The Coase theorem states that if property rights are well-defined and transaction costs (including costs of negotiating) are zero or negligible, then the most efficient economic activity will occur regardless of who initially owns the property rights. Negotiation and market transactions will ensure optimal allocation of property. Simply put, it means "build a better mousetrap, and the world will beat a path to your door," no matter who or where you are.
This simple theorem, first published in a 1960 paper by Ronald Coase who won the Nobel Prize for Economics for this in 1991, has powerful implications for economics, law, politics, and even Christianity. This theorem reinforces teachings of Jesus, such as the parable of the sprouting seed, and supports conservative interpretations of the Chicago School of Economics.
The implications in law are that the best a judge can do for the economy as a whole is to minimize transaction costs, such as bureaucracy. Court decisions that impose additional procedural obligations, such as Goldberg v. Kelly (1969), can only detract from overall wealth and efficient economic behavior. The Coase theorem implicitly holds that many of the legal attempts to improve the economy are illusory, because there is no way to improve over the combination of clear legal entitlements and no government interference.
The implication in economics is that regulations that increase transaction costs are harmful, and the best that government can do is to clarify property rights and lower transaction costs. Regulatory attempts to correct negative externalities, which some consider to be a type of market failure, will add inefficiencies if the regulations increase transaction costs.
The implications in politics are that, in a free society, it is almost irrelevant who has wealth and who does not with respect to economic activity. Useful or desired economic activity will occur regardless of who owns property or wealth. A list of the wealthiest individuals (Forbes 500) is meaningless, as wealth will flow to efficient activity regardless of who controls the money.
A basis for this theorem can be found in the Parable of the Talents. One's faith and pleasing of God does not depend how the talents are divided. The person given two talents pleases the master just as much as the person given five talents.
Future v. Past
The Coase theorem proves that the future governs the present, and the past has little or no significance. The assignment of rights or wealth, which is in the past, is virtually irrelevant to the productivity of activity today, which is dictated by future transactions. In this sense the Coase theorem confirms a key aspect of Christianity, a religion focused on the future far more than the past.
Lack of forgiveness (of others or one's self) is an enormous impediment to productivity, and to unlocking the potential provided by the Coase theorem, which assumes rational behavior by individuals without distortions caused by lack of forgiveness. Proper application of the Coase theorem to individuals promotes forgiveness and elimination of grudges.
The Coase theorem has remarkable power in eliminating excuses for unproductive activity. Transaction costs are the only real obstacle to efficient, productive activity. Coining a famous saying, anyone of any means or background might invent a better mousetrap, and then the entire world will beat a path to his door. There is no real excuse for not realizing full potential or opportunity, except perhaps transaction costs, and all should agree to reduce or eliminate those.
To summarize Ronald Coase's paper The Problem of Social Cost, a judge should have regard for the total effect of his decision once people adapt to it. Professor Coase's famous paper observes that assigning a property right to one side in a dispute typically does not alter the economically efficient use of resources, as long as parties can easily bargain with each other.
Only one judge -- and none on the U.S. Supreme Court -- has ever cited the "Coase theorem" in a court opinion, and he did so only twice. The paucity of references to the insightful Coase theorem in legal decisions says more about the court system than it does about the brilliant theorem. Law schools generally either ignore the Coase theorem, or are outspokenly hostile to its truth.
Federal district judge Milton Shadur observed the following in a decision when he presided over a case as part of the U.S. Court of Appeals for the Seventh Circuit:
|“||It provides a classic illustration of the Coase Theorem, which has earned Professor Ronald Coase a long-belated but much-deserved Nobel Prize: So long as the rule of law is known when parties act, the ultimate economic result is the same no matter which way the law has resolved the issue.||”|
The most efficient allocation of resources is referred to by economists as "Pareto optimal." When resource allocation is Pareto optimal, then no one can improve his position without making someone else worse off. Italian engineer and philosopher Vilfredo Pareto (1848–1923) is the namesake for the term.
The Coase Theorem states that Pareto optimality, or Pareto efficiency, occurs regardless of who owns the property rights.
- The phrase is attributed to Ralph Waldo Emerson, who said something similar.
- Ronald H. Coase, “The Problem of Social Cost,” 3 J. Law & Econ. 1 (1960)
- Mark 4:26-29.
- Available online for $10 at this University of Chicago website
- Coase, R. October 1960 The Problem of Social Cost. Journal of Law and Economics
- A few additional judges have included in their opinions citations to law review articles that have the Coase theorem in their titles.
- Coltman v. Commissioner, 980 F.2d 1134, 1136-37 (7th Cir. 1992)