Ronald Coase

Ronald Harry Coase (/ˈkoʊs/; 29 December 1910 – 2 September 2013) was a British economist and author. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.[1]

Coase, who believed economists should study real markets and not theoretical ones, established the case for the corporation as a means to pay the costs of operating a marketplace.[2] Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms; and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities (see Coase theorem). Additionally, Coase's transaction costs approach is currently influential in modern organizational economics, where it was reintroduced by Oliver E. Williamson.

Ronald Coase
Coase scan 10 edited
Scanned photo of Coase from University of Chicago Law School archives
Born
Ronald Harry Coase

29 December 1910
Died2 September 2013 (aged 102)
Chicago, Illinois, United States
NationalityBritish
InstitutionUniversity of Dundee
University of Liverpool
London School of Economics
University at Buffalo
University of Virginia
University of Chicago
FieldLaw and economics
School or
tradition
New institutional economics
Alma materUniversity of London
London School of Economics
ContributionsCoase theorem
Analysis of transaction costs
Coase conjecture
AwardsNobel Prize in Economics (1991)
Information at IDEAS / RePEc

Biography

Coase scan 11 edited
Scanned photo of Coase from UChicago Law archives

Ronald Harry Coase was born in Willesden, a suburb of London, on 29 December 1910. His father, Henry Joseph Coase (1884–1973) was a telegraphist for the post office, as was his mother, Rosalie Elizabeth Coase (née Giles; 1882–1972), before marriage. As a child, Coase had a weakness in his legs, for which he was required to wear leg-irons. Due to this problem, he attended the school for physical defectives. At the age of 12, he was able to enter the Kilburn Grammar School on scholarship. At Kilburn, he studied for the intermediate examination of the University of London as an external student in 1927–29.[3][4] Coase married Marion Ruth Hartung of Chicago, Illinois in Willesden, England, 7 August 1937. Although they were unable to have children, they were married 75 years until her death in 2012, making him one of the longest-married Nobel Prize laureates.[5]

Coase attended the London School of Economics, where he took courses with Arnold Plant[3] and received a bachelor of commerce degree in 1932. During his undergraduate studies, Coase received the Sir Ernest Cassel Travelling Scholarship, awarded by the University of London. He used this to visit the University of Chicago in 1931–1932 and studied with Frank Knight and Jacob Viner. Coase's colleagues would later admit that they did not remember this first visit.[6] Between 1932–34, Coase was an assistant lecturer at the Dundee School of Economics and Commerce, which later became part of the University of Dundee. Subsequently, Coase was an assistant lecturer in commerce at the University of Liverpool between 1934–1935 before returning to London School of Economics as a member of staff until 1951. He then started to work at the University at Buffalo and retained his British citizenship after moving to the United States in the 1950s.[7] In 1958, he moved to the University of Virginia. Coase settled at the University of Chicago in 1964 and became the editor of the Journal of Law and Economics. He was also for a time a trustee of the Philadelphia Society.[8] He received the Nobel Prize in Economics in 1991.

Nearing his 100th birthday, Coase was working on a book concerning the rise of the economies of China and Vietnam.[9] In an interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists.[10][11] Coase was honoured and received an honorary doctorate from the University at Buffalo Department of Economics in May 2012.[12]

Coase died in Chicago on 2 September 2013 at the age of 102.[13] His wife had died on 17 October 2012.[14] He was praised across the political spectrum, with Slate Magazine calling him "one of the most distinguished economists in the world"[15] and Forbes magazine calling him "the greatest of the many great University of Chicago economists".[16] The Washington Post called his work over eight decades "impossible to summarize" while recommending five of his papers to read.[17]

Contributions to economics

The Nature of the Firm

In "The Nature of the Firm" (1937), a brief but highly influential essay, Coase attempts to explain why the economy features a number of business firms instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that "production could be carried on without any organization [that is, firms] at all", Coase asks, why and under what conditions should we expect firms to emerge?

Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.

The traditional economic theory of the time (in the tradition of Adam Smith) suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.

Coase noted, however, a number of transaction costs involved in using the market; the cost of obtaining a good or service via the market actually exceeds the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something from another party. This suggests that firms will arise which can internalise the production of goods and services required to deliver a product, thus avoiding these costs. This argument sets the stage for the later contributions by Oliver Williamson: markets and hierarchies are alternative co-ordination mechanisms for economic transactions.[18]

There is a natural limit to what a firm can produce internally, however. Coase notices "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. These factors become countervailing costs to the use of the firm.

Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.

Other things being equal, therefore, a firm will tend to be larger:

  • the lower the costs of organising and the slower these costs rise with an increase in the number of transactions organised
  • the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organised
  • the greater the lowering (or the smaller the rise) in the supply price of factors of production to firms of larger size

The first two costs will increase with the spatial distribution of the transactions organised and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organising transactions across space may allow firms to become larger – the advent of the telephone and of cheap air travel, for example, would be expected to increase the size of firms.

The Problem of Social Cost

Coase working 2000s
Coase working in 2003 ( photo taken at and by University of Chicago Law School)

Upon publishing his article The Federal Communications Commission in 1959, Coase received negative feedback from the faculty at the University of Chicago over his conclusions and apparent conflicts with A. C. Pigou. According to Coase, "What I said was thought to run counter to Pigou's analysis by a number of economists at the University of Chicago and was therefore, according to them, wrong. At a meeting in Chicago I was able to convince these economists that I was right and Pigou's analysis faulty." Coase had presented his paper in 1960 during a seminar in Chicago, to twenty senior economist including George Stigler and Milton Friedman. He gradually won over the usually skeptic audience, in what has later been considered a "paradigm-shifting moment" in the genesis of Chicago Law and Economics.[19] Coase would join the Chicago faculty four years later.

Published in the Journal of Law and Economics in 1960, while Coase was a member of the Economics department at the University of Virginia, "The Problem of Social Cost" provided the key insight that it is unclear where the blame for externalities lies. The example he gave was of a rancher whose cattle stray onto the cropland of his neighbour. If the rancher is made to restrict his cattle, he is harmed just as the farmer is if the cattle remain unrestrained.

Coase argued that without transaction costs the initial assignment of property rights makes no difference to whether or not the farmer and rancher can achieve the economically efficient outcome. If the cost of restraining cattle by, say, building a fence, is less than the cost of crop damage, the fence will be built. The initial assignment of property rights determines who builds the fence. If the farmer is responsible for the crop damage, the farmer will pay for the fence (as long the fence costs less than the crop damage). The allocation of property rights is primarily an equity issue, with consequences for the distribution of income and wealth, rather than an efficiency issue.

With sufficient transaction costs, initial property rights matter for both equity and efficiency. From the point of view of economic efficiency, property rights should be assigned such that the owner of the rights wants to take the economically efficient action. To elaborate, if it is efficient not to restrict the cattle, the rancher should be given the rights (so that cattle can move about freely), whereas if it is efficient to restrict the cattle, the farmer should be given the rights over the movement of the cattle (so the cattle are restricted).

This seminal argument forms the basis of the famous Coase theorem as labelled by Stigler.

Law and economics

Coase profile 2003
Coase profile photo in 2003 (photo taken at and by University of Chicago Law School)

Though trained as an economist, Coase spent much of his career working in a law school. He is a central figure in the development of the subfield of law and economics. He viewed law and economics as having two parts, the first "using the economists' approach and concepts to analyze the working of the legal system, often called the economic analysis of the law"; and the second "a study of the influence of the legal system on the working of the economic system."[20] Coase said that the second part "is the part of law and economics in which I am most interested."

In his Simons Lecture celebrating the centennial of the University of Chicago, titled "Law and Economics at Chicago", Coase noted that he only accidentally wandered into the field:

It is generally agreed that this article has had an immense influence on legal scholarship, but this was no part of my intention. For me, "The Problem of Social Cost" was an essay in economics. It was aimed at economists. What I wanted to do was to improve our analysis of the working of the economic system. Law came into article because, in a regime of positive transaction costs, the character of the law becomes one of the main factors determining the performance of the economy. If transaction costs were zero (as is assumed in standard economic theory) we can imagine people contracting around the law whenever the value of production would be increased by a change in the legal position. But in a regime of positive transaction costs, such contracting would not occur whenever transaction costs were greater than the gain that such a redistribution of rights would bring. As a consequence the rights which individuals possess will commonly be those established by the law, which in these circumstances can be said to control the economy. As I have said, in "The Problem of Social Cost" I had no intention of making a contribution to legal scholarship. I referred to legal cases because they afforded examples of real situations as against the imaginary ones normally used by economists in their analysis. It was undoubtedly an economist who invented the widget. But in "The Problem of Social Cost" I did something else. I pointed out that the judges in their opinions often seemed to show a better understanding of the economic problem than did many economists even though their views were not always expressed in a very explicit fashion. I did this not to praise the judges but to shame economists.[21]

Despite wandering accidentally into law and economics, the opportunity to edit the Journal of Law and Economics was instrumental in bringing him to the University of Chicago:

[W]hen I was approached to fill Aaron Director's place on his retirement, what I found most attractive about coming to Chicago was the opportunity it gave me of editing the Journal. Indeed, it is probable that without the Journal I would not have come to Chicago. I knew nothing of the original aim of the Journal. What I wanted to do was to encourage the type of research which I had advocated in "The Problem of Social Cost," and I used my editorship of the Journal as a means of bringing this about.[21]

Coase believed that the University of Chicago was the intellectual center of law and economics. He concluded his Simons lecture by stating:

I am very much aware that, in concentrating in this lecture on law and economics at Chicago, I have neglected other significant contributions to the subject made elsewhere such as those by Guido Calabresi at Yale, by Donald Turner at Harvard, and by others. But it can hardly be denied that in the emergence of the subject of law and economics, Chicago has played a very significant part and one of which the University can be proud.[21]

Coase Conjecture

Another important contribution of Coase is the Coase conjecture, which states that an informal argument that durable-goods monopolists do not have market power because they are unable to commit to not lowering their prices in future periods.

Political views

When asked what he considered his politics to be, Coase stated,

I really don't know. I don't reject any policy without considering what its results are. If someone says there's going to be regulation, I don't say that regulation will be bad. Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't.[22]

Coase admitted that early in life, he aligned himself with socialism.

As a young man I was a Socialist. The first challenge to this belief came when, in 1931, 5 months before I took the final examinations for the B.Com. degree, I attended Arnold Plant's seminar at the London School of Economics (LSE). He introduced me to Adam Smith's invisible hand and to the advantages of a competitive system. He also pointed out that government schemes in the economic sphere were often ill-conceived and were introduced to placate special interests. I adopted many of Plant's positions but continued to regard myself as a Socialist. That this meant holding what could be considered, and were, inconsistent positions was not unusual at that time. Abba Lerner, a fellow student and a fine theorist, with whom I had a very friendly relation, also believed in the virtues of a competitive system but was even more attached to Socialism than I was.[20]

Guido Calabresi wrote that Coase's focus on transaction costs in The Nature of the Firm was the result of his socialist beliefs. Reflecting on this, Coase wrote: "It is very difficult to know where one's ideas come from but for all I know he may well be right." Coase continued:

My socialist sympathies gradually fell away and this process was accentuated as a result of being assigned in 1935 at LSE the course on the Economics of Public Utilities. I soon found out that very little was known about British public utilities and I set about making a series of historical studies on the water, gas, and electricity supply industries and of the Post Office and broadcasting.

These researches taught me much about the public utility industries and they certainly made me aware of the defects of government operation of these industries, whether municipal or through nationalisation. These researches were interrupted by the war, when I joined the civil service, at first, for a short period, in the Forestry Commission, then responsible for timber production, and for the rest of the war, in the Central Statistical Office, one of the offices of the War Cabinet. This war-time experience did not significantly influence my views but I could not help noticing that, with the country in mortal danger and despite the leadership of Winston Churchill, government departments often seemed more concerned to defend their own interests than those of the country.[20]

The Ronald Coase Institute

Coase was research advisor to the Ronald Coase Institute, an organisation that promotes research on institutions and organizations – the laws, rules, customs, and norms – that govern real economic systems, with particular support for young scholars from developing and transitional countries.

The Coase-Sandor Institute for Law and Economics

Coase b&w2
Coase at a conference in 2008 with Richard Sandor in the background (from UChicago Law archives)

The University of Chicago Law School carries on the legacy of Ronald Coase through the mission of the Coase-Sandor Institute for Law and Economics. Each year, the University of Chicago Law School hosts the Coase Lecture, which was delivered in 2003 by Ronald Coase himself.[23]

Publications

  • Coase, R. H. (1937). "The Nature of the Firm". Economica. 4 (16): 386–405. doi:10.1111/j.1468-0335.1937.tb00002.x.
  • Coase, R. H. (1960). "The Problem of Social Cost". Journal of Law and Economics. 3 (1): 1–44. doi:10.1086/466560.
  • Coase, R. H. (1972). "Durability and Monopoly". Journal of Law and Economics. 15 (1): 143–49. doi:10.1086/466731.
  • Coase, R. H. (1974). "The Lighthouse in Economics". Journal of Law and Economics. 17 (2): 357–76. doi:10.1086/466796.
  • Coase, R. H. (1992). "The Institutional Structure of Production". American Economic Review. 82 (4): 713–19. JSTOR 2117340. (Nobel Prize lecture)
  • Coase, Ronald (2006). "The Conduct of Economics: The Example of Fisher Body and General Motors". Journal of Economics & Management Strategy. 15 (2): 255–78. CiteSeerX 10.1.1.424.5083. doi:10.1111/j.1530-9134.2006.00100.x.
  • Coase, Ronald; Wang, Ning (2011). "The Industrial Structure of Production: A Research Agenda for Innovation in an Entrepreneurial Economy". Entrepreneurship Research Journal. 2 (1). doi:10.2202/2157-5665.1026.
  • How China Became Capitalist (2012) co-authored with Ning Wang. Palgrave Macmillan. ISBN 1137019360.

See also

References

  1. ^ Hahn, Robert (2013). "Ronald Harry Coase (1910–2013) Nobel-prize winning economist whose work inspired cap-and-trade". Nature. 502 (7472): 449. Bibcode:2013Natur.502..449H. doi:10.1038/502449a. PMID 24153291.
  2. ^ Henderson, David R.,The man who resisted blackboard economics, Wall Street Journal, 4 September 2013, p. A15
  3. ^ a b Ronald Coase. "Nobel Prize Autobiography," 1991
  4. ^ Breit, William and Barry T. Hirsch. Lives of the Laureates, 4th ed. Cambridge, Mass: The MIT Press, 2004.
  5. ^ Littlewood, Mark (4 September 2013). "Ronald Coase obituary". the Guardian. Retrieved 9 September 2018.
  6. ^ Kitch, Edmund W. (1983). "The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932–1970". Journal of Law and Economics. 26 (1): 163–234. doi:10.1086/467030. JSTOR 725189.
  7. ^ "U. of Chicago Professor Wins Nobel Economics Prize".
  8. ^ "Trustees". Phillysoc.org. Archived from the original on 27 August 2013. Retrieved 3 September 2013.
  9. ^ "99-year-old economist researches the rise of China and Vietnam". VietNamNet Bridge. 24 March 2010. Archived from the original on 3 September 2010.
  10. ^ "Coase China Society Interviews Ronald Coase". Chicago University Law School. 3 January 2011.
  11. ^ "Interview with Professor Ronald Coase". Unirule Institute of Economics. 3 January 2011. Archived from the original on 17 January 2011.
  12. ^ http://economics.buffalo.edu/ Robert Coase Honorary Doctorate
  13. ^ Galer, Sarah. "Ronald H. Coase, Founding Scholar in Law and Economics, 1910–2013". Law.uchicago.edu. University of Chicago Law School. Archived from the original on 5 September 2013. Retrieved 3 September 2013.
  14. ^ Lyons, Patrick J. (3 September 2013). "Ronald H. Coase, a Law Professor And Leading Economist, Dies at 102". The New York Times.
  15. ^ Yglesias, Matthew (3 September 2013). "Ronald Coase, the Economist Who Explained Why We Have Companies".
  16. ^ Smith, Fred (3 September 2013). "Ronald Coase Was The Greatest Of The Many Great University Of Chicago Economists". Forbes.
  17. ^ Matthews, Dylan (3 September 2013). "Ronald Coase is dead. Here are five of his papers you need to read".
  18. ^ Hein Schreuder, "Coase, Hayek and Hierarchy", In: S. Lindenberg & Hein Schreuder, editors, Interdisciplinary Perspectives on Organization Studies, Pergamon Press
  19. ^ Davies, William (2014). The Limits of Neoliberalism: Authority, Sovereignty and the Logic of Competition. SAGE. pp. 87–90. ISBN 9781473905337.
  20. ^ a b c Coase, R. H. (1996). "Law and Economics and A.W. Brian Simpson". Journal of Legal Studies. 25 (1): 103–19. doi:10.1086/467973. JSTOR 724523.
  21. ^ a b c Coase, R. H. (1993). "Law and Economics at Chicago". Journal of Law and Economics. 36 (1): 239–54. doi:10.1086/467274. JSTOR 725475.
  22. ^ "Looking for results". Reason magazine. January 1997.
  23. ^ "2003 Coase Lecture: Ronald Coase, "The Present and Future of Law and Economics"".

Bibliography

External links

Awards
Preceded by
Harry M. Markowitz
Merton H. Miller
William F. Sharpe
Laureate of the Nobel Memorial Prize in Economics
1991
Succeeded by
Gary S. Becker
Aaron Director

Aaron Director (; September 21, 1901 – September 11, 2004), a professor at the University of Chicago Law School, played a central role in the development of the Chicago school of economics. Together with his brother-in-law, Nobel laureate Milton Friedman, Director influenced some of the next generation of jurists, including Robert Bork, Richard Posner, Antonin Scalia and Chief Justice William Rehnquist.

Chicago school of economics

The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles.

In the context of macroeconomics, it is connected to the "freshwater school" of macroeconomics, in contrast to the saltwater school based in coastal universities (notably Harvard, Columbia, MIT, and UC Berkeley). Chicago macroeconomic theory rejected Keynesianism in favor of monetarism until the mid-1970s, when it turned to new classical macroeconomics heavily based on the concept of rational expectations. The freshwater-saltwater distinction is largely antiquated today, as the two traditions have heavily incorporated ideas from each other. Specifically, New Keynesian economics was developed as a response to new classical economics, electing to incorporate the insight of rational expectations without giving up the traditional Keynesian focus on imperfect competition and sticky wages.

Chicago economists have also left their intellectual influence in other fields, notably in pioneering public choice theory and law and economics, which have led to revolutionary changes in the study of political science and law. Other economists affiliated with Chicago have made their impact in fields as diverse as social economics and economic history. Thus, there is not a clear delineation of the Chicago school of economics, a term that is more commonly used in the popular media than in academic circles. Nonetheless, Kaufman (2010) says that the School can be generally characterized by:

A deep commitment to rigorous scholarship and open academic debate, an uncompromising belief in the usefulness and insight of neoclassical price theory, and a normative position that favors and promotes economic liberalism and free markets.

The University of Chicago Economics department, considered one of the world's foremost economics departments, has been awarded 13 Nobel Prizes in Economics as of 2018 —more than any other university; and has also fielded more John Bates Clark medalists in economics than any other university.

Coase conjecture

The Coase conjecture, developed first by Ronald Coase, is an argument in monopoly theory. The conjecture sets up a situation in which a monopolist sells a durable good to a market where resale is impossible and faces consumers who have different valuations. The conjecture proposes that a monopolist that does not know individuals' valuations will have to sell its product at a low price if the monopolist tries to separate consumers by offering different prices in different periods. This is because the monopoly is, in effect, in price competition with itself over several periods and the consumer with the highest valuation, if he is patient enough, can simply wait for the lowest price. Thus the monopolist will have to offer a competitive price in the first period which will be low. The conjecture holds only when there is an infinite time horizon, as otherwise a possible action for the monopolist would be to announce a very high price until the second to last period, and then sell at the static monopoly price in the last period. The monopolist could avoid this problem by committing to a stable linear pricing strategy or adopting other business strategies.

Coase theorem

In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining. This "theorem" is commonly attributed to Nobel Memorial Prize in Economic Sciences winner Ronald Coase during his tenure at the London School of Economics, SUNY at Buffalo, University of Virginia, and University of Chicago.

This 1960 paper, along with his 1937 paper on the nature of the firm (which also emphasizes the role of transaction costs), earned Ronald Coase the 1991 Nobel Memorial Prize in Economic Sciences. In this 1960 paper, Coase argued that real-world transaction costs are rarely low enough to allow for efficient bargaining and hence the theorem is almost always inapplicable to economic reality. Since then, others have demonstrated the importance of the perfect information assumption and shown using game theory that inefficient outcomes are to be expected when this assumption is not met.

In his later writings, Coase expressed frustration that his theorem was often misunderstood. Although some have used Coase's analysis to argue that because transaction costs are never zero it is always appropriate for a government to intervene and regulate, Coase believed that economists and politicians "tended to over-estimate the advantages which come from governmental regulation." Some mistakenly understood the theorem to mean that markets would always achieve efficient results when transaction costs were low, when in reality his point was almost the exact opposite: because transaction costs are never zero, it cannot be assumed that any institutional arrangement will necessarily be efficient. Therefore, Coase argued that it is important to always compare alternative institutional arrangements to see which would come closest to "the unattainable ideal of the (mythical) world of zero transaction costs."Nevertheless, the Coase theorem is considered an important basis for most modern economic analyses of government regulation, especially in the case of externalities, and it has been used by jurists and legal scholars to analyse and resolve legal disputes. George Stigler summarized the resolution of the externality problem in the absence of transaction costs in a 1966 economics textbook in terms of private and social cost, and for the first time called it a "theorem." Since the 1960s, a voluminous amount of literature on the Coase theorem and its various interpretations, proofs, and criticism has developed and continues to grow.

EconTalk

EconTalk is a weekly economics podcast hosted by Russ Roberts. Roberts was an economics professor at George Mason University and is now a research fellow at Stanford University's Hoover Institution. On the podcast Roberts typically interviews a single guest—often professional economists—on topics in economics. The podcast is hosted by the Library of Economics and Liberty, an online library sponsored by Liberty Fund. On EconTalk Roberts has interviewed more than a dozen Nobel Prize laureates including Nobel Prize in Economics recipients Ronald Coase, Milton Friedman, Gary Becker, and Joseph Stiglitz as well as Nobel Prize in Physics recipient Robert Laughlin.

Frank Knight

Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates Milton Friedman, George Stigler and James M. Buchanan were all students of Knight at Chicago. Ronald Coase said that Knight, without teaching him, was a major influence on his thinking. F.A. Hayek considered Knight to be one of the major figures in preserving and promoting classical liberal thought in the twentieth century. Paul Samuelson named Knight (along with Harry Gunnison Brown, Allyn Abbott Young, Henry Ludwell Moore, Wesley Clair Mitchell, Jacob Viner, and Henry Schultz) as one of the several "American saints in economics" born after 1860.

Guido Calabresi

Guido Calabresi (born October 18, 1932) is an American legal scholar and Senior United States Circuit Judge of the United States Court of Appeals for the Second Circuit. He is a former Dean of Yale Law School, where he has been a professor since 1959. Calabresi is considered, along with Ronald Coase and Richard Posner, a founder of the field of law and economics.

Incomplete contracts

In economic theory, the field of contract theory can be subdivided in the theory of complete contracts and the theory of incomplete contracts.

The incomplete contracting paradigm was pioneered by Sanford J. Grossman, Oliver D. Hart, and John H. Moore. In their seminal contributions, Grossman and Hart (1986), Hart and Moore (1990), and Hart (1995) argue that in practice, contracts cannot specify what is to be done in every possible contingency. At the time of contracting, future contingencies may not even be describable. Moreover, parties cannot commit themselves never to engage in mutually beneficial renegotiation later on in their relationship. Thus, an immediate consequence of the incomplete contracting approach is the so-called hold-up problem. Since at least in some states of the world the parties will renegotiate their contractual arrangements later on, they have insufficient incentives to make relationship-specific investments (since a party's investment returns will partially go to the other party in the renegotiations). Oliver Hart and his co-authors argue that the hold-up problem may be mitigated by choosing a suitable ownership structure ex ante (according to the incomplete contracting paradigm, more complex contractual arrangements are ruled out). Hence, the property rights approach to the theory of the firm can explain the pros and cons of vertical integration, thus providing a formal answer to important questions regarding the boundaries of the firm that were first raised by Ronald Coase (1937).The incomplete contracting approach has been subject of a still ongoing discussion in contract theory. In particular, some authors such as Maskin and Tirole (1999) argue that rational parties should be able to solve the hold-up problem with complex contracts, while Hart and Moore (1999) point out that these contractual solutions do not work if renegotiation cannot be ruled out. Some authors have argued that the pros and cons of vertical integration can sometimes also be explained in complete contracting models. The property rights approach based on incomplete contracting has been criticized by Williamson (2000) because it is focused on ex ante investment incentives, while it neglects ex post inefficiencies. It has been pointed out by Schmitz (2006) that the property rights approach can be extended to the case of asymmetric information, which may explain ex post inefficiencies. The property rights approach has also been extended by Chiu (1998) and DeMeza and Lockwood (1998), who allow for different ways to model the renegotiations. In a more recent extension, Hart and Moore (2008) have argued that contracts may serve as reference points. The theory of incomplete contracts has been successfully applied in various contexts, including privatization, international trade, management of research & development, allocation of formal and real authority, advocacy, and many others.

The Nobel Prize in Economics 2016 was awarded to Oliver D. Hart and Bengt Holmström for their contribution to contract theory, including incomplete contracts.

Law and economics

Law and economics or economic analysis of law is the application of economic theory (specifically microeconomic theory) to the analysis of law that began mostly with scholars from the Chicago school of economics. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.

List of Nobel laureates affiliated with the London School of Economics

A list of Nobel laureates affiliated with the London School of Economics. By official figures 18 Nobel Prizes in economics, peace and literature have been awarded to LSE alumni and staff. By 2016, 27% (or 13 out of 48) of all the Nobel Prizes in Economics have been awarded or jointly awarded to LSE alumni, current staff or former staff, making up 17% (13 out of 78) of all laureates. LSE alumni and staff have also won 3 Nobel Peace Prizes, and 2 Nobel Prizes in Literature.

Alumni

1950: Ralph Bunche (Peace)

1979: Sir William Arthur Lewis (Economics)

1991: Ronald Coase (Economics)

1999: Robert Mundell (Economics)

2007: Leonid Hurwicz (Economics)

2016: Juan Manuel Santos (Peace)Founders and professors

1925: George Bernard Shaw (Literature)

1950: Bertrand Russell (Literature)

1959: Philip Noel-Baker (Peace)

1972: Sir John Hicks (Economics)

1974: Friedrich von Hayek (Economics)

1977: James Meade (Economics)

1990: Merton Miller (Economics)

1998: Amartya Sen (Economics)

2001: George Akerlof (Economics)

2008: Paul Krugman (Economics)

2010: Christopher A. Pissarides (Economics)

2016: Oliver Hart (Economics)Non-alumni1987: Óscar Arias (Peace)

New institutional economics

New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the social and legal norms and rules (which are institutions) that underlie economic activity and with analysis beyond earlier institutional economics and neoclassical economics. It can be seen as a broadening step to include aspects excluded in neoclassical economics. It rediscovers aspects of classical political economy.

Philadelphia Society

The Philadelphia Society is a membership organization the purpose of which is "to sponsor the interchange of ideas through discussion and writing, in the interest of deepening the intellectual foundation of a free and ordered society, and of broadening the understanding of its basic principles and traditions". The membership of the Society tends to be composed of persons holding conservative or libertarian political views, and many of those associated with the Society have exercised considerable influence over the development of the conservative movement in the United States.

It was founded in 1964 by Donald Lipsett in conjunction with Bill Buckley, Milton Friedman, Frank Meyer, and Ed Feulner, and the former Presidents of the Society include Henry Regnery, Edwin J. Feulner, Russell Kirk, Mel Bradford, Forrest McDonald, T. Kenneth Cribb, M. Stanton Evans, Ellis Sandoz, Edwin Meese, Claes G. Ryn, Midge Decter, Roger Ream, Steven F. Hayward, Lee Edwards, William F. Buckley, and George H. Nash.Notable speakers at past meetings of the Society have included Larry Arnhart, Andrew Bacevich, Wendell Berry, Robert Bork, Mel Bradford, Warren T. Brookes, William F. Buckley, Vladimir Bukovsky, Ronald Coase, T. Kenneth Cribb, Midge Decter, M. Stanton Evans, Edwin J. Feulner, Milton Friedman, George Gilder, Victor Davis Hanson, William Hague, S. I. Hayakawa, Friedrich von Hayek, Henry Hazlitt, W.H. Hutt, Herman Kahn, Russell Kirk, Irving Kristol, Erik von Kuehnelt-Leddihn, Forrest McDonald, Edwin Meese, Frank Meyer, Charles Murray, Robert Nisbet, Michael Novak, Richard Pipes, Norman Podhoretz, Henry Regnery, William A. Rusher, Paul Ryan, Ellis Sandoz, Shelby Steele, George J. Stigler, Terry Teachout, Edward H. Teller, and Eric Voegelin.

Real-world economics

Real-world economics is a school of economics that uses an inductive method to understand economic processes. It approaches economics without making a priori assumptions about how ideal markets work, in contrast to what Nobel Prize-winning economist, Ronald Coase, referred to as "blackboard economics" and its deductive method.

Steven N. S. Cheung

Steven Ng-Sheong Cheung (; born December 1, 1935) is a Hong-Kong-born American economist who specializes in the fields of transaction costs and property rights, following the approach of new institutional economics. He achieved his public fame with an economic analysis on China open-door policy after the 1980s. In his studies of economics, he focuses on economic explanation that is based on real world observation (an observation first approach). He is also the first to introduce concepts from the Chicago School of Economics, especially price theory, into China. In 2016, Cheung claimed to have written "1,500 articles and 20 books in Chinese" during his academic career.He obtained his PhD in economics from UCLA, where his teachers were the American economists Armen Alchian and Jack Hirshleifer. He taught in the Department of Economics at the University of Washington from 1969 to 1982, and then at the University of Hong Kong from 1982 to 2000. During this period, Cheung reformed the syllabus of Hong Kong's A-level Economics examination, adding the concepts of the postulate of constrained maximization, methodology, transaction cost and property right, most of which originate from the theories of the Chicago school.

The Armchair Economist

The Armchair Economist: Economics and Everyday Life is an economics book written by Rochester professor of economics Steven Landsburg. The first edition appeared in 1993. A revised and updated edition appeared in May 2012. The underlying theme of the book, as Landsburg states on the first page, is that "[m]ost of economics can be summarized in four words: People respond to incentives." With this apparently innocuous observation, Landsburg discusses some unexpected effects of various policies such as automobile safety legislation and environmental policies. The rest of the book includes expositions on a wide range of topics, including budget deficit, unemployment, economic growth, and cost–benefit analysis.

Chapter 4 covers the "Indifference Principle".

Chapter 9 covers the Coase Theorem of professor Ronald Coase.

The book is also recommended reading by the departments of economics at several universities.

The Nature of the Firm

“The Nature of the Firm” (1937), is an article by Ronald Coase. It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market. The paper won a Nobel Prize in Economic Sciences in 1991.

The Problem of Social Cost

"The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost–benefit analysis, and that nuisances that are often regarded as being the fault of one party are more symmetric conflicts between the interests of the two parties. If there are sufficiently low costs of doing a transaction, legal rules would be irrelevant to the maximization of production. Because in the real world there are costs of bargaining and information gathering, legal rules are justified to the extent of their ability to allocate rights to the most efficient right-bearer.

Along with an earlier article, “The Nature of the Firm”, "The Problem of Social Cost" was cited by the Nobel committee when Coase was awarded the Nobel Memorial Prize in Economic Sciences in 1991. The article is foundational to the field of law and economics, and has become the most frequently cited work in all of legal scholarship.

University of Chicago Law School

The University of Chicago Law School is a professional graduate school of the University of Chicago. It employs more than 200 full-time and part-time faculty and hosts more than 600 students in its Juris Doctor program, while also offering the Master of Laws, Master of Studies in Law and Doctor of Juridical Science degrees in law. It is consistently ranked among the top law schools in the world, and has produced many distinguished alumni in the judiciary, academia, government, politics and business.

The law school was conceived in 1902 by the President of the University of Chicago, William Rainey Harper, who requested assistance from faculty at Harvard Law School in setting up the new school. Harper and the law school's first Dean, Joseph Henry Beale, designed the school's curriculum with inspiration from Ernst Freund's interdisciplinary approach to legal education. The construction of the school was financed by John D. Rockefeller and the cornerstone was laid by President Theodore Roosevelt. The law school opened for classes in 1903.

In the 1930s, the law school's curriculum was transformed by the emergence of the law and economics movement. Economists Aaron Director and Henry Calvert Simons taught courses integrated with the antitrust curriculum taught by statesman Edward H. Levi, leading to the development of the Chicago school of economics and the Chicago School approach to antitrust law. The law school expanded rapidly in the 1950s under Levi's leadership and, in the 1970s and 1980s, many scholars with connections to the social sciences were attracted to the school's influence in law and economics, including Nobel laureates Ronald Coase and Gary Becker and the most cited legal scholar of the 20th century, Richard A. Posner.The law school's flagship publication is the University of Chicago Law Review. Students edit two other independent law journals, with another three journals overseen by faculty. The law school was originally housed in Stuart Hall, a Gothic-style limestone building on the campus's main quadrangles. Since 1959, it has been housed in an Eero Saarinen-designed building across the Midway Plaisance from the main campus of the University of Chicago. The building was expanded in 1987 and again in 1998. It was renovated in 2008, preserving most of Saarinen's original structure.

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