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Coase and the Austrians

September 3, 2013 in Economics

By Peter G. Klein

Ronald Coase passed away yesterday at the age of 102.  Coase is one of the most influential economists of the twentieth century, perhaps of all time. Here is an official notice from the University of Chicago law school; here are comments from Lynne Kiesling, Mike SykutaPete  Boettke, Josh Gans, and me.  Much will be written in the coming days on Coase and his contributions, so let me just highlight a few points about his relationship with the Austrian school.

Coase was no Austrian, but was friendly with many Austrian economists, was deeply critical of modern positivism and instrumentalism, and was skeptical of most regulations. Austrians have generally rejected Coase’s approach to property rights, externalities, and liability (see Block, 1977Rothbard 1982, and Cordato, 1992, for examples of a large literature). However, Coase’s insight that legal entitlements are often traded, and that trading partners can often “contract around” legal and regulatory barriers, is important and useful, even if contemporary law-and-economics scholarship has drawn the mistaken implication that judges can somehow use this insight to determine the “optimal” allocation of property rights.

Coase’s approach to the firm has both its supporters and detractors within the Austrian literature. My own work fits mostly within the “Coasean” tradition in which the firm and market are regarded as alternative resource-allocation mechanisms, and in which legal and contractual issues, rather than knowledge or spontaneous order, are central to the theory of the firm. Quoting from a piece I wrote on Oliver Williamson:

Some Austrians have argued, following Alchian and Demsetz (1972), that Coase and Williamson wrongly claim that firms are not part of the market, that entrepreneurs substitute coercion for voluntary consent, and that corporate hierarchies are somehow inconsistent with the free market (e.g., Minkler, 1993Langlois, 1995Cowen and Parker, 1997; Matthews, 1998). I think this is a misreading of Coase and of Williamson. It is true that Coase speaks of firms “superseding” the market and entrepreneurs “suppressing” the price mechanism, while Williamson says firms emerge to overcome “market failure.” But they do not mean that the firm is outside the market in some general sense, that the market system as a whole is inefficient relative to government planning, or anything of the sort.

Coase was certainly familiar with Mises’s and Hayek’s arguments about central planning, having learned them directly from Hayek. In an entry on Hayek for the …read more


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