When the Coase Theorem met Chinese reality
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E-mail China.org.cn, October 29, 2013
Editor's note: On September 2, 2013 Nobel Laureate Ronald Coase, died at the age of 102. Coase had a profound influence on China's reform and opening-up. In 2008 he hosted an international seminar on the 30th Anniversary of China's economic reforms. His students include the well known Chinese economists Professor Zhou Qiren and Professor Steven N. S. Cheung.
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Chen Ping [File photo] |
Professor Coase once said the biggest regret of his life was that he had never been to China. But although his Coase Theorem is well-known in China, he regarded it as the most misunderstood part of his academic achievements. His legacy, and its influence on China's reforms, deserves closer examination.
The Observer (Guancha.cn) asked Professor Chen Ping, a senior research fellow at Fudan University's Center for New Political Economy, for his evaluation of Coase's contribution to economics.
The Observer: Professor Coase received the 1991 Nobel Prize for Economics and was renowned as one of the founders of institutional economics. What was his most important contribution to economic theory?
Chen Ping: I think Professor Coase made three main contributions:
First, he raised questions about the institutional preconditions of neoclassical economics. But raising a good question is not the same as finding a satisfactory answer. In the end what Professor Coase proved was that optimization theory cannot cope with institutional diversity.
Second, Coase proposed that property rights can be transacted. For example, government auctions of broadcasting frequencies are an alternative to administrative allocation.
Third, Coase expanded the application of neoclassical economics to its limits by extending price theory to the investigation of institutions. But in doing so he exposed the limitations of neoclassical economics.
The most famous criticism of the Coase Theorem came from Paul Samuelson who said there are infinite possible outcomes of a transaction not just one. But a single possible outcome was the basis of Coase's famous article "The Problem of Social Cost" (1960). In his book "The Firm, the Market, and the Law" (1988), Coase said that those who refuse to transact property rights cannot survive. But his words are contradicted by historical facts. From the Great Wall of China to modern Palestine, the origins of borders lie in things that cannot be transacted. If the Coase Theorem were true, there would be neither wars nor clashes in the world. We would not need states or organizations. In fact, his ideal world boils down to the great utopia of anarchism.
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