Coase’s lighthouse

In honor of Ronald Coase, an intellectual giant who just died at the ripe old age of 102, prior probability wants to share this excerpt from section 3 of our paper Confessions of a Latino Law Prof to explain the immense impact Professor Coase has had on our thinking (footnotes omitted):

            << If the great German philosopher Immanuel Kant once credited David Hume with awakening him from his “dogmatic slumbers,” I must recognize Ronald Coase for unwittingly doing the same for me. I say “unwittingly” because Coase is an economist; I, a literary lawyer living and teaching in Caribbean at the time, a world away from Coase’s formidable home, the University of Chicago.

            Nevertheless, one day I stumbled upon a short paper entitled “The Lighthouse in Economics.” Perhaps it was inevitable that Coase’s paper on lighthouses and I should cross paths because of my interest in all things history—after all, the topic of Coase’s paper was the history of the British lighthouse system—but what was not preordained was the enormous effect Coase would come to exert on my world-view. In fact, I was deeply suspicious of Coase.  I approached his paper cautiously, with a wary eye and with trepidation. Was not Coase the intellectual godfather of the Chicago school of law and economics?

            You see, while I was a student at Yale, and even as late as when I began teaching, I was not terribly impressed by either the Chicago school in general or the celebrated “Coase Theorem” in particular. I had tried on two or three previous occasions to read Coase’s landmark paper, “The Problem of Social Cost,” but I could never get beyond the first few pages. Specifically, my problem with “The Problem of Social Cost” was the magical world of zero transaction costs, and I was especially troubled by Coase’s use of make-believe numbers to illustrate his famous example of the cattle rancher and the crop farmer. In my view, all Coase was doing was rigging the game ahead of time to get the results he wanted instead of confronting his counter-intuitive hypothesis with actual test data.

            Moreover, as a philosophical matter, I had rejected the whole of “law and economics” out of hand. The concept of an “efficient breach,” the notion that there exists an optimal level of safety precautions, the idea of putting the pursuit of economic efficiency ahead of traditional notions of “justice”—all the major ideas of the economic approach to law enormously offended my Kantian values. In addition, I had already read a plethora of potent critiques of the economic approach to law that seemed to settle the matter: Frank Michelman’s astute appraisal of normative economics, Jules Coleman’s subtle analysis of “efficiency,” and Arthur Alan Leff’s claim that “law and economics” is simply a new form of legal formalism—though none of these academic works delivered as devastating a blow as Shakespeare’s Merchant of Venice.

            Ronald Coase thus had no direct effect on my thinking when I began teaching, and Coase might have remained on the sidelines of my intellectual life had it not been for a fortuitous event in December of 2000, for it was chance that intervened the day I found Coase’s paper, “The Lighthouse in Economics.” What I found in Coase’s lighthouse paper, to my surprise, was a stinging critique of conventional economic wisdom.

            In economics, lighthouses are the paradigmatic example of a public good. Coase, however, examined the historical record and saw that the first lighthouses to be built in England and Wales were owned and operated by private firms. The lighthouse operators made a profit by collecting their tolls directly from the shippers. Although Parliament eventually nationalized the lighthouses, Coase was making a larger prescriptive point: scholars should not use an empirical example that is not truly empirical; they should get their facts right before they make an assumption. Now, this was music to my ears.

            The lighthouse paper thus allowed me to see Coase in new light (pun intended). I gained a newfound respect for his work, and most important, I decided to return to my old nemesis, “The Problem of Social Cost.” This time, I read it carefully and closely in one sitting. This time, I understood what Coase was really trying to say. And this time, I would undergo nothing less than a Gestalt switch in my world-view * * * >>


About F. E. Guerra-Pujol

When I’m not blogging, I am a business law professor at the University of Central Florida.
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2 Responses to Coase’s lighthouse

  1. The Professor's Wife says:

    R.I.P Coase

  2. Justin Venegas says:

    Coases’s theorem was a huge breakthrough in Economics when he developed it. Even Coase admitted that he wasn’t completely responsible for the theory. Coase articulated the work of George Stigler. As you probably know, Coase’s theorem basically says that without transaction costs, the assignment of legal rights has no bearing on the allocation of resources. Have you heard of Simon Rottenberg’s “Invariance Hypothesis”? In 1956 Mr. Rottenberg stated that, “It seems, indeed, to be true that a market in which freedom is limited by a reserve rule such as that which now governs the baseball labor market distributes players among teams about as a free market would.” Coase’s theorem wasn’t developed until 1960. Did Rottenberg get the short end of the stick, or do economists just need to watch more baseball?

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