Re: Of Coase
- Original Message - From: Max B. Sawicky [EMAIL PROTECTED] nice. mbs === For an hilarious send up of a Coase-Nozick libertarian economy see Neal Stephenson's Snow Crash. Privatization and protection rackets run amok... Ian
Re: Of Coase
for a pro-libertarian Science Fiction book, see Heinlein's THE MOON IS A HARSH MISTRESS. In the end, the whole libertarian edifice turns out to be based on a secret dictatorship, though Heinlein didn't see this as a bad thing. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine -Original Message- From: Eubulides [mailto:[EMAIL PROTECTED] Sent: Tuesday, July 22, 2003 10:07 AM To: [EMAIL PROTECTED] Subject: Re: [PEN-L] Of Coase - Original Message - From: Max B. Sawicky [EMAIL PROTECTED] nice. mbs === For an hilarious send up of a Coase-Nozick libertarian economy see Neal Stephenson's Snow Crash. Privatization and protection rackets run amok... Ian
Re: Of Coase
Another libertarian utopia by a Scot Trot, The Stone Canal by Ken MacLeod. His communist fantasy is The Cassini Division. I find this less interesting. His revolutionary novel, The Star Fraction, is quite interesting. Then there is The Sky Road, an uneven but inreresting exploration of a non-u-(or dis-)topian postrevolutionary society. --- Devine, James [EMAIL PROTECTED] wrote: for a pro-libertarian Science Fiction book, see Heinlein's THE MOON IS A HARSH MISTRESS. In the end, the whole libertarian edifice turns out to be based on a secret dictatorship, though Heinlein didn't see this as a bad thing. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine -Original Message- From: Eubulides [mailto:[EMAIL PROTECTED] Sent: Tuesday, July 22, 2003 10:07 AM To: [EMAIL PROTECTED] Subject: Re: [PEN-L] Of Coase - Original Message - From: Max B. Sawicky [EMAIL PROTECTED] nice. mbs === For an hilarious send up of a Coase-Nozick libertarian economy see Neal Stephenson's Snow Crash. Privatization and protection rackets run amok... Ian __ Do you Yahoo!? Yahoo! SiteBuilder - Free, easy-to-use web site design software http://sitebuilder.yahoo.com
Of Coase
(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
Re: Of Coase
nice. mbs -Original Message- From: PEN-L list [mailto:[EMAIL PROTECTED] Behalf Of Jurriaan Bendien Sent: Monday, July 21, 2003 5:51 PM To: [EMAIL PROTECTED] Subject: Of Coase (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
Innovation (was Of Coase)
Carrol Cox wrote: Why this lust for innovation? Most innovations are either (1) destructive or (2) desperate attempts to compensate for the destruction brought by prior innovations. within the engineering world that i am familiar with, the lust for innovation is one of several things: 1.) the owners/execs of a enterprise want to take their capital and find new areas to invest in (because they are not making so much anymore in the areas they are already invested in). 2.) the owner/exec sees another company making inroads in a new area. this other company is either a direct competitor via its existing products or will be by its new products. therefore the owners/exec feel the need to fight strategically via innovation. 3.) the owner/exec wants to make a show of innovation to the stockholders as a way of gaining confidence in management decisions or control. why, we just started a line of yada yada yada which has the potential to earn us yada yada yada. so they throw some money at, or raise some money for, a new line. the fourth item is so infrequent in the business world today, its almost a sin to include in the same list with the other three. 4.) someone has a good idea and works their ass off to develop it. it perhaps has never been done before and even the company owners/execs are reluctant to back it. there was an engineer at Honda who had an idea for vastly increasing overall fuel economy using dual sets of valves. as i recall, he basically worked it out w/o much management help. in other words, most of the need for innovation in business is really a disguise for figuring out how to keep alive any particular company and its current (possible sickly) business plan and much much much less to do with creatively solving the needs of homo sapiens. regarding Carrol's insistence that capitalism MUST innovate is an unacceptable answer: rather, it DOES innovate when the owner(s)/execs need to achieve something in the business planning end of things which has nothing to do w/ classical innovation a la freedom and human creativity. and it DOES NOT innovate when said owners have only for the moment to sit quietly atop their profit mechanisms. for example, there are many old-style companies where the owners are content with the profits they make even if their engineers would love nothing better BUT TO INNOVATE in related areas. i can't count the number of engineers i know who went to work for companies excited about their innovative environment, only to realize later that this environment was just a front for the owners/execs to do what they had to do to stay in business. the number of innovative projects which are dropped, thereby wasting said working engineers time (and aspirations), has got to be staggering. as is the amount of needless competition between engineers in competing companies (secrecy, duplication, patents shmatents, etc): there is also destructive competition within innovation. as just ONE example, an engineer friend of mine who worked for many years at Xerox tells me that the split between development of laser printers and (the later innovation of) ink-jet printers was destructive from the point of view of what COULD be achieved within a different social/production structure. (i know, blueprints of the future). in terms of destructiveness: innovations in biology (DDT), physics-engineering-materials (weapons), etc. and we now have an explicit new ideology for innovation which is to first innovate for destructiveness (military programs) followed by using the cool stuff for human needs. they call 'em spinoffs. under the category perhaps of wastefulness but masquerading as innovation: the product/creation of new NEEDS simply for the sake of creating MARKETS for COMMODITIES. i am not arguing __against__, for example, cell phones (from what i understand they are hugely popular in Third World countries), but am arguing that the owners/exec of the electronics firms in question had business needs to solve and couldn't care less about Third World needs -- i feel stupid even having to state that! -- or innovation. if someone came along at the same time and developed, say, widget XXX with the same projected market growth, they might have chosen widget XXX instead. or if someone came along and said, oh lets do this marketing drive for existing product WWW instead of putting money into new products (err, innovations) and we'll add this much market share, you could kiss cell phones goodbye. and we all know the stories of owners/execs at Company ZZ-Bot who nixed widget YYY at one time, only for it to be acceptable to Company ZZ-Top later on and it made them millions. does Intel care about innovation??? http://www.intel.com/labs/features/cn02031.htm Integration -- the Key Innovation In creating the wireless-Internet-on-a-chip technology, Intel engineers overcame complexities associated with separate optimization paths for communications and
Re: Innovation (was Of Coase)
Another material basis might be, where the employment contracts of higher executives are based, in part or as a whole, on performance, and this performance may be evaluated according to the ability of the executive to solve new problems which arise in the conduct of business. Therefore, the executive might be placed in a situation of, innovate or lose your pay and later your job. What was it that Marx said about piece wages again ? J.
Re: Innovation (was Of Coase)
Les is correct about innovation. Most studies indicate that innovation is much more rapid in depression conditions. During booms, firms have less pressure to innovate. I don't have time to elaborate, since I am under deadline to finish the index for my new book. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Innovation (was Of Coase)
i forgot one category of innovation lust: 3a.) the sales/marketing departments of a company decide it's current product line is old in the tooth and sales people are requesting something they can go out and sell more enthusiastically. Some years ago someone in the company said why don't we make XXX. So sales/marketing goes to owners/execs and ask for a new line of XXZ (a little different from original idea). management plays what if, how much games. and then calls in engineering and tells them to suspend work on that problem we were all worried about last year and get cracking on new product XXZ. you have 9 months to produce a prototype that we can demonstrate at the Hanover Fair, and you must be in production 3 months after sales does its annual trade fair in Phoenix. the engineer who originally suggested XXX specified it would take 2 years to complete development, now they are given one year to get to market. les schaffer
Re: Of Coase
Max Sawicky writes: Coase is unradical in the sense of recognizing hierarchy but not power. There is an efficiency rationale for the size or scope of a firm -- economizing on a bundle of transactions -- but this does not answer the question, who gets to be 'coordinator'? Coase takes expertise out of it, debunking Frank Knight's dichotomy between the employer, who is inclined to take risk and knows howw to handle it, and workers who are the opposite. Coase says the firm can always hire an advisor to foresee the uncertain. All that's left is the coordinating function. (Financial risk is a different matter not treated in this lit.) Power explains who is assigned (or self-assigned) the task of coordinator. Power derives from ownership of capital. Capital permits the owner, perhaps thru an agent, to engage workers without capital into implicit contracts reflecting the bargaining power of the owner. Workers might do better with individual, specific contracts (lacking a union mechanism) than with the employee relationship, but lacking capital obliges them to work for someone else. The firm needs a coordinator, but Coase fails to explain why (s)he isn't hired by the workers. A couple of thoughts/questions: 1. You state that the employee must work for someone else because of the lack of capital, but Coase suggests (demonstrates?) that the firm (employer-employee relationship) exists because of transaction costs. Therefore, even if every worker starts with his own capital and is not compelled to be an employee, firms would still be formed because they would be more profitable (including for the salaried worker). 2. You state that the firm needs a coordinator, but Coase fails to explain why the coordinator is not hired by the workers. Isn't that because the firm, by definition, always precedes the workers? For instance, every corporation is created by a person that incorporates the corporation, initially finances the corporation and establish its purposes. Once the purpose of the firm is established, then that person determines what labor is required to achieve the purpose, taking into consideration the firm's resources and other factors. Comparatively, is it possible to imagine certain workers combining themselves without any specific purpose, and then hiring a coordinator to provide them with purpose? How would that work? I think this points to the necessary role of the entrepeneur in the equation. David Shemano
Re: Of Coase
I discussed the concept of the virtual company with a Marxist friend once, and he had an idea. He said, you know how Marx sketches the capitalist production process as the circuit: M-C(MP+LP)-P-C'-M' [_] Well, he said, the virtual company is the same formula, but then it goes like this, without the feedback (reinvestment) loop: M-C(MP+LP)-P-C'-M', M-C(MP+LP)-P-C'-M', M-C(MP+LP)-P-C'-M', M-C(MP+LP)-P-C'-M' ... The idea being, that producers would assemble for a specific project, and then move on. Yes, I said, but there are production processes which need to be carried on in a stable, continuous way for many production cycles. That doesn't matter, he said. Then I pointed out that in the glory days of Dutch mercantile capitalism, the Dutch had discovered an even more simple circuit, namely M-M'. He didn't have an immediate reply to that one. Regards J.
Re: Of Coase
A couple of thoughts/questions: 1. You state that the employee must work for someone else because of the lack of capital, but Coase suggests (demonstrates?) that the firm (employer-employee relationship) exists because of transaction costs. Therefore, even if every worker starts with his own capital and is not compelled to be an employee, firms would still be formed because they would be more profitable (including for the salaried worker). right. Coase's logic of the firm holds no matter who has the capital. The firm in Coase is a bundle of transactions covered by an implicit contract wherein the workers concede control over their work time to the coordinator. 2. You state that the firm needs a coordinator, but Coase fails to explain why the coordinator is not hired by the workers. Isn't that because the firm, by definition, always precedes the workers? For instance, every corporation is created by a person that incorporates the corporation, initially finances the corporation and establish its purposes. Financing is a separate matter. There is no financing in Coase, nor any capital. The basis for hierarchy is its favorable cost, relative to market transactions. Once the purpose of the firm is established, then that person determines what labor is required to achieve the purpose, taking into consideration the firm's resources and other factors. Comparatively, is it possible to imagine certain workers combining themselves without any specific purpose, and then hiring a coordinator to provide them with purpose? How would that work? I think this points to the necessary role of the entrepeneur in the equation. David Shemano But such a purpose could be conceived by anyone. Workers could hire somebody to conceive a firm. In Coase, the conceiving (which he describes as dealing with uncertainty) can be marketized, contrary to Knight, who (according to Coase) sees it as basic to the firm and to the formation of classes. Of course, workers don't hire their boss because they lack sufficient capital. With only a modest amount of capital, sinking it into one business would be too risky for some. With a lot of capital, the worker is not a worker any more. In practice, before the advent of huge corporations, ownership of capital confers the power to assign 'coordination' responsibilities. Ergo, the ability to economize on transactions costs provides a rationale for the firm, it leaves to the imagination the nature of the employee-employer relationship. This may be old hat to a lot of people, but I'd like to note that in Coase the entrepreneur's function is really mechanical. There is no innovation, creativity, or special faculty being exercised. (All of that you can buy.) The coordinator is just another worker. Maybe there's something radical there. mbs
Re: Of Coase
I think this points to the necessary role of the entrepeneur in the equation. David Shemano That is what Hayekians say about why you need capitalism, not just markets, but I do not understand why entrepreneurship requires ownership. Hell, most capitalist entrepreneurship is corporate, and the owners are not likely to be the entrepreneurs. jks __ Do you Yahoo!? SBC Yahoo! DSL - Now only $29.95 per month! http://sbc.yahoo.com
Re: Of Coase
Max writes: This may be old hat to a lot of people, but I'd like to note that in Coase the entrepreneur's function is really mechanical. There is no innovation, creativity, or special faculty being exercised. (All of that you can buy.) The coordinator is just another worker. Maybe there's something radical there. but Coase would be subject to the Austrian school and the Marxian school's critique that the neoclassical economics that Coase pursues is fundamentally static and thus ignores the role of entrepreneurs and innovation. I don't believe in the innovation argument, BTW, because there's nothing that says that innovation is automatically good (since, e.g., the new Ponzi schemes that are thought up almost every day are examples of innovation) and there's nothing that says that governments, grass-roots democratic groups, etc., can't innovate. Jim
Re: Of Coase
What would the critics say to Coase's dictum that you can buy innovation or rent entrepreneurs? I suppose innovation is hard to price, hence the market for it is deficient. For inability to sell innovation, entrepreneurs (and venture capital) are born. This would be accentuated insofar as there is innovation without social purpose that drains effort and capital from useful innovation. Either way, the power is still with capital. mbs but Coase would be subject to the Austrian school and the Marxian school's critique that the neoclassical economics that Coase pursues is fundamentally static and thus ignores the role of entrepreneurs and innovation. I don't believe in the innovation argument, BTW, because there's nothing that says that innovation is automatically good (since, e.g., the new Ponzi schemes that are thought up almost every day are examples of innovation) and there's nothing that says that governments, grass-roots democratic groups, etc., can't innovate. Jim
Re: Of Coase
- Original Message - From: Carrol Cox [EMAIL PROTECTED] Why this lust for innovation? Most innovations are either (1) destructive or (2) desperate attempts to compensate for the destruction brought by prior innovations. Carrol P.S. I won't accept as an answer that capitalism must innovate. That is one of the most destructive aspects of capitalism. Innovation which is forced on one by invisible social relations existing behind your back are a manifestation of unfreedom, not of freedom or human creativity. Let's go back to Eden and reinvent consciousness so the so-called malignant invisible hand won't take over. Sheesh, Ian
Re: Of Coase
Max: What would the critics say to Coase's dictum that you can buy innovation or rent entrepreneurs? I suppose innovation is hard to price, hence the market for it is deficient. For inability to sell innovation, entrepreneurs (and venture capital) are born. This would be accentuated insofar as there is innovation without social purpose that drains effort and capital from useful innovation. Either way, the power is still with capital. I guess you could say that each case of entrepreneurship is such a unique item that the market for such would be so thin that there would be no price. Looked at another way, trying to sell an innovation would either be totally academic (since innovations _qua_ innovations have to be put into practice) or would undermine its uniqueness and therefore the entrepreneur's profits. Now, someone could buy a partially-revealed innovation as a pig in a poke, but then that person would be the entrepreneur (risk-taker), not just a purchaser of an innovation. As I said before, innovation isn't necessarily good. The nature of innovation under capitalism is socially irresponsible, either ignoring external costs and benefits or (more actively) seeking to internalize external benefits (e.g., public spaces) for private profit or to externalize internal costs (e.g., pollution). It's not all producing new goodies, while much of what is called innovation is government-subsidized -- or is simply imitation driven by competition. Innovation would be very different with a socialist-democratic system. Jim Devine [EMAIL PROTECTED] http://bellarmine.lmu.edu/~jdevine
Re: Of Coase
Schumpter is relevant here because he insists (following Marx) that innovation makes the existing price system irrelevant -- to the extent that it is really innovative. On Fri, Jul 18, 2003 at 02:12:55PM -0400, Max B. Sawicky wrote: What would the critics say to Coase's dictum that you can buy innovation or rent entrepreneurs? I suppose innovation is hard to price, hence the market for it is deficient. For inability to sell innovation, entrepreneurs (and venture capital) are born. This would be accentuated insofar as there is innovation without social purpose that drains effort and capital from useful innovation. Either way, the power is still with capital. mbs but Coase would be subject to the Austrian school and the Marxian school's critique that the neoclassical economics that Coase pursues is fundamentally static and thus ignores the role of entrepreneurs and innovation. I don't believe in the innovation argument, BTW, because there's nothing that says that innovation is automatically good (since, e.g., the new Ponzi schemes that are thought up almost every day are examples of innovation) and there's nothing that says that governments, grass-roots democratic groups, etc., can't innovate. Jim -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail [EMAIL PROTECTED]
Of Coase
Rereading The Nature of the Firm . . . Coase is unradical in the sense of recognizing hierarchy but not power. There is an efficiency rationale for the size or scope of a firm -- economizing on a bundle of transactions -- but this does not answer the question, who gets to be 'coordinator'? Coase takes expertise out of it, debunking Frank Knight's dichotomy between the employer, who is inclined to take risk and knows howw to handle it, and workers who are the opposite. Coase says the firm can always hire an advisor to foresee the uncertain. All that's left is the coordinating function. (Financial risk is a different matter not treated in this lit.) Power explains who is assigned (or self-assigned) the task of coordinator. Power derives from ownership of capital. Capital permits the owner, perhaps thru an agent, to engage workers without capital into implicit contracts reflecting the bargaining power of the owner. Workers might do better with individual, specific contracts (lacking a union mechanism) than with the employee relationship, but lacking capital obliges them to work for someone else. The firm needs a coordinator, but Coase fails to explain why (s)he isn't hired by the workers. mbs
Re: Of Coase
- Original Message - From: Max B. Sawicky [EMAIL PROTECTED] Rereading The Nature of the Firm . . . = As someone quoted in Frederic Lee's book on post-Keynesian price theory put it: The product of the itching imaginations of uninformed and inexperienced arm-chair theorizers.
Re: Of Coase/Hayek Not?
The firm needs a coordinator, but Coase fails to explain why (s)he isn't hired by the workers. mbs Same problem with Hayek's argument for markets. This leads you on the path of market socialism, my own view. I used to drive libertarians crazy with this one. Probably still could if the occasion presented itself. jks __ Do you Yahoo!? SBC Yahoo! DSL - Now only $29.95 per month! http://sbc.yahoo.com
Re: Re: Re: Re: Coase, the myth; was, RE: Re: on howeconomistspubl
It is so typical of economists to analyse problems without recourse to actual empirical evidence. Many firms use market mechanisms for internal allocation - I'm sure Coase could have found some. Anyone who has worked in such firms can attest that the problem is not transactions costs. It's capturing profits for the owners of the firm, maintaining control over employees, etc. I never get it when people talk about how important this work on transaction costs is, how brilliant and insightful. I find, like Rod that it's mostly meaningless handwaving. It reminds me of Marx's comment on John Stuart Mill - in the barren plain of political economy even a minor plateau looks like a mountain. Ellen [EMAIL PROTECTED] writes: For those who are not in the know, the Coase article referred ask a simple question. If the market is the most efficient mechanism for allocation, why do firms not use the market to allocate resources internally? The answer is that using the market costs. These costs are called transactions costs. Allocation will then be done by the method that is cheapest. I.e., by the market or by command. Transactions cost then determine what is allocated by the market and what is internal to the firm. The problem is that the reasoning is circular. It is a tautology. The problem has been given a name, but no demonstration, either logical or empirical, has been given. It sounds nice, "Oh yeah, transactions costs, that makes sense." But it means nothing. [EMAIL PROTECTED] wrote: In a message dated 00-02-01 00:04:31 EST, you write: sn't that what you academics are for? Hell I work two jobs, do I have to solve the theory of the firm problem too...don't tell me to unionize the folks where I work; already tried that and the owner of my company went to Congress, shelled out 863K$ in one day and got the law changed to kill the drive [which was succeeding quite well, thank you]. I'm a practicing lawyer, Ian, I do this stuff in my spare time, too. Realize I talk a bit like professor and used to be one, but that was years ago. --jks -- Rod Hay [EMAIL PROTECTED] The History of Economic Thought Archive http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/index.html Batoche Books http://home.golden.net/~rodhay 52 Eby Street South Kitchener, Ontario N2G 3L1 Canada
Coase
Ellen Frank wrote: I never get it when people talk about how important this work on transaction costs is, how brilliant and insightful. And as Coase himself noted, his paper was "much cited and little used," at least in 1970 when he said that. It also begins from premises so ridiculous that only an economist could hold them. He quoted Sir Arthur Salter as saying "The normal economic system works itself." Why the insight that it doesn't "work itself" should be seen as profound is further proof of the banality of so much economics. Doug
Re: Re: Re: Re: Coase, the myth; was, RE: Re: on howeconomistspublish
At 01:14 AM 2/1/00 -0500, you wrote: For those who are not in the know, the Coase article referred ask a simple question. If the market is the most efficient mechanism for allocation, why do firms not use the market to allocate resources internally? The answer is that using the market costs. These costs are called transactions costs. Allocation will then be done by the method that is cheapest. I.e., by the market or by command. Transactions cost then determine what is allocated by the market and what is internal to the firm. The problem is that the reasoning is circular. It is a tautology. The problem has been given a name, but no demonstration, either logical or empirical, has been given. It sounds nice, "Oh yeah, transactions costs, that makes sense." But it means nothing. I don't think this is a sufficient criticism. There's nothing wrong with tautology if one can use it to help with the understanding of something, going beyond tautology. The physics equation Force = mass x acceleration is tautological in that each two of the terms define the third. Somehow physicists use it to get a lot of mileage. The neoclassical concept of "economic rationality" is tautologically true, but it seems productive for them. In my interpretation, Marx's "law of value" (a.k.a., "labor theory of value") is tautologically true. But it helps us understand capitalism better. Even Coasian transactions costs can help us understand the world better, as shown by some of the later work of Douglass North. The key thing is to avoid excessive reliance on tautology. That, however, is what the Chicago-school does best, usually hiding it in a welter of math and/or econometrics. The biggest logical circle is that of the MF. His "positive economics" says that it doesn't matter how unrealistic one's assumptions are as long as they predict well. So he assumes perfect competition in markets (unless the gov't meddles). But then his empirical work is poor, not really testing the assumption against alternative ones. He then uses the "success" of his econometrics to validate his unrealistic assumption and argues that the government shouldn't "meddle." BTW, the transactions costs emphasized by Coase and the Coasoids are nothing new. Classical economists were aware of them, as were Robinson and Chamberlain when they developed theories of monopolistic competition. As Doug points out, they are only important if one's theoretical base-line is the silly Walrasian general equilibrium model (or hallucinogenic visions of the Invisible Hand). Maybe the role of transactions costs have moved some economists away from such silliness. But usually it doesn't do so unless other "imperfections" (i.e., deviations of the real world from the ideal forms) are brought in. Douglass North produces more interesting and revealing results because he assumes "bounded rationality" and the like along with transactions costs. He also is an economic historian, so that the concern with the actual history of the US economy slowly pushed him away from his Chicago-school economics. Of course, weakening two or more of the hegemonic assumptions and inductively bringing in reference to the real world gets one beyond the journal article form. Jim Devine [EMAIL PROTECTED] http://liberalarts.lmu.edu/~jdevine
Re: Coase, the myth
Coase always struck me as a mediocre figure. His so-called theorem -- which he himself denied to be his intention -- was useful because it denied paying the need for regulation, which was his basic theme. His theory of the firm was interesting in so far as it pointed out a problem with the market. However he refused to extend his logic to argue for the transcendence of the market into socialism, by arguing that the status quo was the optimum. This made him useful because the existence of the corporate sector as we know it was ruled out by the simplistic, textbook version of economic theory. -- Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901
Re: Coase, the myth; was, RE: Re: on howeconomistspubl
-Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of Ellen Frank It is so typical of economists to analyse problems without recourse to actual empirical evidence. Many firms use market mechanisms for internal allocation - I'm sure Coase could have found some. Anyone who has worked in such firms can attest that the problem is not transactions costs. It's capturing profits for the owners of the firm, maintaining control over employees, etc. But maintaining control over employees is a transaction cost under the Coasian theory and its modern elaborations. It's usually called "monitoring costs" or preventing "opportunism" (i.e. workers doing what makes their lives bearable rather than what they are told to do). Oliver Williamson is the strongest elaboration on this theme in regard to workers and employers, but the key issue of employee control or other power relations pervades transaction cost analysis. One reason I like transaction cost analysis is that it gives a very specific set of analytic tools to discuss power within the framework of economic analysis. Conservatives use it for their purposes, but it is quite possible (and has been used) to argue for quite different arguments of why workers inability to absorb risk and employers greater ability to engage in opportunism gives them disproportionate power to enforce the bargains they wish. Transaction cost analysis demystifies "freely made contracts" by making clear why some actors have no real contractual choice in the matter once certain sunk investments are made -- firm-specific skills in the case of workers as one example. The competing uses of market versus authority relationships and the role of transaction costs (or various names given to it and its relations) has been a fruitful area of analysis ranging from left-leaning "New Institutionalists" in economic sociology to law and economics types in legal research. It has always struck me as a much more convincing analysis than neoclassical simulation of markets in all sorts of situations where nothing that resembles a market is operating. -- Nathan Newman
Re: Re: Re: Coase, the myth
Peter Dorman wrote: I've gotten flamed in the past for defending the value of Coase's article on external costs, but I still believe it, for two reasons. First, it clarified the definition of an externality: a missing market. Peter, I considere you to be a very careful thinker. Why should can do externality be a missing market? Doesn't the suggest that we need to think about the world in terms of markets or that markets are some help a natural phenomena? To me it seems simpler to think in a pre-Coasean fashion that markets create enormous damage -- period. (Why does it matter, other than for the distribution of income, whether the mugger has the right to mug or the muggee has the right to not be mugged, if they can bargain over whether there will be a mugging? If there is only one night and one mugging opportunity, Coase is right.) Peter, why is he right? Let's turn to another example rather than mugging -- environmental racism. Surely it makes a difference whether I have to pay the polluter not to pollute or whether he has to pay me to accept the pollution. Or am I misunderstanding you? -- Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901
Coase, the myth
Peter, I considere you to be a very careful thinker. Why should can do externality be a missing market? Doesn't the suggest that we need to think about the world in terms of markets or that markets are some help a natural phenomena? To me it seems simpler to think in a pre-Coasean fashion that markets create enormous damage -- period. From the Financial Times, April 5, 1993: THE small and misunderstood sale of pollution rights by the US Environmental Protection Agency and the Chicago Board of Trade last week was the latest step in the evolution of a market. Pricing pollution is no different from pricing bonds, according to Nobel laureate Professor Ronald Coase of the University of Chicago. His work on determining economic costs of social problems forms the basis of the EPA's market-based pollution reduction programme. 'People basically think they need something physical to trade. The point is you never, ever trade in physicals. You always only trade the rights to something. Once that's understood, it becomes much easier to see trading in intangibles,' Prof Coase says. He says the great advantage of a market-based system for allocating pollution is that it achieves a set level of pollution reduction at the lowest possible cost. Eventually, information from that market can become a valuable public-policy tool. 'Over the long run, it allows us to determine what the costs of pollution are, and will allow the EPA to balance better the costs and benefits of pollution control.' Louis Proyect (The Marxism mailing list: http://www.marxmail.org)
Re: Re: Coase, the myth; was, RE: Re: on howeconomistspubl
I am not denying that transactions are costly. Or there are other costs associated with different institutions of allocation, including the market. What I am objecting to is logic of this sort. Transactions costs imply firms Therefore firms imply transactions costs. How do we measure transactions cost? Why do we assume that what exists is optimal? And any number of other questions that would have to be answered before this becomes even a useful hypothesis. By the way Carrol, I don't think that this is the same problem that you indicate in psychology. Classification is a useful prescientific exercise. But substitution a name for an explanation is of no intellectual significance. It remains a mystery. Rod Nathan Newman wrote: But maintaining control over employees is a transaction cost under the Coasian theory and its modern elaborations. It's usually called "monitoring costs" or preventing "opportunism" (i.e. workers doing what makes their lives bearable rather than what they are told to do). Oliver Williamson is the strongest elaboration on this theme in regard to workers and employers, but the key issue of employee control or other power relations pervades transaction cost analysis. One reason I like transaction cost analysis is that it gives a very specific set of analytic tools to discuss power within the framework of economic analysis. Conservatives use it for their purposes, but it is quite possible (and has been used) to argue for quite different arguments of why workers inability to absorb risk and employers greater ability to engage in opportunism gives them disproportionate power to enforce the bargains they wish. Transaction cost analysis demystifies "freely made contracts" by making clear why some actors have no real contractual choice in the matter once certain sunk investments are made -- firm-specific skills in the case of workers as one example. The competing uses of market versus authority relationships and the role of transaction costs (or various names given to it and its relations) has been a fruitful area of analysis ranging from left-leaning "New Institutionalists" in economic sociology to law and economics types in legal research. It has always struck me as a much more convincing analysis than neoclassical simulation of markets in all sorts of situations where nothing that resembles a market is operating. -- Nathan Newman -- Rod Hay [EMAIL PROTECTED] The History of Economic Thought Archive http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/index.html Batoche Books http://home.golden.net/~rodhay 52 Eby Street South Kitchener, Ontario N2G 3L1 Canada
Re: Re: Coase, the myth; was, RE: Re: on howeconomistspubl
[EMAIL PROTECTED] writes: But maintaining control over employees is a transaction cost under the Coasian theory and its modern elaborations. It's usually called "monitoring costs" or preventing "opportunism" (i.e. workers doing what makes their lives bearable rather than what they are told to do). Oliver Williamson is the strongest elaboration on this theme in regard to workers and employers, but the key issue of employee control or other power relations pervades transaction cost analysis. It is true that "maintaining control" can be framed (sort of) within the language of transactions cost, but it's not quite the same thing as talking about power and control. There is a difference between saying "workers tend to shirk, causing hourly output to fall, therefore employers need to incur costs to monitor and measure performance" and saying "workers tend not to share information about productivity and quality with owners who will use it against them by laying people off, therefore employers have to..." or saying "workers will work harder if owners empower them, but will also have higher expectations about job security, profit-sharing, etc, therefore employers have to" These are not all the same thing. Only the first statement is a statement about transaction costs. One reason I like transaction cost analysis is that it gives a very specific set of analytic tools to discuss power within the framework of economic analysis. Conservatives use it for their purposes, but it is quite possible (and has been used) to argue for quite different arguments of why workers inability to absorb risk and employers greater ability to engage in opportunism gives them disproportionate power to enforce the bargains they wish. Transaction cost analysis demystifies "freely made contracts" by making clear why some actors have no real contractual choice in the matter once certain sunk investments are made -- firm-specific skills in the case of workers as one example. The idea that some actors have no real choice is self-evident to most people. The transaction cost framework allows non-NC economists to talk a lingo accepted by NC- economists and make points accepted by non-NC economists. That's all. It's only enlightening in the context of NC economics. In the context of intellectual history, it's a watered-down, half-baked language.
Re: Re: Re: Re: Coase, the myth
Michael Perelman wrote: Peter Dorman wrote: I've gotten flamed in the past for defending the value of Coase's article on external costs, but I still believe it, for two reasons. First, it clarified the definition of an externality: a missing market. Peter, I considere you to be a very careful thinker. Why should can do externality be a missing market? Doesn't the suggest that we need to think about the world in terms of markets or that markets are some help a natural phenomena? To me it seems simpler to think in a pre-Coasean fashion that markets create enormous damage -- period. In a sense, this is exactly my point. An externality is a market phenomenon, and it applies within that context. It doesn't make sense to speak of an externality in a non-market situation. But pollution, for instance, can certainly occur and be a problem with or without markets. (Example: I would not use the concept of externalities to explain the failure of the USSR to cope with its environmental problems.) And once we are within a market context, it is important to distinguish between problems due to market organization (like externalities) and problems due to other factors (like interaction effects/nonconvexities, as I've argued elsewhere). Finally, I still think it is useful to be very precise about exactly how and why markets have the effects they have. I don't think we are going to leap into a marketless world any time soon, and so we have to figure out how to cope with the downsides of markets. (Why does it matter, other than for the distribution of income, whether the mugger has the right to mug or the muggee has the right to not be mugged, if they can bargain over whether there will be a mugging? If there is only one night and one mugging opportunity, Coase is right.) Peter, why is he right? Let's turn to another example rather than mugging -- environmental racism. Surely it makes a difference whether I have to pay the polluter not to pollute or whether he has to pay me to accept the pollution. Or am I misunderstanding you? Whenever people disagree with me it's because they don't understand... All I'm saying is that more is at stake besides income distribution. Coase said: whether you pay the polluter or the polluter pays you, either way there will be the same amount of pollution, and it will be efficient. Then Posner said: since the law should be neutral with respect to income distribution, the allocation of rights should be determined by the degree to which they create efficient markets through which erstwhile externalities can be negotiated. (The goal is to achieve efficient pollution along with efficient everything else -- "wealth creation".) I'm saying: wrong -- the negotiated agreement based on the polluter having the right to pollute will be different from the agreement based on my right not be polluted. They can't both be efficient, can they? Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901 Peter
Re: Re: Re: Coase, the myth
You are, of course, referring to a different article by Coase, than I referred to. The Coase theorem of 1960 which you refer to here is a different fish altogether. Here Coase assumes that transactions costs are zero. But he also assumes that all income effects are zero. It is this article that lead to such wonders as the government selling transferable permits for firms to pollute. "Your plant polluting too much, no worry, buy a permit from a plant that is polluting too little." By extension, we have neo-classical economists arguing that the inefficiencies that are evident even to them could be cleared up if only we were able to supply those "missing markets" because we all know that the market is the most efficient allocation institution that god ever gave to man. Rod Peter Dorman wrote: I've gotten flamed in the past for defending the value of Coase's article on external costs, but I still believe it, for two reasons. First, it clarified the definition of an externality: a missing market. This seems obvious, but my experience is that most economists still don't get it. They think externalities are "natural", having to do with unintended byproducts, waste streams, intangible spillovers, etc. All of these things can exist, but, without the necessary social arrangement -- a system of markets minus one (or more) -- no externality. (This has impeded the analysis of "natural" variations in cost and benefit relationships by confusing them with externalities.) And there are many externalities that exist for strictly social and political reasons. Coase, with his residue of economic naturalism (we would have created a market were it not for this messy feature, transaction costs) still obscures this somewhat, but the point is there for anyone who reads carefully. Second, his claim that the allocation of property rights does not alter the bargaining outcome in a transaction costless world is false, but we learned a lot by proving it false. (Reminds me of Lakatos' "Logic of Proofs and Refutations".) What I for one learned was the relevance of repeated game analysis as a critique of one-shot supply-and-demand logic; this is the ultimate refutation of Coase and, for that matter, almost the entire corpus of neoclassical microtheory. (Why does it matter, other than for the distribution of income, whether the mugger has the right to mug or the muggee has the right to not be mugged, if they can bargain over whether there will be a mugging? If there is only one night and one mugging opportunity, Coase is right. If there are many nights, he is wrong.) Peter Michael Perelman wrote: Coase always struck me as a mediocre figure. His so-called theorem -- which he himself denied to be his intention -- was useful because it denied paying the need for regulation, which was his basic theme. His theory of the firm was interesting in so far as it pointed out a problem with the market. However he refused to extend his logic to argue for the transcendence of the market into socialism, by arguing that the status quo was the optimum. This made him useful because the existence of the corporate sector as we know it was ruled out by the simplistic, textbook version of economic theory. -- Michael Perelman Economics Department California State University [EMAIL PROTECTED] Chico, CA 95929 530-898-5321 fax 530-898-5901 -- Rod Hay [EMAIL PROTECTED] The History of Economic Thought Archive http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/index.html Batoche Books http://home.golden.net/~rodhay 52 Eby Street South Kitchener, Ontario N2G 3L1 Canada
Re: Re: Re: Coase, the myth; was,RE: Re: on howeconomistspubl
Rod Hay wrote: Classification is a useful prescientific exercise. Yes. It is also a highly useful heuristic gimmick (which is perhaps part of what you mean) and a good (essential) aid to memory, as well as to convenient storage of information (in a computer or a card file, what have you). I think the problems arise when this usefulness of classification as a *pre-scientific* exercise gets confused with science. (By science I mean any systematic and progressive study; by "progressive" I mean holds on to and builds on past results.) There is a famous case of this in literary criticism: Northrop Frye's *Anatomy of Criticism*. He seriously thought, it seems, that he had turned literary criticism into a science simply by inventing a magnificent multi-layered classification system. What he had produced (I think) is an extraordinarily beautiful pile of of useful and useless gadgets. Carrol
Coase, the myth; was, RE: Re: on how economists publish
Justin, You need to go and work in a large corporation for about 10 years; Coase' work is just so much phlogiston theory. Ian -Original Message- From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]On Behalf Of [EMAIL PROTECTED] Sent: Monday, January 31, 2000 6:58 PM To: [EMAIL PROTECTED] Subject: [PEN-L:15868] Re: on how economists publish OK, but consider that among the most important works of economics of the last century are Mises' article from 1920 on socialist calculation, Lange's "reply" and Hayek's response, all journal articles, and Coase's paper on the theory of the firm, perhaps THE most important work in 20th century economics. Wasn't Arrow and Debreu originally a journal article, too? Sure, there's also the Theory of the Leisure Calss and the General Theory, etc. But the point si taht you don't have to writea book to think a different thought. You just need vision and economy of style,w hich of coursea re hard commodities to come by. --jks In a message dated 00-01-31 19:35:24 EST, you write: The contemporary economics profession emphasizes the journal article as the vehicle for developing new knowledge claims in economics. In important and poorly understood respects, this practice has changed the ways in which knowledge claims are developed. More importantly, it has also affected the type of knowledge claims that _can_ be developed. This is because the space limitations imposed by the journal format encourage the adoption of formalized thinking that economizes on space by making use of conventional assumptions and frameworks. In doing so, it places a huge handicap on those trying to develop new visions that embody both new sets of assumptions and new sets of economic relations. This is because such projects require enormously more space in which to justify assumptions, and to develop the particulars governing the framework of analysis. Contrastingly, scholarship that proceeds within the convention is free of these burdens, since the underlying assumptions and framework are taken for granted.
Re: Coase, the myth; was, RE: Re: on how economistspublish
Unlike the rest of economics? I mean, you aren't go to see general equilibrium being attained or labor markets clearing. You won't see profit maximization or factors of production being priced at their marginal contribution. That's not news in these circles. You wil also not see labor being exchanged for its value equivalent or commodities exchanging for equal labor values generally. You will, however, encounter real transactions costs and see executives struggling, often in a half-assed and incompetent way to define the firm-market boundry in ways that minimize these. Coase is probably more like real world business than msot economics. Btw the phlogiston theory was a very good theory until Laviosier and Priestly showed it was wrong by explaining combustion with something better. What have you got that is better? = Isn't that what you academics are for? Hell I work two jobs, do I have to solve the theory of the firm problem too...don't tell me to unionize the folks where I work; already tried that and the owner of my company went to Congress, shelled out 863K$ in one day and got the law changed to kill the drive [which was succeeding quite well, thank you]. Ian
Re: Re: Coase, the myth; was, RE: Re: on howeconomistspublish
In a message dated 00-02-01 00:04:31 EST, you write: sn't that what you academics are for? Hell I work two jobs, do I have to solve the theory of the firm problem too...don't tell me to unionize the folks where I work; already tried that and the owner of my company went to Congress, shelled out 863K$ in one day and got the law changed to kill the drive [which was succeeding quite well, thank you]. I'm a practicing lawyer, Ian, I do this stuff in my spare time, too. Realize I talk a bit like professor and used to be one, but that was years ago. --jks
Re: Re: Re: Coase, the myth; was, RE: Re: on howeconomistspublish
For those who are not in the know, the Coase article referred ask a simple question. If the market is the most efficient mechanism for allocation, why do firms not use the market to allocate resources internally? The answer is that using the market costs. These costs are called transactions costs. Allocation will then be done by the method that is cheapest. I.e., by the market or by command. Transactions cost then determine what is allocated by the market and what is internal to the firm. The problem is that the reasoning is circular. It is a tautology. The problem has been given a name, but no demonstration, either logical or empirical, has been given. It sounds nice, "Oh yeah, transactions costs, that makes sense." But it means nothing. [EMAIL PROTECTED] wrote: In a message dated 00-02-01 00:04:31 EST, you write: sn't that what you academics are for? Hell I work two jobs, do I have to solve the theory of the firm problem too...don't tell me to unionize the folks where I work; already tried that and the owner of my company went to Congress, shelled out 863K$ in one day and got the law changed to kill the drive [which was succeeding quite well, thank you]. I'm a practicing lawyer, Ian, I do this stuff in my spare time, too. Realize I talk a bit like professor and used to be one, but that was years ago. --jks -- Rod Hay [EMAIL PROTECTED] The History of Economic Thought Archive http://socserv2.mcmaster.ca/~econ/ugcm/3ll3/index.html Batoche Books http://home.golden.net/~rodhay 52 Eby Street South Kitchener, Ontario N2G 3L1 Canada
Re: Re: Re: Re: Coase, the myth; was,RE: Re: on howeconomistspublish
Rod Hay wrote: The problem is that the reasoning is circular. It is a tautology. The problem has been given a name, but no demonstration, either logical or empirical, has been given. It sounds nice, "Oh yeah, transactions costs, that makes sense." But it means nothing. The classic description of this process (substituting a name for an explanation) is Marx's comment on Providence in *Poverty of Philosophy*. Over on LBO I've been trying to convince people that psychology (of any kind, but particularly psychoanalysis) operates by the same schtick: It proliferates a number of names (take a noun that describes one event well enough, give it a capital letter, and you are off) and pretends it has explained human thought and feeling. Carrol
[PEN-L:5925] Re: Coase
Paul writes: There have been a couple of posts today denigrating the so-called Coase theorum. Let me say first that I have always believed the theorum to be a crock and seen a number of references to that effect in the litterature -- though precious little argument or model criticism to that effect. Since I am teaching environmental economics next year and the standard texts all trumpet Coase's theorum as the latest and best in absolute truth (Migod, the standard micro texts are a packet of sh--), how would the list like to help me out and provide a symphony of critiques of the theorum? If you do not wish to expose yourself to the ethernet, my private (parts) address is [EMAIL PROTECTED] -- otherwise, expose yourself to the world on Pen-l! Let's make clear what we're criticizing. The Coase Theorem on social cost, as such, was formulated by Stigler based on the arguments in Coase's famous article. It says that, *in a world of zero transaction costs*, optimizing behavior will lead to perfect internalization of external benefits or harms, so that "private costs will equal social costs." This will happen whatever the initial assignment of property rights. The theorem can be criticized in two ways: first, on the basis of its reasoning from the premise of zero transaction costs, or second, by arguing that the zero-transaction-cost condition never holds and is in fact not even meaningfully approximated. But concerning this second route, Coase recognizes that transaction costs matter; his argument was against the inconsistency of Pigovian analysis of externalities against an implicit backdrop of zero transaction costs. He was saying, in effect, that *if* one accepts a frictionless view of the world, then the Pigovian taxes-and-subsidies apparatus is at best redundant. However. With respect to the second approach, the question becomes *how* transaction costs matter, and here I believe that Chicago- oriented types from Frank Knight through Stigler, Alchian, and Williamson consistently get it wrong. All have suggested in one form or another that "second-best" efficient outcomes will emerge in a world with significant transaction costs, as long as big, blundering government doesn't interfere with private orderings. This claim depends on the assumption, stated explicitly by Alchian and Williamson, that the overriding motive of those who enjoy decision rights [read: capitalists] is to "economize on transaction costs." It is easily shown that this does not follow from the assumption of optimizing behavior under transaction costs; one can't rule out that purely redistributional motives won't be at least as important. Peter Dorman's excellent post from yesterday gives an illustration of the problems which arise here. To assert the legitimacy of the "second-best" claim is to assume that markets for control rights (in a capitalist economy, markets for firm ownership) work well, which is never established, and frankly, is not credible. But back to the first line of attack on the Coase Theorem. It asserts that externalities will be fully internalized in a world of zero transaction costs, no matter what the initial assignment of property rights. In saying this, it asserts a particular solution to the problem of bilateral monopoly which naturally arises when the actions of some person A creates a public good or bad for some person or persons B. In effect, the Coase theorem asserts that the solution of the bilateral monopoly problem under zero transaction costs always ends up on the contract curve, and does so independent of the initial distribution of property rights. Says who? The rest of the economic world writing at the time of Coase, then Stigler, thought that the bargaining problem was a pretty tough nut to crack, with or without transaction costs. One could respond by imposing one of the cooperative-game solutions such as the Nash bargaining solution, but doing so would beg the central question, becasue such solutions are not derived explicitly from optimizing behavior under given transaction costs and property conditions. It gets worse. The modern strategic approach to the analysis of bargaining, based on the work of Ariel Rubinstein, requires the existence of transaction costs; "zero-transaction costs" results in this framework are actually results *in the limit* as transaction costs approach zero; and by the way, in that world *the initial distribution of property rights matters* because it determines the exit options of the bargainers. For example, if the polluter owns the property right, then the polluting activity takes place if bargaining breaks down. If the pollutee owns the property right, no pollution results if bargaining breaks down. This asymmetry will affect bargaining outcomes if one or the other "exit option" is valued highly enough. (See my 1991 RRPE
[PEN-L:5926] Re: Coase
It is true that Coase was not really advocating "the Coase Theorem" in "On Social Cost"; rather, he was making the case for thinking about externalities as missing markets in the context of high transaction costs. But the criticisms of the vulgar Theorem are also criticisms of the more sophisticated argument: even if transaction costs are nonexistent, the mere presence of markets is not sufficient to cope with environmental problems -- at least not in all cases. At the very least, it is necessary that there be the "right" assignment of property rights, and even then it may be that markets can't do the job. (This is the point of the environmental nonconvexities literature -- see Baumol Oates my as yet unpublished article.) Peter Dorman
[PEN-L:5927] Re: Coase
Another generally ignored aspect of the "Coase Theorem" is that it requires constant income elasticities of demand for environmental goods. That this is not empirically valid just reinforces the difficulties raised by Peter and Gil arising from unequal property rights and multi-period bargaining. Barkley Rosser
[PEN-L:5940] Coase Theorem
Pen-lers might be interested in knowing that there's a file on the subject of Coase and "his" Theorem in the pen-l archives which is gettable with a gopher or Netscape. (I don't have the address here.) Michael Perelman -- is it possible to archive the recent very enlightening messages on Coase and "his" Theorem in a similar way? in pen-l solidarity, Jim Devine [EMAIL PROTECTED] Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA 310/338-2948 (daytime, during workweek); FAX: 310/338-1950 "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- K. Marx, paraphrasing Dante A.
[PEN-L:5948] Coase Theorems (was: bigtime radio fun)
Another problem with using Coase to justify deregulation is the Coase theorem assumes transactions cost are zero Bill Humphries * [EMAIL PROTECTED] * On the road until 7/21
[PEN-L:5918] Coase
There have been a couple of posts today denigrating the so-called Coase theorum. Let me say first that I have always believed the theorum to be a crock and seen a number of references to that effect in the litterature -- though precious little argument or model criticism to that effect. Since I am teaching environmental economics next year and the standard texts all trumpet Coase's theorum as the latest and best in absolute truth (Migod, the standard micro texts are a packet of sh--), how would the list like to help me out and provide a symphony of critiques of the theorum? If you do not wish to expose yourself to the ethernet, my private (parts) address is [EMAIL PROTECTED] -- otherwise, expose yourself to the world on Pen-l! Just Coasing along, Paul Phillips
Re: Broken vows Coase
On to the second part of Doug's question. He asks: Relatedly, are there any Marxian theories of the firm? Several of them, or rather, several takes on the central idea that firms serve as the primary arena of capitalist class conflict and exploitation. Strategic aspects underlying Marx's themes on this score were taken up by Stephen Marglin, "What Do Bosses Do?", RRPE Summer 1974, Harry Braverman, _Labor and Monopoly Capital_ 1974, Part I, Bowles and Gintis, _Schooling in Capitalist America_, Chapter 3, Herb Gintis, "The Nature of Labor Exchange and the Theory of Capitalist Production" RRPE Summer 1976, and PEN's own Reich and Devine, "The Microeconomics of Conflict and Hierarchy in Capitalist Production" RRPE Winter 1981--to name but a few from that era. I won't even try to trace how the literature has developed from there. These Marxian approaches to the theory of the firm have in common that they emphasize the "power" half of the power vs. efficiency dichotomy arising from the existence of transaction costs (mentioned in my previous post). In the extreme, the employment relationship is treated as a zero-sum game, i.e., purely a question of distribution. I criticized the microeconomic logic of these early approaches in my dissertation (available at yard sales everywhere) and developed what I argued was an internally consistent conflict model of the firm based on conditions of unequal information between workers and managers. [This approach is summarized --and criticized--in Chapter 2 of Albert and Hahnel's _Quiet Revolution in Welfare Economics_.]
Broken vows Coase
Well the vote was 10-0 for me to unzip my lips. I'll celebrate the occasion by asking a question instead of issuing a pronunciamento. Actually I think I asked this question some time ago, but don't recall getting much in the way of answers. Do PEN-Lers have, or know of, any critiques of Coase's theorem of why firms exist? Relatedly, are there any Marxian theories of the firm? Doug Doug Henwood [[EMAIL PROTECTED]] Left Business Observer 212-874-4020 (voice) 212-874-3137 (fax)
Re: Broken vows Coase
Doug he asked: Do PEN-Lers have, or know of, any critiques of Coase's theorem of why firms exist? Relatedly, are there any Marxian theories of the firm? One relevant item that comes to mind is an interesting piece by Axel Leijonhufvud, which commends both Smith and Marx for having a lot more to say about the existence of firms than do modern neoclassicals. I can't remember the title offhand, but it's in a volume edited by Langlois, entitled "Economics as a Process." === Allin Cottrell Department of Economics Wake Forest University Winston-Salem, NC 27109 (910) 759-5762 [EMAIL PROTECTED] ===
Re: Broken vows Coase
RE: Doug's query on why firms exist Marglin's "What Do Bosses Do" RRPE Summer 1974 may be relevant. Brian Eggleston
Re: Broken vows Coase
Doug's question was a central part of my book: Information, Social Relations, and the Economics of High Technology. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 916-898-5321 916-898-6141 messages E-Mail [EMAIL PROTECTED]
Re: Broken vows Coase
Posted on 12 Sep 1994 at 11:15:13 by Uriacc Mailer (002033) Broken vows Coase Date: Mon, 12 Sep 1994 08:14:01 -0700 Reply-To: [EMAIL PROTECTED] From: Doug Henwood [EMAIL PROTECTED] Well the vote was 10-0 for me to unzip my lips. I'll celebrate the occasion by asking a question instead of issuing a pronunciamento. Actually I think I asked this question some time ago, but don't recall getting much in the way of answers. Do PEN-Lers have, or know of, any critiques of Coase's theorem of why firms exist? Relatedly, are there any Marxian theories of the firm? Well, in Coasian terms I don't know of any. I.e. is there a Marxian theory of why a rational capitalist would not have either one big firm or a completely disintegrated one. But if we leave rational decision making aside, I think Marx's work on the concentration and centralization of capital (it's been a while since I read Das Kap, but I think old greybeard had a fair amount of stuff directly related to why new firms form too) is germaine here. Also Marglin's What do bosses do? seems apropos. Doug Doug Henwood [[EMAIL PROTECTED]] Left Business Observer 212-874-4020 (voice) 212-874-3137 (fax) Marsh Feldman Community Planning Phone: 401/792-2248 204 Rodman Hall FAX: 401/792-4395 University of Rhode Island Internet: [EMAIL PROTECTED] Kingston, RI 02881-0815 "Marginality confers legitimacy on one's contrariness."
