Academic journal article History of Economics Review

The Coase Theorem Down Under: Revisiting the Economic Record Controversy

Academic journal article History of Economics Review

The Coase Theorem Down Under: Revisiting the Economic Record Controversy

Article excerpt

Abstract: This article examines the debate over the Coase theorem that played out in the Economic Record during the 1970s. This case is uniquely illustrative of the issues with which economists and legal scholars grappled in assessing the Coase theorem's correctness, relevance, and applicability to legal and economic policy questions and provides insight into the larger set of issues that surrounded the diffusion of the Coase theorem in the economics profession and literature including its lack of stabilised meaning.

1 Introduction

It is well established that Ronald Coase's article, 'The Problem of Social Cost' (1960), and, in particular, the negotiation result that came to be known as the 'Coase theorem', (1) played an important role in stimulating a rethinking of the economic theory of externalities. Indeed, already in 1964 Columbia University's Stanislaw Wellisz, no friend of Coase's analysis in spite of his recent association with the University of Chicago, wrote that the Pigovian approach to welfare theory was 'dead' and a new approach, inspired by Coase's work, 'triumphs all along the line' (Wellisz 1964: 345). But this is surely an overstatement of the situation circa 1964. It is true that, in the US, at least, the impact of Coase's result on the discussion of externalities manifested itself relatively quickly--particularly in comers of the profession near to the Universities of Virginia and Chicago--and, in England, among some scholars connected to LSE. (2) It is also the case that the initial reaction to Coase's analysis in the literature of this period was almost wholly uncritical. The viewpoint most commonly expressed during the 1960s was that Coase's negotiation result was correct in theory but, because of the prevalence of transaction costs in the real world, was not applicable to the policy issues under consideration (see, for example, Medema 2013a; 2014a).

If the published literature is any guide, however, Wellisz's assessment finds no support outside of the US and England. The diffusion of Coase's analysis into other nations and national literatures proceeded far more slowly, with virtually no references to Coase's article or the negotiation result appearing in these literatures or authored by scholars outside of the US and England during the 1960s. Given the limited international circulation of the Journal of Law and Economics at the time, of course, the lack of attention paid to Coase's article in these wider spheres should come as no surprise.

The 1970s, though, ushered in a number of significant changes in Coase theorem scholarship. The almost wholly uncritical acceptance of Coase's negotiation result during the 1960s quickly gave way in the 1970s as economists began to debate both its validity and its applicability. And, significantly, it was at this stage that the Coase theorem began to make its appearance in the literatures of nations beyond North America and England. Perhaps not coincidentally, earliest discussions of the theorem in two of these literatures--the Australian and the German--immediately touched off debates over the validity of the theorem and the challenge that it posed to the received approach to externalities.

This paper takes up the debate over the Coase theorem that played out in the Australian journal, the Economic Record, over the course of the 1970s. The Economic Record controversy, on the face of it, turned on the effects of the passage of time on Coase's conclusions regarding the allocative efficiency and invariance associated with alternative legal rules governing externality situations specifically, the incentives related to future decisions and actions, including the possibility of blackmail, created by alternative legal rules. But the import of the Economic Record controversy goes beyond a simple debate over the Coase theorem's long-run validity. It is also indicative of several issues surrounding the larger discussions of the theorem during this period: (i) the felt need to defend the Pigovian approach to externalities against the Coase theorem; (ii) the tendency of Coase-theorem-related discussions to nudge economists off their values-free science perch and into discussions of issues such as equity; (iii) the unsettled nature of economists' understanding of the environment contemplated by the Coase theorem, including the nature and characteristics of a world of zero transaction costs--in short, of the specific content of the theorem's lynchpin underlying assumption; (iv) differing views regarding what the Coase theorem posited in terms of ultimate results; and (v) differing understandings of the theorem's potential relevance for policy. …

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