When Did Ronald Coase Become the Ayatollah of Economic Theory?

The old Chicago School of economics that was associated with Milton Friedman, George Stigler, Gary Becker, Arnold Harberger, Sam Peltzman, and others was famous within the economics profession for its intensely combative, argumentative, and sometimes raucous seminars.  Every speaker who gave a presentation, even Nobel prize winners, was challenged, questioned, and called out if he said something that someone thought to be incorrect.

The professed purpose of having such a rough-and-tumble seminar format was the relentless search for economic truth.  As Professor Harberger explained in an interview in the PBS series, The Commanding Heights, if someone stood in front of his students at a Chicago seminar and said something that was incorrect, Harberger believed it was his “duty” to “call him on it, right then and there.”  Otherwise, a room full of students would be misled and miseducated.  But everyone was friendly as can be in the lunch room, said Harberger.

The Nobel laureate Ronald Coase, who my colleague Peter Klein has described as one of the most influential economists of all time, and who serves as a model for much of Peter’s own research, was treated especially roughly at times by his Chicago colleagues (perhaps because he held a law degree and not an economics degree).  Yours truly recalls reading an article by Coase describing the grilling he got before his famous “Coase Theorem” paper was published in a Chicago journal (the Journal of Law and Economics). In addition to the usual torture chamber/economics department seminar experience, Coase was invited to Friedman’s home where Friedman and several[amazon asin=1610162560&template=*lrc ad (right)] other prominent Chicago economists gave him an additional grilling.

The famous University of Chicago economics department has housed about a dozen Nobel prize winners, none of whom – including Friedman – was ever exempted from intellectual challenges and questioning.  If they were to present and defend their version of free-market economics, this rigorous seminar format was useful in forcing everyone to sharpen their thinking.  Indeed, the entire economics profession is based on some (watered down!) version of this skeptical debate seminar format, which is on display at most professional meetings were research papers are presented and critiqued.

All of this is why it has been surprising to yours truly to hear numerous critiques over the past several years of Murray Rothbard’s criticisms of some of Ronald Coase’s work.  First, a George Mason University economist asked me why certain Austrian economists associated with the Mises Instiute, such as Walter Block and the late Murray Rothbard, “have criticized Coase.”  I was taken aback by the suggestion that Coase – or anyone – should be beyond criticism.  Moreover, even if the critic is wrong and Coase is right, well, so what?  That’s what intellectual discourse is supposed to be about.  Ideas are challenged; sometimes the challenges are successful and sometimes they are not.

More recently, I was invited to lunch in Baltimore with several members of a prominent libertarian-oriented D.C. think tank (not the Cato Institute) who asked me the same question – Why do the Rothbardian Austrian economists criticize Coase?  When did Ronald Coase become the Cult Leader of Free-Market economists who is to be shielded from all criticism?[amazon asin=1400083311&template=*lrc ad (right)]

Then there was a Reason TV interview with Gene Epstein of Barron’s entitled “Murray Rothbard’s Mixed Legacy.”  When interviewer Nick Gillespie asked Epstein about Rothbard’s economic legacy, Epstein was full of lavish praise, but then accused Rothbard of “unnecessarily impugning Coase,” of getting the Coase Theorem all wrong, and further accused Rothbard of being “unfair” to un-named others whom he criticized in his intellectual writings.  Gillespie piped in to remind his audience that Coase was “a Nobel prize-winning economist.”  Well, so is Paul Krugman, who is routinely criticized by Reason writers.

I suppose an even greater intellectual “sin” in the eyes of the Reason/Cato/KochFoundation/Beltwaytarian crowd would be the critiques that Walter Block and I have made of another Nobel laureate – James M. Buchanan – for his Quixotic enterprise of writing dozens of books and articles about a “voluntary theory of the state” under the rubric of “constitutional economics.”  We claim no originality in our critiques in this regard, since this hoary idea has been criticized by scholars for literally hundreds of years.

The Coase Theorem is very simple, although Coase originally explained it in a very long-winded and lengthy article.  It has to do with a negative externality problem, such as pollution or, in Coase’s example, sparks from a train setting fire to a farmer’s orchard.  Government regulation or legislation is not necessarily appropriate, argued Coase, as long as transactions costs are low enough that the farmer and the railroad company can bargain their way to a mutually beneficial solution.  If the law gives the railroad the right to pass by the farmer’s property, sparks and all, then it is conceivable that the farmer will offer to pay the railroad something less than the prospective damage to his crops to slow down and avoid sparks.  If, alternatively, the law gives the farmer the property right to be free from spark damage caused by trains, then it is conceivable that the railroad can offer to [amazon asin=0761526463&template=*lrc ad (right)]pay the farmer an amount that will be agreeable to both sides.

That way, said Coase, the economically-efficient outcome can be achieved by voluntary bargaining.  Only the “distribution” of income is different depending on how the law defines property rights.

In his essay,“Law, Property Rights and Air Pollution,” Rothbard made several critiques of the Coase Theorem based on elementary Austrian economic principles.  Coase ignored the unmeasurable or psychic costs, which like all costs, are subjective.  Since it is impossible for any outside observer such as an economist to add up all of these subjective costs, the Coasian/Chicago concept of “social transaction costs” is nonsensical, said Rothbard.  Moreover, like other Chicago Schoolers, Coase implicitly asserted that economic efficiency is somehow the preeminent ethical norm that for some unexplained reasons should trump all other ethical norms, such as fairness or justice.  There are other norms that one can talk about when discussing what kind of legal system should be used to deal with these kinds of conflicts, said Rothbard.

These criticisms of Coase are totally reasonable from the perspective of Austrian economics. There is no evidence that Rothbard “got the Coase Theorem wrong,” as Gene Epstein charged.  It is Epstein who apparently got Rothbard’s critique of Coase wrong.

It is hard to believe that the Reason/Cato/Koch Foundation/Beltwaytarian (RCKFB) crowd believes that it is fair to question any scholar – especially Rothbard and the Rothbardians – except for Ronald Coase.  What, then,[amazon asin=0307338428&template=*lrc ad (right)] should we make of all of this feigned shock and disappointment, and talk of “mixed legacies,” by the RCKFB crowd of free-market economists who would commit the “traitorous” act of criticizing a small part of the writing of another free-market economist?  My guess is that it is just another lame and laughingly-desperate attempt to smear and denigrate those of us who are proud to wear the label of “Rothbardians.”  Many of those who are not familiar with the academic way of life may fall for it, but no reasonably educated person should.

Gillespie may have let the cat out of the bag in his interview with Epstein.  After Epstein announced that “in the political arena” things that Murray Rothbard did were “perverse,” Gillespie immediately added that Rothbard “worked with

Ron Paul in the ‘80s.”  Get it:  1) Rothbard supposedly made crazy, uninformed, and “unfair” criticisms of “respectable” establishment/Republican Party/Beltway think tank-connected free-market economists; 2) he engaged in political “perversion”; and 3) he supported  Ron Paul.