Viena Versus Chicago: THE SOCIAL COSTS OF THE COASE THEOREM

"While there may be an essay by a professional economist that has inflicted more damage on the case for economic freedom than Coase’s “Problem of Social Cost,” and there may be a scholarly essay that has polluted the moral environment of market choice more than Coase’s, I cannot imagine what that essay might be.

Becker’s 1968 essay, “Crime and Punishment: an Economic Approach,” comes close, but it is really only an application of Coase’s approach to law.

Coase can argue that his right to inflict such moral damage is merely a factor of academic production. No doubt this essay advanced his academic reputation after 1960. But for every benefit there is a cost:

it surely has inflicted and will continue to inflict damage on human freedom, for it assailed the moral case for private property as no article “within the camp” ever had.

It created an intellectually and morally bogus concept of the supposed social economic efficiency of production costs that remain the same irrespective of any initial distribution of ownership.

With that seemingly scientific and academically irresistible conclusion, Coase seduced some of the brightest economists and legal theorists of the next generation.

Without a moral case for private property, private property will not survive the attacks, political and intellectual, of its ever-present, ever-envious enemies.

Coase’s essay is regarded by many economists, as well as legal theorists, as a classic. It is a classic all right—a classic exercise in rarified and misleading sophistry. Yet, it is taken very seriously by Chicago School economists who have developed the subdiscipline, “the
economics of property rights.” It was taken seriously by the committee that awarded him the Nobel Prize in economics in 1991.

Sometimes even very bright economists can come up with outrageous hypotheses, and the public adopts these “logical discoveries” at its peril. Coase’s essay is regarded by academic economists—at least non- Keynesian and non-mathematical economists—as a landmark essay.

What it is, on the contrary, is a land mine essay. It blows off both legs of any defender of the free market who inadvertently attempts to stand on it, thereby leaving him, morally speaking, without a leg tostand on.

This is a very high personal transaction cost. Any society that adopts the Coase theorem as its standard of justice must turn over to the courts the right to undermine private ownership.

By defining damages as mutual—the fire-setter and his victim— the Coase theorem undermines the very concept of justice by destroying the concept of victim. The property owner loses his right to exclude invaders from appropriating some or all of the value of his
asset.

The Coase theorem turns over to the courts the right to assess damages in the name of the people. When enforced, it encourages property owners to take into their own hands the defense of their right to exclude.

When a man says “Get your cattle off my land” to someone whose cattle really are on his land, a society that seeks peace, including the reduced transaction costs that peace promotes, would be wise to instruct its judges to direct the cattle owner to round up his cattle and take them home.

Economists, who generally own neither farms nor cattle, and who rarely are armed, would be wise to assess the potential damages, including high transaction costs, that are fostered by a court system that ignores this fundamental principle of justice."

Em (pdf) UNDERMINING PROPERTY RIGHTS: COASE AND BECKER Gary North*