Thus far this past week, we have attempted to trace the intellectual origins of Ronald Coase’s counter-intuitive idea of reciprocal harms to his undergraduate years at the London School of Economics (see here and here), but as I asked at the end of my previous post, what if the English economist had developed his model of reciprocal harms after his undergraduate years at the LSE?
More specifically, another possible catalyst of Coase’s reciprocal-harm axiom is Chicago economist Frank H. Knight (pictured below), especially his paper “Some Fallacies in the Interpretation of Social Cost” (Knight 1924, 1952), which was first published in the Quarterly Journal of Economics in 1924.
Although it is unlikely that Coase would have read Knight’s 1924 paper as a student at LSE (after all, Coase’s major was not economics), Knight’s social cost paper was considered important enough to be subsequently included in a collection of essays edited by George J. Stigler & Kenneth Boulding and published by the American Economics Association in 1952 (PDF here), so even if Coase was not familiar with the original version of Knight’s paper he may still have become acquainted with it in its subsequent incarnation. In addition, consider the following exchange that took place between Ronald Coase and his Chicago colleague William Landes in 1981:
LANDES: Ronald, you mentioned Frank Knight’s Risk, Uncertainty, and Profit as an important influence on your work. One of Knight’s papers that has been most influential in the recent law and economics area is his paper, “Some Fallacies in the Interpretation of Social Cost.” That was in some ways a forerunner of your paper on social cost because it spells out the importance of property rights in resource allocation, and I wonder if you were familiar with Knight’s article?
COASE: Oh, yes. In fact, I would say that the title of my paper came from Frank Knight, and the title of the paper was rather to indicate the topic I was talking about, because, of course, I don’t think the concept of social cost is a very useful one, and I don’t ever refer to it. But it did indicate to people what I was talking about. I knew it, and if there are traces of what Knight says in my work, it wouldn’t surprise me.
(Source: page 183 of Edmund W. Kitch, “The Fire of Truth: A Remembrance of Law and Economics at Chicago, 1932-1970,” Journal of Law & Economics, Vol. 26, No. 1 (1983), pp. 163-234; PDF available here.)
The title of Ronald Coase’s social cost paper can thus be traced back to Frank Knight’s previous paper, but was this precursor also the source of Coase’s reciprocal-harm axiom? After all, Coase had already posited his axiom as early as 1959 in his FCC paper. As it happens, Knight uses the word “reciprocal” to describe two cost charts in his social cost paper. (See Knight 1924, p. 588; Knight 1952, p. 165) I will post Knight’s cost charts and discuss their possible significance for Coase when I resume my this series on Monday, 5 October. (To be continued …)
