Of Coase
Source Jurriaan Bendien
Date 03/07/22/06:14

(Julio Huato ask me to forward this to PEN-L List)

Ronald Coase's work deals with issues that bourgeois economics had
previously swept under the rug.  So it effectively reintroduces them into
modern economics.  How effectively is another matter.  These are issues we
usually associate with Marx.  A big theme in Coasian economics is how
societies organize production by 'choosing' (one way or another) the form of
ownership.  IMO, his concept of 'transaction costs' is not unrelated to
Marx's concept of the 'socialization of production.'

Coase adopts the view popularized by Lionel Robbins that economics is a
purely logical structure separable from any concrete substance.  Economics
is simply the 'logic of choice.'  Therefore it has general applicability in
the social sciences -- a la Becker.  People make choices regardless of the
social institutions around them.  Such choices are amenable to the 'economic
approach.'  Coase's novel view is that the institutions themselves are
amenable to the 'logic of choice.'  Somehow, societies wind up "choosing"
their institutions.  And Coase is concerned with "the choice among different
social arrangements for the solution of economic problems."

Before Coase, the presumption was pretty much that under all conditions the
best "social arrangement for the solution of economic problems" was private
ownership and markets.  Although, in the face of externalities, Pigou's
welfare economics resorted to taxes and subsidies, there was no explicit
second-guessing of the optimality of private ownership and markets.
Although it appeared as a validation of the market as the mechanism that
sorts everything out, in fact Coase's work let the demons out.

When first presented, in the 1930s, Coase's views surprised economists used
to dealing with 'consumers,' 'firms,' and 'markets' as abstract entities.
Coase wanted to apply the 'logic of choice' to explain historically concrete
'social arrangements' under capitalism -- firms and markets in particular
These arrangements -- concrete institutions that people created in the
course of their economic activities -- had to be explained, not merely
assumed.  This clearly connects with Marx's theses that economic and
political "institutions" evolve dialectically driven by the growth of the
productive forces.

The literature in the field of welfare economics that followed Coase has
somehow mingled with the strand spanned by Allyn Young's elucidation of
"external economies" in his 1928 presidential address to the British
Association for the Advancement of Science (see Young's "Increasing Returns
and Economic Progress" in Readings in Welfare Economics, ed. K.J. Arrow and
T. Scitovsky, 1969).  The notions of nonrivalry and nonexcludability that
define the existence of public goods (which, by the way, led to Romer's
endogenous growth theories) are now widespread in economic analysis.
(There's a link also with Amartya Sen's (1972) On Economic Inequality;
particularly with his chapter on "Works, Needs, and Inequality.")

Effectively, Coase and Young changed the landscape in economic analysis.
This is something that some Marxists who have not updated their views on
bourgeois economics since Hilferding's reply to Böhm-Bawerk or since
Bukharin's critic fail to see.

In 1867, Marx wrote:

"In spite of the numerous analogies and links connecting them, the division
of labor in the interior of a society, and that in the interior of a
workshop, differ not only in degree, but also in kind.  The analogy appears
most indisputable where there is an invisible bond uniting the various
branches of trade.  [...]  Now it is quite possible to imagine, with Adam
Smith, that the difference between the above social division of labor, and
the division in manufacture, is merely subjective, exists merely for the
observer, who in the case of manufacture can see at a glance all the
numerous operations being performed on one spot, while in the instance given
above, the spreading-out of the work over great areas and the great number
of people employed in each branch of labor obscure the connection.  But what
is it that forms the bond between the independent labors of the
cattle-breeder, the tanner and the shoemaker?  It is the fact that their
respective products are commodities.  What, on the other hand, characterizes
the division of labor in manufacture?  The fact that the specialized worker
produces no commodities.  It is only the common product of all the
specialized workers that becomes a commodity.  The division of labor within
society is mediated through the purchase and sale of the products of
different branches of industry, while the connection between the various
partial operations in a workshop is mediated through the sale of the
labor-power of several workers to one capitalist, who applies it as a
combined labor-power.  The division of labor within manufacture presupposes
a concentration of the means of production in the hands of one capitalist;
the division of labor within society presupposes a dispersal of those means
among many independent producers of commodities.  While, within the
workshop, the iron law of proportionality subjects definite numbers of
workers to definite functions, in the society outside the workshop, the play
of chance and caprice results in a motley pattern of distribution of the
producers and their means of production among the various branches of social
labor.  It is true that the different spheres of production constantly tend
towards equilibrium, for the following reason.  On the one hand, every
producer of a commodity is obliged to produce a use-value, i.e. he must
satisfy a particular social need (though the extent of these needs differs
quantitatively, and there exists an inner bond which attaches the different
levels of need to a system which has grown up spontaneously); on the other
hand, the law of value of commodities ultimately determines how much of its
disposable labor-time society can expend on each kind of commodity.  But
this constant tendency on the part of the various spheres of production
towards equilibrium comes into play only as a reaction against the constant
upsetting of this equilibrium.  The planned and regulated a priori system on
which the division of labor is implemented within the workshop becomes, in
the division of labor within society, an a posteriori necessity imposed by
nature, controlling the unregulated caprice of the producers, and
perceptible in the fluctuations of the barometer of market prices.  Division
of labor within the workshop implies the undisputed authority of the
capitalist over men, who are merely the members of a total mechanism which
belongs to him.  The division of labor within society brings into contact
independent producers of commodities, who acknowledge no authority other
than that of competition, of the coercion exerted by the pressure of their
reciprocal interests, just as in the animal kingdom the 'war of all against
all' more or less preserves the conditions of existence of every species.
The same bourgeois consciousness which celebrates the division of labor in
the workshop, the lifelong annexation of the worker to a partial operation,
and his complete subjection to capital, as an organization of labor that
increases its productive power, denounces with equal vigor every conscious
attempt to control and regulate the process of production socially, as an
inroad upon such sacred things as the rights of property, freedom and the
self-determining 'genius' of the individual capitalist.  It is very
characteristic that the enthusiastic apologists of the factory system have
nothing more damning to urge against a general organization of labor in
society than it would turn the whole of society into a factory" (Capital, I,
p. 477 Penguin).

More simply: "[I]n the society where the capitalist mode of production
prevails, anarchy in the social division of labor and despotism in the
manufacturing division of labor mutually condition each other."

In 1937, Coase cites Arthur Salter:

"The normal economic system works itself.  For its current operation it is
under no central control, it needs no central survey.  Over the whole range
of human activity and human need, supply is adjusted to demand, and
production to consumption, by a process that is automatic, elastic and

Coase continues:

"An economist thinks of the economic system as being co-ordinated by the
price mechanism and society becomes not an organization but an organism.
The economic system 'works itself.'  This does not mean that there is no
planning by individuals.  These exercise foresight and choose between
alternatives.  This is necessarily so if there is to be order in the system.
  But this theory assumes that the direction of resources is dependent
directly on the price mechanism.  Indeed, it is often considered to be an
objection to economic planning that it merely tries to do what is already
done by the price mechanism.  Sir Arthur Salter's description, however,
gives a very incomplete picture of our economic system.  Within a firm, the
description does not fit at all.  [...]  Those who object to economic
planning on the grounds that the problem is solved by price movements can be
answered by pointing out that there is planning within our economic system
which is quite different from the individual planning mentioned above and
which is akin to what is normally called economic planning.  [It
encompasses] a large sphere in our modern economic system.  Of course, this
fact has not been ignored by economists.  Marshall introduces organization
as a fourth factor of production; J.B. Clark gives the co-ordinating
function to the entrepreneur; Knight introduces managers who co-ordinate.
As D.H. Robertson points out, we find 'islands of conscious power in this
ocean of unconscious co-operation like lumps of butter coagulating in a pail
of buttermilk.'  But in view of the fact that it is usually argued that
co-ordination will be done by the price mechanism, why is such organization
necessary?  Why are there these 'islands of conscious power'?  Outside the
firm, price movements direct production, which is co-ordinated through a
series of exchange transactions on the market.  Within a firm these market
transactions are eliminated, and in place of the complicated market
structure with exchange transactions is substituted the
entrepreneur-co-ordinator, who directs production.  It is clear that these
are alternative methods of co-ordinating production.  Yet, having regard to
the fact that, if production is regulated by price movements, production
could be carried out without any organizing at all, well might we ask, Why
is there any organization?" ("The Nature of the Firm").

(Coase doesn't acknowledge Marx's precedence.  Perhaps he really wasn't
aware of it.  But it seems that he got the idea from Marx, although
indirectly.  He writes: "This distinction between the allocation of
resources in a firm and the allocation in the economic system has been very
vividly described by Maurice Dobb when discussing Adam Smith's conception of
the capitalist."  Of course that is because Dobb did read Marx.)

As known, Coase 'solved' the puzzle of the firm appealing to the concept of
'transaction costs,' which he defines as "the cost of using the price
mechanism" or, more specifically, as "search and information costs,
bargaining and decision costs, policing and enforcement costs."  This of
course raises the question of why a society idyllically described as "an
ocean of unconscious co-operation" (!) is so *opaque* that it makes people
incur in 'search and information costs' or so *antagonistic* that there are
'bargaining and decision, policing and enforcement' costs to sustain.  Why
is it that the use of the price mechanism is costly?

The 'Coase theorem,' presented in his essay "The Problem of Social Cost," is
an extrapolation of the same insight.  One agent (firm or consumer) imposes
an externality on another one.  If the 'transaction costs' are zero and the
ownership rights are well defined, then all utility-maximizing solutions
turn out to be equivalent: the harming party bribing the other to accept a
certain amount of harm, or the harmed party bribing the former to reduce the
harm to a certain amount, or -- if both agents merge their interests --
their internal allocative decision.  Zero transaction costs means a costless
negotiation between the agents.  Of course, if there were complete markets
for the ownership rights, then it would be piece of cake.  In that
'frictionless' world, ownership rights can be divided, merged, and exchanged
costlessly and welfare is thus maximized under any configuration.  But that
'frictionless' world is such that capitalism and communism become

The theorem doesn't say which type of ownership rights is best: private or
collective ownership rights?  If the economy evolves in such a way that the
externalities people impose on one another expand, the optimality of the
'price mechanism' is increasingly compromised.  In such case, the
'transaction costs' are constantly going up.  Marx's idea that as the
productive forces under capitalism grow the interdependence in production
('socialization of production' -- and consumption?) tends to increases is
like saying that externalities and transaction costs tend to increase with
technological change.  That makes sense to me.

What kind of institutions would be necessary to cope with expanding
externalities and transaction costs?  Doesn't the coordination by the price
mechanism become increasingly wasteful?  If 'transaction costs' lead people
to build 'islands of conscious power,' then will sufficiently large
'transaction costs' arising from the economic system as a whole lead people
to 'choose' communism?

Consider, for example, the increased destructive power of individuals
nowadays (recipes for explosive devices on the net, etc.) or the
implications of human cloning.  The externalities that "private" pursuits of
this kind may impose on the rest of us are huge.  How is the 'price
mechanism' going to deal with these transaction costs?

Modern economics has returned to dilemmas that until recently had only been
posed by the radical critics of capitalism.  Of course, if one believes that
the 'logic of choice' is useless as an analytical tool (because it is too
abstract or polluted by bourgeois ideology), then there may not be any real
gain here.

The field of environmental economics -- based on the presumption that the
'price mechanism' cannot deal efficiently with externalities in the realm of
natural resources -- has already sprawled.  More recently, there has been an
explosion in the literature analyzing the impact of social externalities on
a market economy.  For example, a host of kosher general equilibrium models
where social inequality leads to inefficient patterns of intertemporal
allocation (for Marxists, the foundation of capitalist production is the
divorce between wealth and labor power).

IMHO, the 'dialectics' between the productive forces and the relations of
production (economic structures) is one of the most obscure aspects of
Marx's historical materialism.  To some Marxists, the belated, half-hearted
admission by modern economics that there is indeed an elephant in the room
means little.  Some seem to think that all that needs to be known about that
is known already.  But, if an exercise analogous to that of Marx on Smith
and Ricardo -- but now on Coase, Young, etc. -- is to shed some light on the
conflict between capitalism and socialism, I will welcome it.

[View the list]

InternetBoard v1.0
Copyright (c) 1998, Joongpil Cho