Academic journal article History of Economics Review

An Interpretation of Ronald Coase's Analytical Approach (1)

Academic journal article History of Economics Review

An Interpretation of Ronald Coase's Analytical Approach (1)

Article excerpt

'Rather, he [Coase] offers a new approach, a new angle, from which economic phenomena can be seen in a different light'. (Cheung 1992, p. 55)

Abstract: Coase has made important contributions to economics and has been recognised as one of the most important economists of the twentieth century, but the recognition has mainly focused on the subject matter and much less attention has been given to his analytical approach. In this paper, an attempt is made to identify a distinctive, simple, and straightforward analytical approach that is implicit in his major works. Specifically, it is argued that in both of his famous 1937 and 1960 papers, as well as in some of his other important works, a reasoning procedure of setting a benchmark first and then using the benchmark as the reference point for analysis can be identified. The uniqueness of Coase's benchmark approach is specified and the implications are derived.

1 Introduction

Coase (1988, p. 1) observed wryly once that in general his view has not commanded assent among economists, nor has his argument been understood. Nevertheless, in view of the frequent citations and high acclaim his work has enjoyed, Coase is undoubtedly one of the most important economists of the twentieth century. (2) Specifically, his 1937 article provides a theoretical explanation for the existence and the nature of the firm, and thus initiated subsequent research in the theory of the firm, and the theory of industrial organisation more generally. (3) Alternatively, his 1960 article on the problem of social cost is generally viewed as an important landmark in the development of the modern literature on law and economics.

While Coase's work concerning the subject matter has been extensively discussed in the literature, the analytical approach he employs has received much less attention. (4) This led Maki (1993, p. 5; 1998a, p. 249) to remark that 'much less work has been done on the methodological and conceptual foundations of the theories and approaches of, say, Ronald Coase', and that '[h]is methodological thought is beginning to be explored ... but much more needs to be done'. For economists, how one of the masters of twentieth-century economics actually accomplished his tasks remains a fascinating as well as a puzzling question. In responding to Maki's call, and in trying to answer the question just stated, this paper will concentrate on the methodology, or the analytical approach, employed by Coase. In particular, I will argue that a distinctive, simple and straightforward analytical approach can in fact be identified in his major works, one that can be termed a benchmark-and-comparison approach, or a benchmark approach for short. More specifically, I will show that, in both of his 1937 and 1960 papers, Coase adopts a reasoning procedure of setting a benchmark first and then using the benchmark as the reference point for his analysis. As such, I am making a limited claim that it is helpful from the perspective of the benchmark approach to understand Coase's methodology in his two most important papers, but at the same time it should be noted that I am not suggesting that the benchmark approach can be identified in all, or even most, of his works. But while the larger issue of whether Coase employs the benchmark approach in all or most of his works remains to be examined, I will demonstrate that the distinctive analytical approach can be seen in at least some of his other major works. Nevertheless, it is not clear from his own writings that Coase is aware of his particular way of reasoning.

As the concept of transaction costs can be said to crystallise Coase's contributions to the subject matter of economics, similarly I argue that the benchmark approach provides a unifying theme for Coase's analytical approach, at least for his most important works. Furthermore, the intuitively straightforward benchmark approach may be so obvious that, 'like the postman in G. …

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