Monday, May 08, 2017

Ronald Coase

The Nature of the Firm (1937), argued that the reason for the existence of firms (companies, partnerships, etc.) is the existence of transaction costs. Rational individuals trade through bilateral contracts on open markets until the costs of transactions mean that using corporations to produce things is more cost-effective.

The Problem of Social Cost (1960), argued that if we lived in a world without transaction costs, people would bargain with one another to create the same allocation of resources, regardless of the way a court might rule in property disputes.
Coase used the example of the nuisance case Sturges v. Bridgman, where a noisy sweet maker and a quiet doctor were neighbors and went to court to see who should have to move. Coase said that regardless of whether the judge ruled that the sweet maker had to stop using his machinery, or that the doctor had to put up with it, they could strike a mutually beneficial bargain about who moves house that reaches the same outcome of resource distribution. Only the existence of transaction costs may prevent this.
So the law ought to pre-empt what would happen, and be guided by the most efficient solution. The idea is that law and regulation are not as important or effective at helping people as lawyers and government planners believe.
Coase and others like him wanted a change of approach, to put the burden of proof for positive effects on a government that was intervening in the market, by analyzing the costs of action. Economists require deregulation and free markets. They prefer the effectiveness of the allocation of resources in a market economy without any laws or regulations that distort free trade. Law is less important in this world perspective. On the other hand, the sociology of law remains highly
relevant to social institutions.

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