Cronyism

Ronald Coase, Titan of Economic Thought, Passes Away at 102

Ronald Coase, an economist hailed as one of the top 10 greatest economic thinkers of all time, passed away Monday, September 2, 2013, just shy of 103 years of age. Coase was truly a titan in economics, publishing his first article at only 27, and producing fresh and insightful content well into his 100s. A winner of the Nobel Prize in Economic Sciences, Coase is one of the founders of both the law and economics and new institutional economics disciplines, as well as one of the seminal thinkers in industrial organization economics and the study of social costs. He was an intellectual giant and the members of the American Legislative Exchange Council mourn his passing and celebrate his brilliant life.

Many of us remember him most fondly for his insight into social costs. These helpful videos from Learn Liberty describe Coase’s approach to so-called negative externalities:

Coase’s approach to negative externalities is in stark contrast to economist A.C. Pigou, the intellectual luminary of many progressives, and even some conservatives such as Professor Greg Mankiw. Pigou proposes that negative externalities, explained in the videos and link above, be dealt with by a tax (known as a Pigovian Tax) on the creator of adverse costs that forces that cost-creator to internalize the cost. An example of this would be excise or “sin” taxes on alcohol due to the perceived social harm created by the intoxicated.

Coase has other ideas: he suggests assigning property rights. As Deirdre McCloskey points out, the true lesson of Coase’s so-called Coase Theorem is two-fold: knowing the proper level at which to impose a Pigovian Tax requires unknowable “Hayekian” knowledge of the total extent of harm and good created by a given action on all of society and moreover, the notion of an externality “causer” is an irrational concept.

Take airport noise: it is no more the fault of the airport to create noise (a costly negative externality on homeowners seeking peace and quiet) than it is the fault of the homeowner for moving too close to the airport. After all, absent those homeowners in proximity of the airport, the noise of the airport would in no sense be a problem, only an occurrence. These problems of negative externalities are intractable as anything other than questions about the proper assignment of property rights, not an academic exercise to be promptly solved by social planners through taxes and regulation. Government should handle externalities by carefully considering the proper allocation of property rights, not punitive regulations or Pigovian taxes. Todd Zywicki also has a great article on this topic which reiterates this same point.

This insight has important and far reaching implications to the Pigovian taxes that many advocate for on tobacco products, alcoholic beverages, sweet or fatty foods, and carbon fuels or emissions, among many others.

Coase not only wrote on negative externalities, but also positive externalities or public goods, which are conventionally viewed as a justification of the government provision of a good or service. At the time, one of the most common examples of a public good was a lighthouse: it provides benefits to all ships, irrespective of whether or not the ship’s captain or the company operating the ship help build or maintain the lighthouse (a circumstance known among economists as “non-rivalrous” and “non-excludable”). Those goods and services that are public goods will be underprovided by the market because there is, in theory, no mechanism to get those who desire that good or service to pay for it. Because of this, theory would suggest that government must subsidize or provide public goods, or otherwise they will be underprovided.

Coase showed, both in theory and in the specific experience of the lighthouse, that markets with well assigned property right can provide so-called public-goods at socially optimum levels. This insight has far reaching implications of how society should pay and provide for things like schools, police and military protection, courts, and road—through government or through markets. Coase was a teacher of all of humanity and the world is far worse off for having lost the continued contributions of his mind. ALEC celebrates his significant contributions to the field of economics. Below is an assortment of links chronicling Ronald Coase’s life and work.

Remembering Ronald Coase
University of Chicago Law School Memorial
Pictures of Coase’s Life from the University of Chicago Law School
Walter Olson of the Cato Institute
Richard Epstein
Reason Interview of Ronald Coase
National Review Obituary
Ronald Coase’s Nobel Prize Lecture.
University of Chicago’s Becker Friedman Institute Obituary
Peter Klein
Bloomberg Obituary
Geoffrey Manne Truth on the Market
Wall Street Journal Obituary
Financial Times Obituary

Video and Audio Interviews: Ronald Coase in his Own Words
Ronald Coase, the Accidental Economist
NPR Interview
Coase Centennial Lecture
Coase on Markets, Firms, and Property Rights
EconTalk Podcast with Ronald Coase

 


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth