Sunday, April 27, 2008

A Perspective on the Coase "Theorem"

"'Coase's Theorem' says that once we determine who can legally do what, externalities will vanish as actors pay one another off. This methodology - either the victims bribe the perpetrator to stop the distasteful behavior (when the perpetrator has the legal right to do it) or the perpetrator bribes the victim to put up with the distasteful outcome (when the victims have a right not to suffer the pain) - is considered an epochal innovation in American economics and jurisprudence. Even without understanding all the details and context, this tells us a great deal about our intellectual culture since, in fact, Coase's methodology doesn't work.
  1. Bargains made with only two parties, perpetrator and victim, will rarely if ever be efficient.
  2. Whenever the perpetrator is a corporation and the victim a far-flung collection of disparate individuals, the latter is at such a disadvantage in seeking recompense that without intervention correction rarely takes place at all.
  3. Coase's methodology provides a 'bully incentive' for anyone able to muster the courts on their behalf. Suppose Z owns a train. If we have the legal right to spew sparks, we should create the most spark-spewing train we can. If we have the right to be noisy, we should create a decibel demon. Whenever anyone with the means to pursue legal claims has a right that could cause others pain, they should threaten to exercise it and then extort bribery payments to desist. In the absence of a specific legal prohibition, a bully walking down the street should spit on everyone, claiming that he will only suffer the pains of stopping if his vitims bribe him to do so.
Not surprisingly, Coase's 'extort the victim,' 'empower the powerful' analysis was welcome as soon as economists could understand its utility to elites able to make legal claims here, there, and everywhere, thereby profitably spitting this way and that with impunity.

Why the hoopla for Coase? First, Coase's Theorem, better named the Bully Theorem, reinstates markets and privatization as optimal, even providing an argument against unwanted government regulation. Second, it elevates 'property rights' to the defining position in jurisprudence and establishes a logic for dealing with externalities perfectly suited to co-optation by capital." -- Michael Albert (November 1991)


Gabriel M said...

Michael Greinecker's posts on this are enlightening.

Anonymous said...

But Coase's Theorem as well as the whole of the usual Arrow-Debreu story is completely irrelevant for policy, as least where efficiency is concerned, because of the Second Best Theorem.

I am astonished that this is not mentioned more often by those who think that the propaganda economics from Arrow-Debreu, rational expectations and others is based on mathemtical contradictions.

Even if Arrow-Debreu-Coase were not fallacious, they would still be irrelevant to poliocy because of the Second Best Theorem and its devastating impact.

Anonymous said...

Just because it is utterly unrealistic and completely irrelevant for policy, it does not stop neo-classical economists taking anything seriously and defending it regardless...

Hell, you might even get a so-called Nobel prize in economics for it...

An Anarchist FAQ

Robert Vienneau said...

Thanks for the comments. I deliberately did not include editorial comments in my post, other than the title.