FOREVER CONTEMPORARY the Economics of Ronald Coase

FOREVER CONTEMPORARY The economics of Ronald Coase Edited by CENTO VELJANOVSKI Forever Contemporary: The Economics of Ronald Coase FOREVER CONTEMPORARY: THE ECONOMICS OF RONALD COASE EDITED BY CENTO VELJANOVSKI with contributions from PHILIP BOOTH STEPHEN DAVIES MICHAEL MUNGER MARK PENNINGTON MARTIN RICKETTS ALEX ROBSON NICOLA TYNAN CENTO VELJANOVSKI First published in Great Britain in 2015 by The Institute of Economic Affairs 2 Lord North Street Westminster London SW1P 3LB in association with London Publishing Partnership Ltd www.londonpublishingpartnership.co.uk The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. Copyright © The Institute of Economic Affairs 2015, except Chapter 8, which was previously published in Journal of Man and the Economy, reproduced by permission The moral rights of the authors have been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (elec- tronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. A CIP catalogue record for this book is available from the British Library. ISBN 978-0-255-36711-0 (interactive PDF) Many IEA publications are translated into languages other than English or are reprinted. Permission to translate or to reprint should be sought from the Director General at the address above. Typeset in Kepler by T&T Productions Ltd www.tandtproductions.com CONTENTS The authors ix Foreword xiv Summary xxvi 1 Introduction 1 Cento Veljanovski A short biography 1 Coase’s approach 3 What of the future? 6 Contributions 8 2 The economics of Ronald Coase 14 Cento Veljanovski What Coase did 14 Coase’s impact 23 New Institutional Economics (NIE) 24 Economic analysis of law 28 Economics 31 Regulation 37 Antitrust 39 Spectrum: from wireless to mobile phones 42 Coase’s legacy 44 v COntents 3 Ownership, governance and the Coasian firm 46 Martin Ricketts The nature of the firm 46 ‘Ownership’ in the Coasian theory of the firm 49 The hazards of transacting 52 Competition and the selection of governance structures 57 Public policy towards the governance of enterprise 64 Conclusion 68 4 Coase’s contributions to the theory of industrial organisation and regulation 70 Alex Robson Introduction 70 The nature of the firm: implications for the theory of industrial organisation 73 Regulating utilities: the Coasean critique of marginal cost pricing 77 The hold-up problem: implications for regulation 80 Regulation and industrial organisation of the communications industry 83 The development of the radio broadcasting industry in Britain 85 The allocation of radio frequency spectrum in the United States 86 Conclusion 89 5 Coase on property rights and the political economy of environmental protection 92 Mark Pennington Introduction 92 Coase on the problem of social cost 94 vi COntents Coasian analysis and the scope for environmental markets 100 Ethical objections to the extension of environmental markets 108 Conclusion 116 6 Coase and water 118 Nicola Tynan Introduction 118 Clearly defined property rights 120 Integrated water resources management 124 Conclusion 136 7 The Coase research agenda: public goods, transaction costs and the role of collective action 137 Stephen Davies Introduction 137 Was the lighthouse a public good? 138 Conditions for private provision 140 Coase’s research agenda 141 Bundling private with public goods 147 Coase’s way 159 8 Stock exchanges as lighthouses 160 Philip Booth Lighthouses – what does not work ‘in theory’ works in practice 162 Financial regulation – what does not work ‘in theory’ works in practice 163 Private regulation and stock exchanges 166 ‘Big bang’ and ‘deregulation’ 172 vii COntents The further development of statutory regulation 175 Could bank regulation be provided by market institutions? 178 Conclusion 182 Coda 185 9 Coase and the ‘sharing economy’ 187 Michael Munger Introduction 187 Tomorrow 3.0: rent or own? 189 The power drill trope: it’s about time 191 Entrepreneurs can sell reductions in transactions costs 195 Middlemen as brokers and sellers of connections 197 Why sell products when you can sell reductions in transactions costs? 200 Coase’s insight 204 Publications by Ronald H. Coase in chronological order 209 References 218 About the IEA 232 viii THE AUTHORS Philip Booth Philip Booth is Editorial and Programme Director at the In- stitute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St Mary’s University, Twickenham. He was formerly Professor of Insurance and Risk Management at the Cass Business School, where he also served as Asso- ciate Dean. He has an undergraduate degree in economics from the University of Durham and a PhD in finance. He is a Fellow of the Institute of Actuaries and of the Royal Statisti- cal Society. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues. He has written widely, including a number of books, on investment, finance, social insurance and pensions, as well as on the re- lationship between Catholic social teaching and economics. Stephen Davies Dr Stephen Davies is Education Director at the IEA. Pre- viously he was programme officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK, where he was Senior Lecturer in the Department of History and Economic His- tory at Manchester Metropolitan University. He has also ix The authOrs been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A histori- an, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003), and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991). Michael Munger Michael Munger received an economics PhD from Wash- ington University in 1984. He worked at the US Federal Trade Commission, then taught at Dartmouth College, Texas, and North Carolina State University before moving to Duke University in 1997. He chaired Political Science at Duke from 2000 to 2010, and now directs PPE there. He is a past Public Choice President, as well as past editor of that society’s journal. His most recent book is Choosing in Groups (Cambridge University Press, 2015). Mark Pennington Mark Pennington is Professor of Political Economy at King’s College, University of London. He holds a PhD from the London School of Economics and Political Science, and was the winner of the Atlas Institute for Economic Research prize for ‘contributions to the understanding of spontaneous order’ in 2007. His research focuses on the intersection between politics, philosophy and economics x The authOrs with a particular emphasis on the implications of Hayekian and public choice concepts for the comparative evaluation of socio-economic systems. He has published several books examining these themes, including Public Choice and the Politics of Government Failure (Athlone/Continuum, 2000) and Liberating the Land (IEA, 2002). He is also the author of Robust Political Economy (Edward Elgar, 2010). Martin Ricketts Professor Martin Ricketts is Professor of Economic Organ- isation and was formerly Dean of the School of Humanities at the University of Buckingham. He is also Chairman of the IEA’s Academic Advisory Council. He has a DPhil from the University of York and was Research Economist at the Industrial Policy Group from 1970 to 1972 under the direction of John Jewkes. He was next Research Fellow at the Institute of Social and Economic Research, University of York. He joined the academic staff of the University of Buckingham in the autumn of 1977. He has published in professional journals on the new institutional economics, the theory of the firm, entrepreneurship, public choice, aspects of public finance and housing policy and has authored several books. He was Economic Director of the National Economic Development Office (1991–92). Alex Robson Alex Robson is Director of the Economic Policy Analysis Pro- gram at the Business School, Griffith University (Brisbane, xi The authOrs Australia). He was previously Senior Research Fellow at the SMART Infrastructure Facility at the University of Wol- longong, Australia, and lecturer at the Australian National University in Canberra, Australia. Nicola Tynan Nicola Tynan is Associate Professor of Economics at Dick- inson College, Pennsylvania, where she teaches courses relating to economic history, microeconomics, and environmental and natural resource economics. She holds an MS in government from the London School of Economics and Political Science and a PhD in economics from George Mason University. Her research interests and publications focus on the economic history of water in Britain, particu- larly London, along with topics in the history of economic thought relating to natural monopoly and institutional choice. Cento Veljanovski Dr Cento Veljanovski is Managing Partner of Case Asso- ciates, and IEA Fellow in Law & Economics. He was previously Research and Editorial Director at the Institute of Economic Affairs (1989–91), Lecturer in Law and Econom-

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