Nobel Prize-winning economist Ronald Coase died recently at the age of 102. Many fine tributes have been written over the past week, but a common theme in many of them is that Coase was an economist interested in what actually happens in the economy. Or, as he explains below, “the approach [to economics] should be empirical.”
“[Coase] taught economists that they should not just pore over numbers but look inside the organisations that produce wealth,” writes The Economist. In an earlier article honoring his 100th birthday, the same magazine stated that “the twin decisions” by Coase had been vindicated: “to look inside the black box rather than simply ignoring it, and to examine businesses, not just fiddle with theories. Is it too much to hope that other practitioners of the dismal science will follow his example and study the real world?” Coase was not fond of what he called “blackboard economics“: mere theory versus real life. “As a young scholar,” writes Fred Smith in Forbes, “Coase studied how businesses in competitive markets actually survived and thrived. Coase recommended that economists look at businesses’ actual practices and organizational structures, as these likely indicated rational approaches to complex competitive challenges…Coase saw the economy as an evolving, spontaneously ordered system characterized by entrepreneurial creative destruction, in which firms find their way by experimenting with new organizational forms…” (italics mine.)
Where did this approach come from? Peter Boettke of George Mason University offers the following:
While many younger readers will associate Coase with the University of Chicago and what they understand the field of Law and Economics to be, Ronald Coase didn’t join the staff at the University of Chicago Law School until 1964. His formative intellectual background was at the London School of Economics in the 1930s, where Hayek loomed as a large intellectual influence (along with Robbins and Arnold Plant). The ideas behind Coase’s examination of the nature of the firm, he told us on numerous occasions, were born in contemplation of Plants discussion of the socialist calculation controversy and his everyday observations of the organization of business activities during his study trip to the US. As he began teaching, he had to present a lecture on the firm and these ideas clicked…Ronald Coase was a masterful economist. His work represents the approach to political economy that was pioneered at LSE and developed into the Virginia School of Political Economy. He was a champion of basic economic reasoning pursued persistently and consistently, and for an appreciation of real-world institutional diversity and its implications…I would nudge [my] students by referring to Coase as the ideal “economic minimalist” to be contrasted with the “economic maximalist.” The economic minimalist strives to have the greatest insight with the least theory possible, while the maximalist has very little insight for a lot of theoretical mumbo-jumbo…Most practicing economist don’t see the power of basic economic reasoning or are in awe of the mystery of the mundane experience of everyday commercial activity, so enamored they are with technique and so-called sophisticated efforts at measurement.
Coase was working all the way up to the end. Just last year, he published How China Became Capitalist with Ning Wang and was in the process of launching a new journal, Man and the Economy. It has been argued that “Coase’s ideas are still considered renegade in the ivory tower” and that his “insights have not finished bearing fruit.” Ultimately, economics needs to be saved from economists (like Paul Krugman). “Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship,” argued Coase in the December 2012 issue of Harvard Business Review.
The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate…The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost. This separation of economics from the working economy has severely damaged both the business community and the academic discipline…Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task…It is time to reengage the severely impoverished field of economics with the economy. Market economies springing up in China, India, Africa, and elsewhere herald a new era of entrepreneurship, and with it unprecedented opportunities for economists to study how the market economy gains its resilience in societies with cultural, institutional, and organizational diversities. But knowledge will come only if economics can be reoriented to the study of man as he is and the economic system as it actually exists.
We can only hope that there is much more fruit to be borne.