The Moral Cost of the Coase Theorem by Jonathan Anomaly (Ithaca College)
As a descriptive claim, the Coase Theorem is an interesting curiosity of microeconomic analysis. As a guiding principle for public policy, however, the Coase Theorem is seriously inadequate. This essay argues that Ronald Coase’s innovative approach to the problem of externalities subverts the moral basis of personal and property rights by undermining our core concept of responsibility. It further attempts to show that the Coase Theorem relies on its own concealed (and controversial) normative assumptions about the function of laws that regulate economic transactions. These assumptions, it is argued, are deeply incompatible with a liberal or libertarian conception of property rights.
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This is great! I can almost hear Murray chuckling on reading this. I recall him talking about the problem with the Coase Theorem and its inability to recognize personal responsibility and the moral dimension in relationships. He would have given the author an “A” in understanding the problems inherent in the Chicago School.
Cheers!
Just Ken
Good paper, and shows that author has used time to learn most significant concepts used in the present academic theoretical discussion.
One problem with the Pigouvian approach to welfare economics is that we must always suppose that well defined social welfare function exist. Suppose that there are three agents in the economy A,B and C. Their utilities depends on use/consumption of activity/product x and each has a defined utility index u(x),v(x) and z(x). Suppose now that there exist a social welfare function of form U(x)=F(u(x),v(x),z(x)). Maximization of social utility means that U(x) is maximized and minimization of social costs means that -U(x) is maximized.
Previous example showed how many postulates must be used before we can analyze problems of social costs or social benefits by using welfare economics alone. It’s no wonder that concentrating on just property rights we can evade many spurious theories. How judge could decide when to award rights to other agent just based on theory of maximization of social utility? These kind of comparisons are not valid as shown by Lord Robbins in his book “Nature and significange of economic science”.
Douglass North, the founder of the New Institutionist school, has commented on the fact that Coase assumed nearly zero transaction costs. North’s work focuses mainly on transaction costs and shows that Coase’s theorem might be a good analytic tool but is completely divorced from reality.
Of course, I agree with Adi that Pigou’s remedy is worth than the disease.
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