prior probability

Via Ben Orlin’s fun blog Math with Bad Drawings:

This list goes against everything I’ve been taught about good writing. Good writing, they say, is vivid and sensory. It involves punchy verbs, …

A Brief Collection of Math Metaphors in Literature

What happens when Jerry Seinfeld meets Homer Simpson? You get a pre-Breaking Bad Bryan Cranston! (File under: Questions Rarely Asked.)

In response to Tyler Cowen’s excellent new work, I have explained in two of my previous posts why Ronald Coase deserves to be considered the greatest economist of all time or GOAT, but I have not yet discussed Cowen’s last GOAT criterion: “if you sat down with the person and discussed economic issues, you would be in some way impressed.” As it happens, I actually had an opportunity to sit down with Ronald Coase and have lunch with him at his retirement home in North Chicago many years ago. (See photo below of Coase and me.) Suffice it to say it was an afternoon I will never forget. We ate hamburgers and talked about his lifelong friendship with another intellectual hero of mine, Duncan Black (as an aside, Coase’s 1993 obituary of Professor Black is still worth reading), and about our mutual admiration of Adam Smith (see here, for example). In addition, Coase and I also compared notes on a recent paper he had published in the Journal of Law & Economics finding fault with Benjamin Klein, Robert G. Crawford, and Armen A. Alchian’s work on the the acquisition of Fisher Body by General Motors (see here and here). Although by this time Coase was approaching the ripe old age of 100, I was very impressed with the English economist on many different levels, especially his wry sense of humor. Among other things, Coase mentioned how the sex ratio in his retirement home was not 1:1 but was skewed toward females!

Alternate title: Why Coase is the GOAT (part 3 of 3)

Hyper-blogger Tyler Cowen has nominated six men as the greatest economists of all time (GOAT) in his excellent new work on the history of economics: Milton Friedman, John Maynard Keynes, F. A. Hayek, John Stuart Mill, Thomas Malthus (really?), and Adam Smith. Put aside the fact that Lord Keynes is way overrated (see here, for example). As I mentioned in a previous post, the economist with the strongest claim to GOAT status (after Adam Smith) appears in passing only twice in Professor Cowen’s new work: Ronald H. Coase. I already explained why Coase is the GOAT in this post. Here, I will address (and respond to) a different question: why the Hell did Cowen snub Coase?

For Cowen, to be even considered for GOAT status an economist must not only have had original ideas with great historical import; he must also “have a hand in both macro and micro”. Alas, macro is Coase’s achilles heel, for his two most famous works — “The Problem of Social Cost” (1960) and “The Nature of the Firm” (1937) — focus mostly on such micro questions as the problem of harmful effects, i.e. so-called negative externalities, and the logic of industrial organization, i.e. why do we have firms? Coase has thus little or next to nothing to say about macro issues or the economy as a whole. So, how can Ronald Coase be the GOAT when his contributions to macroeconomics are nil? There are at least three reasons why:

1. The “Revisionist Ronald Coase” argument. First off, one could argue that Coase did, in fact, make meaningful contributions to macro. To begin with, Coase’s critique of welfare economics (or what Coase himself calls the “Pigovian tradition”) poses a direct challenge to standard macro models. In brief, Coase claimed that the fundamental distinction between “private cost” and “social cost” in welfare economics was pure nonsense because harms are reciprocal in nature, not uni-directional. When a factory pollutes the air, for example, should the factory owner be paid to shut down, or should the downwind neighbors be paid to move to another location? The distinction between private and social costs is totally and utterly irrelevant to these questions!
2. The “big question in macro” argument. The other contribution Coase made to macro, though perhaps an indirect one, was his overall comparative and agnostic approach toward what I call “the big question” in econ: when to rely on decentralized markets and when to make room for centralized command-and-control. Unlike Coase’s pragmatic and agnostic approach, all macroeconomists share the same fatal flaw: their macro models presume that command-and-control methods of manipulating the economy will have their desired effect, i.e. that macro-scale economic interventions will work out the way they are supposed to. Coase, however, called bullshit. In his seminal social cost paper, Coase himself extolled his fellow economists “to take into account the costs involved in operating the various social arrangements (whether it be the working of a market or of a government department), as well as the costs involved in moving to a new system. In devising and choosing between social arrangements we should have regard for the total effect. This, above all, is the change in approach which I am advocating.” Just because Coase’s approach toward the big question is all but ignored by most academic economists doesn’t mean Coase is wrong, which leads me to my third and final point for now …
3. The “dog that didn’t bark” argument. Whether or not you accept my revisionist take of Coase’s work, one could still argue, in the alternative, that Coase’s overall silence towards macro itself constitutes a statement: a condemnation of what has truly become a bullshit and faddish field. Writing in 2016, for example, no less an economic authority than Paul Romer wrote: “The methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation large Keynesian models, and is worse because it is far more opaque. On simple questions of fact, such as whether the Fed can influence the real fed funds rate, the answers verge on the absurd.” (Romer’s devastating critique of macroeconomics is available here.) Romer is not the only economist to diss macro, but he is, perhaps, the second-most prominent one to do so (after Coase, that is).

I will conclude my friendly reply to Tyler Cowen explaining why Ronald Coase is the GOAT of modern-day economics (and law!) in the next day or two; in the meantime, below is a 2003 lecture delivered by Coase himself:

In the introduction to his new online work, polymath Tyler Cowen identifies six or seven criteria for deciding who the greatest economist of all time is:

To qualify as “GOAT the greatest economist of all time,” I expect the following from a candidate. The economist must be original, of great historical import, serve as a creator and carrier of important ideas, have a hand in both theory and empirics, have a hand in both macro and micro, and be “not too wrong” on the substance of issues. Furthermore, the person also must be a pretty good economist! That is, if you sat down with the person and discussed economic issues, you would be in some way impressed.

Although Cowen does not assign weights to his criteria, by any measure the late English economist Ronald Coase is the true GOAT of economics.

Let’s begin with Cowen’s first criterion: originality. During his lifetime Coase came up with not one, but two original ideas! One is the concept of “marketing costs” (to use Coase’s preferred term), i.e. markets are not frictionless. Coase’s other original insight is that most harms are “reciprocal” or jointly-caused, i.e. so-called negative externalities are often the result of the actions and omissions of both the wrongdoer and the victim! (As an aside, this second idea is the subject of my 2023 Mercer Law Review article “Coase’s Parable“.)

Furthermore, Coase combined these two ideas to produce one of the most original and surprising theoretical insights in not one, but two different academic fields (economics and law), a result referred to in the literature as the Coase Theorem. In summary, when two conditions are met — namely, when transaction costs are zero, i.e. bargaining is costless, and when property rights are well-defined, i.e. the legal rules are clear cut — Coase’s counterintuitive theorem predicts that the victim and the wrongdoer will negotiate an optimal agreement (one that maximizes the total value of production) and the terms of the agreement will be the same regardless of what the actual legal rules are! (For an excellent survey of Coase’s contributions to economics and law, check out this beautiful essay by David Friedman.)

So Coase wins the theory and originality categories hands down. But what about the other criteria, such as historical import and empirics? Coase is the Michael Jordan of these categories as well, for he was not just an ivory tower thinker engaged in “blackboard economics” like most academic economists are — a point that Cowen himself concedes about modern-day economics in his introduction — for of all the great thinkers in the history of economics that Cowen surveys in his new book, Coase was the one economist whose ideas not only changed the world but who changed the world in a positive way!

In brief, Coase made a modest proposal in the late 1950s: the FCC should use markets to allocate broadcast licenses instead of holding costly and arbitrary administrative hearings or “beauty contests”. Although the idea of a market in broadcast rights was first dismissed as a joke, it was finally tested in the the 1990s, when the FCC started to use auctions to allocate spectrum rights. Suffice it to say, the rest is Internet history! (For more information about the impact of Coase’s ideas on the real world, check out this excellent paper by Thomas Hazlett, David Porter, and Vernon Smith.)

Okay, that still leaves Cowen’s “macro and micro” and “not too wrong” categories. Although Coase is not generally considered to be a macroeconomist like Lord Keynes or Milton Friedman, I shall explain in my next post why Coase should be … and why he without question wins that category as well!

Polymath, “information monster“, and hyper-blogger Tyler Cowen has just self-published a fascinating story-book titled “Who is the greatest economist of all time, and why does it matter?” Alas, the economist who has the strongest claim to GOAT status in economics (after Adam Smith, of course) appears in passing only twice in Professor Cowen’s new work: Ronald H. Coase. (Also, for what it’s worth, my other intellectual hero, Thomas C. Schelling, is mentioned only once; go figure!) Stay tuned, I will explain why Coase is the true GOAT in my next few posts over the weekend.

To commemorate the start of the 2023/24 NBA season, check out this nifty tool via the website PerThirtySix as well as Yo Gotti’s hit “LeBron James”, my all-time favorite sports anthem.