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| | Like Isaac Newton, who invented calculus in order to do his work on physics, Ronald Coase first invented a new concept of “transaction costs” to lay the groundwork for his insight. As we explained in an earlier lecture, “transaction costs” consist of the time, money, and effort someone loses in obtaining what he wants. The libertarian law professor Richard Epstein tersely summed up the meaning of “transaction costs” in one word: “friction.”<ref name="Coase article"/> Coase’s Nobel Prize was based on his discovery and development of this new concept, and the committee conferring the prize (the Royal Swedish Academy of Sciences) likened this to the discovery of a new set of elementary particles. | | Like Isaac Newton, who invented calculus in order to do his work on physics, Ronald Coase first invented a new concept of “transaction costs” to lay the groundwork for his insight. As we explained in an earlier lecture, “transaction costs” consist of the time, money, and effort someone loses in obtaining what he wants. The libertarian law professor Richard Epstein tersely summed up the meaning of “transaction costs” in one word: “friction.”<ref name="Coase article"/> Coase’s Nobel Prize was based on his discovery and development of this new concept, and the committee conferring the prize (the Royal Swedish Academy of Sciences) likened this to the discovery of a new set of elementary particles. |
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| − | Once “transaction costs” were discovered and described, Coase’s insight became possible. The Coase theorem states that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights. The free market guarantees the efficient outcome regardless of who owns what, because there will remain incentives to bargain towards the efficient result until it is achieved. This is true even for activities that generate “negative externalities” (harm to others); freedom to negotiate will enable all affected to bargain towards the most efficient output. | + | Once “transaction costs” were discovered and described, Coase’s insight became possible. '''''The Coase theorem states that in the absence of transaction costs, an efficient or optimal economic result occurs regardless of who owns the property rights.''''' The free market guarantees the efficient outcome regardless of who owns what, because there will remain incentives to bargain towards the efficient result until it is achieved. This is true even for activities that generate “negative externalities” (harm to others); freedom to negotiate will enable all affected to bargain towards the most efficient output. |
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| | Restated another way, if property rights are well-defined and transaction costs are zero, then the most efficient or optimal economic activity will occur regardless of who holds the rights, because negotiation and market transactions will ensure the optimal allocation and use of property in a free market. | | Restated another way, if property rights are well-defined and transaction costs are zero, then the most efficient or optimal economic activity will occur regardless of who holds the rights, because negotiation and market transactions will ensure the optimal allocation and use of property in a free market. |
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| | But an entire educated class—including lawyers, accountants, and politicians—makes a very good living from transaction costs. Leading academics build their life’s work on the claim that “reforming” legal entitlements and property rights will somehow improve society. The Critical Legal Studies movement, started in 1977 at a conference at the University of Wisconsin at Madison, asserts that the upper class manipulates the law in order to perpetuate oppression of the lower class. The Coase theorem, however, disproves all that. Unchanging legal rules have no effect on economic activity, in the absence of transaction costs. | | But an entire educated class—including lawyers, accountants, and politicians—makes a very good living from transaction costs. Leading academics build their life’s work on the claim that “reforming” legal entitlements and property rights will somehow improve society. The Critical Legal Studies movement, started in 1977 at a conference at the University of Wisconsin at Madison, asserts that the upper class manipulates the law in order to perpetuate oppression of the lower class. The Coase theorem, however, disproves all that. Unchanging legal rules have no effect on economic activity, in the absence of transaction costs. |
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| − | The meaning of Coase’s insight for government regulation was unmistakable. A society is better off by simply assigning property rights, reducing transaction costs, and getting out of the way so that the market process can reach its most efficient result. Government regulations that add transaction costs hurt efficiency and prosperity. In response to the question “What’s an example of bad regulation?,” Coase replied, “I can’t remember one that’s good.” | + | The meaning of Coase’s insight for government regulation was unmistakable. A society is better off by simply assigning property rights, reducing transaction costs, and getting out of the way so that the market process can reach its most efficient result. Government regulations that add transaction costs hurt efficiency and prosperity. In response to the question “What’s an example of bad regulation?,” Coase replied, “I can’t remember one that’s good.” |
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| | ===The Most Famous Dinner in the History of Economics<ref>Warsh D., ''Knowledge and the Wealth of Nations: A Story of Economic Discovery'' 299 (2006).</ref>=== | | ===The Most Famous Dinner in the History of Economics<ref>Warsh D., ''Knowledge and the Wealth of Nations: A Story of Economic Discovery'' 299 (2006).</ref>=== |