By Shubhangi Roy
The oldest living Nobel Laureate passed away recently. Born in 1910, Ronald Coase became a man of great importance in the field of law and economics. Many English Dailies covered the death of the economic stalwart who propounded the Coase Theorem which is one of the fundamentals on which the interdisciplinary field of law and eco thrives. Yet each article varied greatly from the next, some thankful for his contribution while others considering his theory to be the starting point of unchecked, uninhibited reign of private companies.
To believe in either would be unfair to the memory of the departed. Perhaps it is time to consider the theory propounded by Coase and how it was put to use in reality in developing the American Industries. His most popular works on the subject matter of transaction costs includes: The Nature of the Firm (1937) and The Problem of Social Cost (1960).
A follower of Adam Smith and the laissez affair economy that Smith propounded, it troubled Coase that the free market could not explain the many government restrictions that were imposed on transactions in the form of taxes, fines etc. He believed that well defined property rights and low transaction costs would allow individuals to bargain amongst themselves without the intervention of the government.
He used the basic cattle-crop example which stated a situation where a farmer wanted to grow crops on the same piece of land where the rancher wanted his cattle to graze. Prior to Coases theory, such externalities had to be dealt with in court of law or through legislations. It was the judges responsibility to decide who the property rights would go to. However, according to Coase, as long as the property rights are well defined, such externalities can be bargained upon between the parties ensuring that the one who has the values the property most ends up possessing it while the other party is compensated for his loss of right with an amount equal to higher than the value he placed on the right. One of the strongest appeals of this theory was that it did not matter who originally had the property rights. Once the bargaining was done, the highest valuing owner will get the property rights.
At first glance, one might wrongly get the impression that the attempt of this theory was to justify a market with no government interference. In fact the prominent Chicago University academia (which dominated much of the economic policy landscape of 20th Century America) did interpret and reinterpret this theory with the basic assumption that Ronald Coase intended to justify zero government interference while rampant privitisation continued unchecked destroying the environment and depriving people of their property rights of clean air, noise free living etc.
To assume so is flawed. Even Ronald Coase did not attempt to justify such hyper-coaseism. But by this time, he was an old man and not the endearing young economist who could convincingly argue for hours without breaking into sweat.
Firstly and most importantly, Coase had never intended his theory to be an irrefutable theorem of how a market will operate at all times. His lack of interest and aptitude in mathematics ensured that he was one of the few economists who wrote in comprehensible English instead of the many mathematical equations. The issue is that it also implies that he never contested that what he said was universal. Coase dealt in examples implying that to apply his theory one had to consider individual situations one at a time.
So, while this theory fits perfectly when parties have the same bargaining power and employ only ethical means, it is no longer applicable in situations where a single business might be expected to bargain with an entire citys population. Labour Unions are a good example of how this weakened bargaining power due to smaller individual units negotiating with a comparatively gigantic opposite party can be dealt with.
Ronald Coase was an inspiring authority in his field of work and his significant contributions to economic analysis of law should not be dwarfed merely because it was conveniently interpreted by the then capitalist state of America in favour of its laissez affaire policies. Perhaps, the only fault he can be held responsible for is that he lived long enough to see his theory remoulded into what the then academia wanted and not what Coase originally intended it to be.
Shubhangi Roy: She is a third year student pursuing B.A. LLB. (Hons) at Gujarat National Law University. She is presently on the editorial board of two books and a few of her research papers are in the process of being published. She can be reached at shubhi.law@gmail.com