NOBEL WINNER COASE BLENDS THEORIES OF ECONOMICS, LAW

Author: By David Warsh, Globe Staff

Date: Wednesday, October 16, 1991
Page: 63
Section: BUSINESS

Ronald Coase, 80, a retired professor of law and economics at the University of Chicago, was cited for two classic papers that transformed the way economists and lawyers viewed the nature of corporations and the possibilities for government regulation.

Both were based on insights garnered on his early trip. Both aimed to persuade other economists to spend less time with their axioms and more time in the real world.

An acute form of microeconomics, the papers couldn't have been farther apart in their methodological stance from the dominant macroeconomics of John Maynard Keynes, which were coming into vogue in the 1930s.

"Friction," summed up Richard Epstein, a University of Chicago professor. ''Friction, friction, friction, friction."

Coase, who was vacationing in Tunisia, could not immediately be reached for comment.

In "The Nature of the Firm," published in 1937, Coase broached for the first time the idea of transaction costs. It was as if he had identified a new kind of "elementary particle," the Nobel citation said yesterday.

Quite aside from production costs, Coase argued, firms faced a wide variety of significant costs of preparing and monitoring various agreements -- with their suppliers, their employees, their customers.

The ubiquitous existence of property rights associated with these costs is what explained the reason why firms arose in the first place: Corporations existed to economize the costs of buying and selling nearly everything under the sun, he wrote. He thereby cleared the way for economists to participate in the modern study of industrial organization, joining business historians such as Alfred Chandler who had pioneered the field.

In "The Problem of Social Cost," published in 1960, Coase pushed his analysis much farther. The reciprocal relations of property rights were the key to understanding problems as diverse as pollution control, government allocation of scarce resources and corporate governance, he said. Moreover, if the particular structure of law had profound implications for economic decision makers, then the designers of the law had an obligation to take economic incentives into consideration in framing their measures, he wrote, giving a powerful impetus to the law and the economics movement.

Issues like the compensation of accident victims -- which had previously been seen as a matter of yes and no, black and white, right and wrong before Coase wrote -- almost overnight became a matter of costs and benefits.

(A third significant paper, on marginal cost pricing, much valued by Coase
himself, wasn't mentioned yesterday by the Swedes.)

Coase's path to the prize was not altogether smooth. He began as an accountant, and published first on the economics of raising pigs. During World War II, he worked his way up to become the War Cabinet's chief statistician, then completed his doctorate at the University of London.

He emigrated to the United States at the end of the 1940s and had trouble catching on, finally landing a job at the out-of-the-way University of Buffalo. He moved in 1958 to the University of Virginia, where a heterodox interest in markets was taking root, effected a famous conversion of the leaders in his field, then switched to the University of Chicago in 1964.

Though Coase's work has a strong empirical flavor, "he never looked at a number in his life," said Epstein. As long-time editor of the Journal of Law and Economics, Coase encouraged others to pursue quantitative studies. But his own work retained a stong literary flavor.

"Anybody can understand it with a 10th-grade education," said Epstein. This clarity cost him with his colleagues. Even at Chicago, "they viewed him as a dinosaur," recalled a colleague.

Despite being recruited with a rush, he wound up on the faculty of the law school, and so became the first law professor ever honored by a Nobel. Although "The Problem of Social Cost" is by far the most-cited paper in economics, according to several surveys, Coase has honorary degrees from only Yale and the University of Cologne.

If his fascination with the real world slowed Coase down on the Nobel track, it made it easier for him in the world of practical affairs. Law schools began adopting his views, and starting in the early 1960s, a steady stream of judges and lawyers flocked to summer camps in which law and economics were taught with excitement bordering on missionary zeal.

Prominent law professors like Guido Calabresi and Richard Posner in effect turned him on his head, using economics to write law and understand it. And prominent practioners like Posner and Frank Easterbrook moved onto the federal bench, enshrining Coaseian doctrines in their opinions.

As the Swedish Academy's citation put it, "it took a long time for his approach to gain a foothold. When the breakthrough finally occurred during the 1970s and 1980s, it was all the more emphatic.

Indeed! The radical extension of microeconomic analysis effected by Coase has unloosed a tidal wave of change, in everything from corporate control to tradeable pollution rights. Takeover law was profoundly influenced by his work during the 1980s. The new atmospheric pollution regulations to be issued later this month by the Environmental Protection Agency draw heavily on his inspiration. And schemes to privatize socialist economies have Coaseian insights at their root.

Though a formidable debater, Coase has a reputation among his colleagues as being somewhat ill at ease in the world of common sense.

"What was difficult for him personally -- a lease, say, or a trip to the store -- was precisely what he explained so deeply," said Epstein.

In Chicago, where he spends the winters, Coase lives far from the university at the fashionable Lake Point Tower. Summers he spends in the south of France. Yesterday, possibly forewarned, he was on a the beach of a German resort in Tunisia -- and quite unreachable.

The award brings to 13 the number of prizes that have gone to economists for work done at Chicago, at least in part. Others include Paul Samuelson, Kenneth Arrow, Friederich von Hayek, Tjalling Koopmans, Milton Friedman, Herbert Simon, Theodore Schultz, Lawence Klein, George Stigler, James Buchanan, Trygve Haavelmo, and Merton Miller and Harry Markowitz. A total of 23 awards have been made since the economics prize was established by the Swedish Central Bank in 1968.

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