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Ronald Coase studied real markets

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Ronald Coase, winner of the 1991 Nobel Economics Prize, was born on December 29th, 1910. As is the way of most Nobel economists, he lived a long time, and died in 2013, aged 102. He studied under Arnold Plant at the LSE, and went on to become part of the Chicago School, where he co-edited the influential Journal of Law and Economics.He gained acclaim by examining why it is that business firms develop as they do, identifying the transaction costs of entering and operating in the market as a key factor determining their size and nature. In a ground-breaking paper, “The Problem of Social Cost,” he dealt with the problems of externalities, and suggested these might be handled by assigning property rights. This approach has been applied to dealing with problems of over-exploiting common

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Ronald Coase, winner of the 1991 Nobel Economics Prize, was born on December 29th, 1910. As is the way of most Nobel economists, he lived a long time, and died in 2013, aged 102. He studied under Arnold Plant at the LSE, and went on to become part of the Chicago School, where he co-edited the influential Journal of Law and Economics.

He gained acclaim by examining why it is that business firms develop as they do, identifying the transaction costs of entering and operating in the market as a key factor determining their size and nature. In a ground-breaking paper, “The Problem of Social Cost,” he dealt with the problems of externalities, and suggested these might be handled by assigning property rights. This approach has been applied to dealing with problems of over-exploiting common resources, such as in the Icelandic fishing industry, where quotas are assigned and traded so that boat-owners have property rights over the fish.

Coase was determined to examine markets that operated in the real world, rather than study theoretical abstract models. It was this empirical approach that led him gradually to alter his political outlook. He started out as a young man thinking of himself as a socialist, but his studies under Plant at the LSE made him recognize the superiority of market systems versus the often ill-conceived government schemes. He studied public utilities in the UK, and working in wartime with the Forestry Commission and the Central Statistical Office, he observed that, “with the country in mortal danger and despite the leadership of Winston Churchill, government departments often seemed more concerned to defend their own interests than those of the country.”

Despite these observations, he still thought of himself as a socialist, but recognized the contradiction, and gradually ceased to describe himself as such as the real world impinged more and more on the theoretical models. He became active postwar in the Mont Pelerin Society founded by F A Hayek.

The Coase journey is one that has been undertaken by many. Starting with a theoretical approach that processes information about an ideal world, setting our models and describing economic activity in terms of equations, some are led to the recognition that this bears sometimes scant relation to the real world in which people do the best they can without perfect knowledge.

It is a commonplace today that many young people’s world view is formed from ideas, and that as they experience more of what actually happens in the world they observe in practice, their views gradually modify to incorporate the lessons of experience. Many come to recognize that it is what actually happens that matters, and that it is sensible, when advocating what a perfect world should be like, to look at what the world is actually like, and at what motivates people in practice. Ronald Coase did, and taught us some valuable economic lessons in consequence.

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