be recognized also as a historically specific
nature, the development of which has its origins at the time, place and con-
ditions of birth, and which is substantially influenced by the class, gender,
occupational positions in which the individual stands along with his or her
experiences generally. Ultimately, any individual will always be subject to
a unique combination of experiences and modes of determination produc-
ing a specific personality so that, from a lower level of abstraction, the
nature of any given human being must be seen as a, more or less, unique
individuality.
Coases assumption that the scope of shared human interests is limited
to the establishment and maintenance of a competitive private enterprise
system undermines his ability to deliver a convincing assessment of alter-
native social institutions. This can be illustrated by reference once again

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 124 The Elgar companion to Ronald H. Coase

to his broadcasting studies. Coase recognizes that government regulators

may have in mind ends other than raising the value of production (1974
[1994]: 61). But when one considers Coases concrete studies it is clear that
he sees such interventions as likely to fail because, for him, there is no basis
for shared agreement on ends. In his study of the BBC monopoly Coase
considers the view that the BBC monopoly was required in order to raise
the standards of tastes:

The really important argument has been that a monopoly was required in order
that there should be a unified programme policy. This argument is powerful
and on its assumptions it is no doubt logical. Its main disadvantage is that to
accept its assumptions it is necessary first to adopt a totalitarian philosophy or at
any rate something verging on it. (1950: 191)

In effect the possibility of developing any criterion or standard beyond

agents immediate wants by which the performance of broadcasting insti-
tutions might be assessed is considered remote. Coase assumes that there
are no real interests that differing groups may share and which could act
as the basis of a guidance system for the assessment of broadcasting insti-
tutions. He argues that reference to the public interest lacks any definite
meaning (1959: 8). There simply are competing individuals with conflict-
ing interests. For Coase any attempt to go beyond the immediate wants
and preferences of consumers becomes mistaken for a dictatorial solution
wherein the preferences/wants of the few dominate those of the many:
Though the programme policy of the corporation gave the lower social
classes what they ought to have, it gave the educated classes what they
wanted (1950: 177).
It may still, of course, be the case that existing institutions do fail when
an orientation to their assessment is adopted which is anchored in a more
sustainable account of human nature. But Coase seems to see the BBC
as a public service institution as problematic from the very start precisely
because it aims to orient itself beyond agents immediate preferences and
wants. Coase sees all such exercises as being necessarily involved in the
implicit promotion of particular interests and hence necessarily elitist and
even totalitarian. This simply serves to expose the highly restricted nature
of the assumptions underpinning Coases institutional assessments.
The degree to which we have shared needs, interests and so on cannot
be assumed but only discovered. The empirical and critical methods of
science are likely to be important here. In terms of the concerns of elitism
and coercion, it is worth noting that even if a framework is adopted which
allows for the possible existence of shared real needs, and acknowledges
the role that science may play in uncovering these, there is no necessary
presumption that the findings of science be acted upon merely by scientists

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 Coase on the nature and assessment of social institutions125

or by people situated in positions of government. Indeed, as Lawson

(1999) notes there is every reason to suppose that critical reasoning activ-
ity can itself reveal the sorts of conditions, including institutional arrange-
ments, that best facilitate the allocation of resources in a society oriented
to the well being of the one and the all.

5. CONCLUDING REMARKS

The account of the nature of institutions that can be drawn out from
Coases writings reflects his own inherited assumptions. Coase takes
from the mainstream framework not a preoccupation with mathematical
modelling but certain assumptions about what constitutes an economic
problem and a particular characterization of the competitive process.
This inheritance places significant constraints upon Coase as he seeks to
address fundamental questions about the nature of specific social institu-
tions. Meanwhile his assessments of alternative institutional arrangements
are limited by his ungrounded scepticism regarding the existence of shared
human interests.

NOTES

1. I am grateful to the editors of this volume and an anonymous referee for valuable
comments.
2. For one illustrative passage where the links between formalism and the kind of abstrac-
tion he finds problematic, see Coase (1995: 2).
3. In considering Coases distinction between appropriate abstraction and mindless
abstraction see Lawsons contrast between abstraction and methods of idealization and
isolation (Lawson, 1997: 2345).
4. Coases advocacy of a particular variety of economic theory is revealed in his assessment
of the Old Institutionalist programme. The Old Institutionalists Coase sees as misguided
because while they address institutions they fail to retain what is valuable in economic
theory (see Coase, 1984: 230). For a detailed evaluation of the relationship between
Coase and the Old Institutionalists see Medema (1996).
5. Coase dates his own adoption of these insights to the influence on him of Arnold Plants
teaching at the LSE, see Coase (1986 [1994]: 1812).
6. For detailed discussion of the content, origins and influence of Coases article The
Nature of the Firm see Medema, 1994, Chapter 2.
7. For one account of the nature of the firm and the corporation where the relevant
complex ontological issues are explicitly confronted see Lawson (2015).
8. For discussion and evaluation of these empirical studies, see the chapters in this volume
by Bertrand, Hazlett and Mnard.

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