The Firm, the Market, and the Law

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Summary: The Authoritative Book on Transaction Cost Economics
Review: (This review was posted earlier, but somehow my names was removed from it. Please put it back or allow this re-post of the review. Thanks!)

This book consists of Nobel Prize winner Ronald Coases classic articles where the 1937 "Nature of the Firm" and The 1960 "The Problem of Social Cost" stands out.

This is *the* book to own on the subject as Coase takes his time to explain some of the reasons why economists in general has misunderstood his argument.

It is also well worth reading if you like Oliver Williamson's elaborations on the subject as a reading of Coases original articles reveals much of Williamsons work as just that. If you haven't read Williamson's 1985 The Economic Institutions of Capitalism book I recommend it highly *after* you've read this.

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Summary: Not just economic theory!
Review: Coase is an excellent read not only for the economist and the student of law, but for anyone interested in the functioning of society. It is also fun to read, since Coase's language is highly original, provocative and precise. Plus you have a whole bunch of original stories to explain real world phenomena to your students or your kids, especially the difficulty to arrive at a consensus when there is a real conflict of interests. My favorite is: The lighthouse in economics.

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Summary: Classic works collected, and explained
Review: Ronald Coase is a Nobel Prize-winning economist, whose work is probably cited more often by lawyers than by economists. "The Firm, The Market, and the Law" is principally a collection of his seminal scholarship, although it does contain some useful new material. The opening chapter is new and shows how a consistent theory of firms and markets, as well as a unique conception of economics and economically-oriented scholarship, runs through Coase's work from the 1930s to the late 1980s (when the book was published).

Coase is best known for two seminal articles. The earlier article "The Theory of the Firm" is the seminal work on the so-called nexus of contracts theory of the firm, as well as an early source for the transaction cost branch of the New Institutional Economics. The nexus of contracts model treats the firm not as an entity, but as an aggregate of various inputs acting together to produce goods or services. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm's inputs. The firm is simply a legal fiction representing the complex set of contractual relationships between these inputs. Besides emphasizing the importance of examining the various contracts making up the firm, however, Coase's fundamental insight was that the contractual nature of the firm does not preclude an element of command and control absent from market transactions. If a corporate employee moves from department Y to department X he does so not because of change in relative prices, but because he is ordered to do so. In other words, markets allocate resources via the price mechanism but firms allocate resources via authoritative direction. The set of contracts making up the firm consists in very large measure of implicit agreements, which by definition are both incomplete and unenforceable. Under conditions of uncertainty and complexity, the firm's many constituencies cannot execute a complete contract, so that many decisions must be left for later contractual rewrites imposed by fiat. It is precisely the unenforceability of implicit corporate contracts that makes it possible for the central decisionmaker to rewrite them more-or-less freely. The parties to the corporate contract presumably accept this consequence of relying on implicit contracts because the resulting reduction in transaction costs benefits them all.

Even better known, and even more central to transaction cost economics, however, is Coase's later article "The Problem of Social Cost," which also is reprinted in full here. In that article, Coase laid a critical foundation of modern law and economics - the so-called Coase theorem. The Coase theorem has been formulated in various ways, but one useful statement might be that: "When the parties can bargain successfully, the initial allocation of legal rights does not matter." Suppose a steam locomotive drives by a field of wheat. Sparks from the engine set crops on fire. Should the railroad company be liable? In a world of zero transaction costs, the initial assignment of rights is irrelevant. If the legal rule we choose is inefficient, the parties can bargain around it. Put another way, according to the Coase theorem, rights will be acquired by those who value them most highly, which creates an incentive to discover and implement transaction cost minimizing governance forms.

The Coase theorem has been widely criticized. The second major set of new material in this book is a chapter entitled "Notes on the Problem of Social Cost," in which Coase answers the more serious criticisms. That essay provides a useful intellectual history of the Coase theorem, as well as a trenchant defense of its main claims. One of the less-well informed criticisms of Coase is that he assumes transaction costs are zero. He does not, as this new essay makes clear. Indeed, as Coase points out, the interesting cases are those in which transactions costs are non-zero. In a world of positive transaction costs, however, the parties may not be able to bargain. This is likely to be true in our example. The railroad travels past the property of many landowners, who put their property to differing uses and put differing values on those uses. Negotiating an optimal solution will all of those owners would be, at best, time consuming and onerous. Hence, the allocation of legal rights becomes quite important.

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Summary: Brilliant insight
Review: Ronald Coase, though not an economist, in this book develops the rationale for the existence of firms (the reduction of transactions costs), an insight that has revolutionized the field of microeconomics since its publication (the original essay was published in the 1930s). He also touches on arguments related to monopolies (and when they should and should not be curbed by regulation). Despite the deep implications, it is written in an easily readable format.

Rating:
Summary: The Authoritative Book on Transaction Cost Economics
Review: This book consists of Nobel Prize winner Ronald Coases classic articles where the 1937 _Nature of the Firm_ and The 1960 _The Problem of Social Cost_ stands out.

This is _the_ book to own on the subject as Coase takes his time to explain some of the reasons why economists in general has misunderstood his argument.

It is also well worth reading if you like Oliver Williamson's elaborations on the subject as a reading of Coases original articles reveals much of Williamsons work as just that. If you haven't read Williamson's 1985 The Economic Institutions of Capitalism book I recommend it highly _after_ you've read this.

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Summary: Some of the most important ideas in economics
Review: This collection of seven of economist Ronald Coase's essays provides important understanding of the workings of market economies, the boundary between private and public, and what determines the size and structure of a firm. Coase distinguished his work from other economists by focusing on the role of transaction costs-now a common theme in discussions of the new economy. If you read only one of the chapters, it should be "The Nature of the Firm". Here Coase provides the intellectual foundations for strategic thinking about business architectures, mergers and acquisitions, outsourcing, and collaborative commerce. Some of this work was later elaborated on by Oliver Williamson (see his 1985 book, The Economic Institutions of Capitalism.) Like Joseph Schumpeter, Ronald Coase is an economist whose works from decades ago are now more relevant than ever. While Schumpeter's phrase "creative destruction" may be more memorable, in the end it is Coase's views on transaction costs and the nature of the firm that may be the more significant (and certainly more readable).

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Summary: Lucid essays on transaction costs and social welfare
Review: This little book is a fantastic introduction to some of the powerful ideas introduced by Coase. Coase initiated two different ideas that today govern or inform much of the work of economists. The first was his introduction of the idea of "transaction costs", from an article suggesting an investigation into the root causes for industrial organization. The second is now known as the Coase Theorem, and stems from his insightful refutation of the Pigouvian view of social cost. There is also an article investigating the actual history of lighthouses in England, something which has usually been cited as a pure public good, and therefore requiring government provision. The history shows that most lighthouses - in some periods, all lighthouses - were privately provided. Coase's writing is lucid, his ideas profound, and his influence widespread. This collection is very important to anyone wanting to understand externalities, transaction costs, and social welfare.

Rating:
Summary: Lucid essays on transaction costs and social welfare
Review: This little book is a fantastic introduction to some of the powerful ideas introduced by Coase. Coase initiated two different ideas that today govern or inform much of the work of economists. The first was his introduction of the idea of "transaction costs", from an article suggesting an investigation into the root causes for industrial organization. The second is now known as the Coase Theorem, and stems from his insightful refutation of the Pigouvian view of social cost. There is also an article investigating the actual history of lighthouses in England, something which has usually been cited as a pure public good, and therefore requiring government provision. The history shows that most lighthouses - in some periods, all lighthouses - were privately provided. Coase's writing is lucid, his ideas profound, and his influence widespread. This collection is very important to anyone wanting to understand externalities, transaction costs, and social welfare.

Rating:
Summary: Best book on Coase Theorem and transaction cost
Review: Unlike other Nobel Prize winners, Coase's original papers, reprinted in this book, actually are the best sources to explain his own theory. Anyone seeking to understand the "Chicago School" of economics should read this book. To readers more familiar with the modern, more linear, writing style, however, Coase may appear to be a bit rambling at times.

Rating:
Summary: Best book on Coase Theorem and transaction cost
Review: Unlike other Nobel Prize winners, Coase's original papers, reprinted in this book, actually are the best sources to explain his own theory. Anyone seeking to understand the "Chicago School" of economics should read this book. To readers more familiar with the modern, more linear, writing style, however, Coase may appear to be a bit rambling at times.