Ronald Coase's work. Ronald Coase and transaction cost theory

Ronald Coase
(born December 29, 1910)
Nobel Prize in Economics 1991
English economist Ronald Harry Coase was born in Willesden, a suburb of London. His father was a telegraph operator, his mother also worked as a postal worker, but left her job after marriage. K.'s parents did not receive an education, but were quite literate people. Both of them were interested in sports. K. is the only child in the family; he had the usual interest in sports for a boy, but his passion for study prevailed. As a child, K. had slight weakness in his legs, and therefore he began to study at a school for children with disabilities. He entered classical secondary school at the age of 12 (instead of the usual 11). This circumstance later affected his biography.
In 1927, K. passed exams in history and chemistry with excellent grades, giving him the right to continue his studies at the university. However, he chose to remain at school for two more years, intending to master the first-year program of the history department of the University of London as a kind of part-time student, followed by passing intermediate exams and moving on to the university. Since knowledge of Latin was required to obtain a diploma in history, and K., due to the fact that he entered school a year later, was unable to learn it, he decided to study the natural sciences course; Sciences, specializing in chemistry. But he soon became convinced that this was not his calling, and then the only specialty that could be studied at school with subsequent transfer to university was commerce. K. passed the exams for this course and in 1929 moved to the London School of Economics (LSE).
Coase's specialty did not involve studying economic theory- the main place in the program was occupied by accounting, statistics, and law. However, Coase had many “theoretician” friends and participated in informal discussions of various problems in economic theory.
At the last stage of training, future bachelors of commerce had to attend seminars on business administration, which were taught by the new head of the department of commerce, A. Plant. For Ronald, these seminars were of great importance. As he himself wrote: “I received a huge gift from fate, which influenced everything I did subsequently.” What happened at these seminars?
In his classes, A. Plant, among other things, told students about the amazing mechanism of the “invisible hand” that controls all manufacturers. The real managers in the economy are consumers, and managers only carry out their commands. Following many economists of his time, Plant believed that “a normal economic system works by itself,”3 and denied the need for central planning.
However, reality cast doubt on this theory: the height of the Great Depression, mass unemployment everywhere, and markets powerless to help. To overcome the situation, various options for planning business activities are increasingly being proposed.
There were also facts of a different kind: in Russia, centralized economic management was becoming a reality. The economy was rebuilt according to the Leninist principle of “the whole country is a single factory.” There was a debate among Western economists about central planning, and in this discussion the question inevitably arose about the reasons for the emergence of firms and the limits of their growth. All this could not but influence the development of the views of R. Coase (who, by the way, sympathized with the socialists at that time).
When it was time for his final exams, Coase planned to continue working at the London School of Economics, working on industrial law. A little more, and Coase would undoubtedly have become a lawyer, but this was not destined to happen. Largely thanks to the efforts of A. Plant, the University of London awarded R. Coase a trip to study in America, virtually predetermining his future fate.
In 1931-1932 Coase worked in the United States, studying the vertical and horizontal integration of industry in that country. Although A. Plant discussed various options for industrial organization in his lectures, there was no single theory explaining the existing differences. In the United States, Coase met with famous economists (including V. Leontiev and F. Knight) and visited many firms with different types of organization, collecting empirical material for his work. The result of this work was the birth of a new approach to explaining the existence of a company. In a 1932 letter, he writes: “I am developing a theory according to which economic integration is the result of overcoming the limitations of small-scale production - in essence, it is the association of small producers in various industries for the purpose of obtaining the benefits of large-scale production.” And further: “Integration is the unification under one control of several different functions.”4 Here the question arises: how to correlate integration (especially vertical) with the generally accepted interpretation of specialization. After all, these trends are in a certain sense opposite. To do this, obviously, it is necessary to somehow measure them, to find an evaluation criterion, and an economic criterion, such as, for example, costs. Coase writes: “I believed that it was necessary to study the costs associated with combining different combinations of functions under central control. This led me [then] to think that the division of integration into vertical and horizontal was not important. What was fundamentally important was the actual integration of various functions under one control, stage poorly studied."5
Thus, already in 1932 the idea of coordination costs was formulated (this is evidenced by a lecture given in October of this year). But Coase is in no hurry to publish it. This was partly due to the author's natural modesty and caution. This is partly due to the fact that the young Coase was completely absorbed in teaching and research and may not have been aware of the significance of his ideas.
In 1932-1935. He teaches at the School of Economics and Commerce in Dundee and at the University of Liverpool. In 1935, he returned to the London School of Economics and began lecturing on public utilities in Great Britain. And only in 1937, he finally published the article “The Nature of the Firm,” in which he expressed his point of view on the reasons for the unification of independent manufacturers into firms.
Later, the significance of the discovery of transaction costs will be compared to the discovery of a new elementary particle in physics. And although this “particle” will be ignored by economists for some time, three decades later an entire branch of economic theory will develop from it - neo-institutionalism.
How did Coase manage to discover a “new elementary particle” in the economy? What circumstances can we explain this achievement?
Firstly, these were the years of “high theory” and an atmosphere of active creative activity reigned within the walls of the London School of Economics, which stimulated everyone to take an active part in the development of a new economic science. This enthusiasm and self-confidence led to many discoveries in the 1930s.
Secondly, A. Plant not only provoked Coase’s thoughts, but also instilled in him a craving for research into real economics. As Coase himself wrote: “The main influence of Arnold Plant on my work was that he drew attention to those questions concerning business practice that at that time remained without a satisfactory answer.”
The key to success was the thinking of the young Coase, free from the generally accepted perception of economic science. Subsequently, he himself wrote: “If you receive serious training, you are taught to think in a certain way, which means that there are some things that you simply do not think about.”
Subsequently, this common sense, which allowed a non-specialist to explain a fundamental phenomenon in the economy, helped Coase to prove himself in other areas of economic science.
During the Second World War, Coase worked in government services - at the Forestry Commission, then at the Central Statistical Service. He managed to return to the London School of Economics only in 1946. He began teaching one of the key courses, “Fundamentals of Economic Theory,” and also continued research into public services (namely mail and radio broadcasting).
In 1948, Coase spent nine months in the United States on a Rockefeller scholarship studying the American broadcasting industry. Soon after, in 1950, his book British Broadcasting: A Study in Monopoly was published.
In 1955, R. Coase emigrated to the United States of America. He initially worked at the University at Buffalo, but in 1959, after a year at the Center for Advanced Study of the Behavioral Sciences, he moved to the economics department at the University of Virginia. Coase maintained his interest in public services (particularly broadcasting), and during his year at the Center he wrote the article "The Federal Communications Commission," which was published in 1959. The FCC dealt with the regulation of the broadcasting industry in the United States, including distribution frequency range. Coase reviewed the procedures followed by the commission and concluded that the distribution was carried out very inefficiently. He tried to offer frequency allocation through a price mechanism (the rights are given to the highest bidder).
Some of his reasoning was critically accepted by a number of economists at the University of Chicago. In this regard, it was decided to meet on a quiet evening with A. Director (professor at the University of Chicago, father-in-law of M. Friedman) and discuss these issues in a calm and comfortable atmosphere. During this meeting, R. Coase convinced the dissenters, as a result of which he was offered to publish his arguments in the Journal of Law and Economics. Despite the fact that the main idea was already contained in a hidden form in the work "Federal Communications Commission", Coase wrote another article - "Problems of Social Costs", in which he outlined and developed his views in more detail. This article appeared in early 1961 and, unlike his 1937 paper, was an immediate success. It was widely discussed at the time and continues to be discussed in modern economic literature to this day. A pleasant twist of fate was that if economists from the University of Chicago had not considered the conclusions of the FCC work to be erroneous, then it is quite obvious that the article “Problems of Social Costs” would never have been written.
The main idea of this wonderful article with many examples from real economy was simple - no matter who owns the right to use a resource, this right will still be bought by the one who will receive a higher profit from it. The law simply defines the person with whom to enter into a contract for the use of the resource.
Soon J. Stigler in his work “The Theory of Price” will dub this statement the Coase theorem, paraphrasing it as follows: “Under conditions perfect competition private and social costs are equal."
In 1964, R. Coase moved to the University of Chicago, where he works to this day. There he became editor of the now well-known Journal of Law and Economics, retaining this position until 1982. The work of the editor was a source of great satisfaction - Coase encouraged economists and lawyers to write about various aspects of the functioning of the market and how the government regulates economic activity. The journal played a key role in creating a new direction of research at the intersection of two sciences - law and economic theory.
Common sense never failed Coase. In almost every subject on which he had occasion to write, Coase proved to be a very insightful critic of existing theory and proposed simple and reasonable ways to correct shortcomings.
In the 1920s, for example, it was common to speak of marginal cost as the cost of an additional firm. This approach seemed unconvincing to R. Coase, and he expressed his doubts to A. Plant. He replied that it might be better to use economic analysis the term "marginal cost of an additional unit of output." Acting as Plant advised, R. Coase and his friend Fowler constructed the marginal cost curve and showed the relationship between it and the average cost curve. Great was their disappointment when, looking at one of the applications of the “Economic Theory of Welfare,” they discovered that A. Pigou had done this before them.
R. Coase was well aware of the shortcomings of the methodology of economic science - especially such a developed part of it as microeconomics. According to Coase, the latter can explain the maximizing behavior of ideal firms and consumers, but in fact this explanation is meaningless. According to the theory, people choose what they choose.
This method of analyzing maximizing behavior, called the economic approach, made possible the expansion of economists into other social sciences. But this emphasis on the logic of choice did not benefit economic theory itself. The theory created consumers who have no trace of humanity, firms that do not know what organization is, exchanges carried out outside markets.
Moreover, modern economic theory uses overly precise and mathematical analysis to explain things that can be understood through simpler reasoning. In many cases, economic theory becomes a prisoner of its method. First, economists thoroughly master the technique of analysis, and then think about where to apply it. Since this method of analysis often cannot be applied to real firms and consumers, economists have come up with imaginary economic systems, turning analysis into a game.
“It’s funny to receive an award at age eighty for work you did at twenty,” Coase said in his Nobel lecture. Fate turned out to be unfair to this man, thereby demonstrating his genius. After all, other economists not only failed to invent this analysis themselves, but for several decades after Coase did it, they could not realize the fundamental significance of what was invented.
etc.............

Oleg Levyakov

In the past, economic theory suffered from its inability to articulate its premises clearly. While developing the theory, economists often avoided examining the foundations on which it was built. But such research is essential not only to prevent false interpretations and unnecessary disputes that arise from insufficient knowledge of the initial premises of the theory, but also because of the extreme importance for economic theory of rational judgment in choosing between competing sets of theoretical premises.
Perhaps the central section of microeconomic theory is the theory of the firm, which enriched economics with the concept of transaction costs. The use of this particular concept for the study of economic processes currently seems to be very fruitful. It is the possibility of reducing transaction costs that makes it effective to replace market exchange with internal organization, which explains the existence of firms.

Transaction cost theory

The theory of transaction costs is an integral part of a new direction in modern economic science - neo-institutionalism. Its development is primarily associated with the names of two economists - R. Coase and O. Williamson. The basic unit of analysis in the theory of transaction costs is the act economic interaction, deal, transaction. The category of transaction is understood extremely broadly and is used to denote the exchange of both goods and legal obligations, transactions of both short-term and long-term nature, requiring both detailed documentation, and presupposing a simple mutual understanding of the parties. The costs and losses that may accompany such interaction are called transaction costs. Transaction costs are the central explanatory category of all neoinstitutional analysis. Orthodox neoclassical theory viewed the market as a perfect mechanism, where there is no need to take into account the costs of servicing transactions. The key importance for the operation of the economic system of transaction costs was realized thanks to the article by R. Coase “The Nature of the Firm” (1937). He showed that in every transaction it is necessary to negotiate, supervise, establish relationships, and resolve disagreements. Initially, transaction costs were defined by R. Coase as “the costs of using the market mechanism.” Later this concept acquired a broader meaning. It has come to mean any types of costs that accompany the interaction of economic agents, regardless of where it takes place - on the market or within organizations, since business cooperation within hierarchical structures (such as firms) is also not free from friction and losses. According to the most widely recognized definition by K. Dahlman, transaction costs include the costs of collecting and processing information, negotiating and making decisions, monitoring compliance with contracts and enforcing their implementation. The introduction of the idea of positive transaction costs into scientific circulation was a major theoretical achievement.

Concept and types of transactions

The concept of transaction was first introduced into scientific circulation by J. Commons. A transaction is not an exchange of goods, but an alienation and appropriation of property rights and freedoms created by society. This definition makes sense (Commons) due to the fact that institutions ensure the extension of the will of an individual beyond the area within which he can influence the environment directly through his actions, i.e., beyond physical control, and therefore turn out to be transactions in differences from individual behavior as such or the exchange of goods. Commons distinguished three main types of transactions:

Transaction transaction - serves to carry out the actual alienation and appropriation of property rights and freedoms, and its implementation requires mutual consent of the parties, based on economic interest each of them.
Management transaction - the key in it is the management relationship of subordination, which involves such interaction between people when the right to make decisions belongs to only one party.
Rationing transaction – it preserves asymmetry legal status parties, but the place of the managing party is taken by a collective body that performs the function of specifying rights. Rationing transactions include: drawing up the company’s budget by the board of directors, federal budget government and approval by a representative body, a decision of an arbitration court regarding a dispute arising between acting entities through which wealth is distributed. There is no control in the rationing transaction. Through such a transaction, wealth is allocated to one or another economic agent.

The presence of transaction costs makes certain types of transactions more or less economical depending on the circumstances of time and place. Therefore, the same operations can be mediated by different types of transactions depending on the rules that they order.
Transactions can be simple, for example, buying a bunch of radishes on the market, or complex, for example, implementing an ERP system with the help of external consultants. Complex and responsible agreements are always formalized by contracts. Any Transaction consists of two parts:

Preparation of the agreement. At this phase, the buyer must find a seller, collect information about prices (ask the price), evaluate quality, select a seller and come to an agreement with him. The seller must buy a place on the market, undergo quality control of his goods, and continuously collect information on prices.
Implementation of the agreement. At this phase, the buyer pays for the goods, receives them at his disposal, and evaluates the quality again.

Each Transaction necessarily defines 4 groups of parameters:

Transaction participants

The resources used in the transaction and the expected results,

The rights of participants to resources and results,

Responsibilities of the parties.

Transaction costs and their types.

Transaction costs are any losses arising from the ineffectiveness of joint decisions, plans, concluded contracts and created structures. Transaction costs limit the possibilities for mutually beneficial cooperation.
Developing Coase's analysis, proponents of the transaction approach proposed various classifications of transaction costs (costs). In accordance with one of them, the following are distinguished:

Costs of searching for information. Before a transaction is made, it is necessary to have information about where potential buyers or sellers of consumer goods or production factors can be found and what the current prices are. Costs of this kind consist of the time and resources required to conduct the search, as well as losses associated with the incompleteness and imperfection of the information received.
Negotiation costs. The market requires the diversion of significant funds for negotiations on the terms of exchange, for the conclusion and execution of contracts. The more participants in the transaction and the more complex the subject matter, the higher these costs. Losses due to poorly concluded, poorly executed and unreliably protected agreements are a powerful source of these costs.
Measurement costs. Any product or service is a set of characteristics. When exchanging, only a few of them are inevitably taken into account, and the accuracy of their assessment can be extremely approximate. Sometimes the qualities of a product of interest are generally immeasurable and you have to use intuition to evaluate them. The purpose of their savings is determined by such forms of business practices as warranty repairs, branded labels,
Costs of specification and protection of property rights. This category includes the costs of maintaining courts, arbitration, government agencies, the cost of time and resources required to restore violated rights, as well as losses from their poor specification and unreliable protection.
Costs of opportunistic behavior. The term "opportunistic behavior" was introduced by O. Williamson. This is the name of dishonest behavior that violates the terms of the transaction or is aimed at obtaining unilateral benefits to the detriment of the partner. Various cases of lying, deceit, loafing at work, and neglecting one’s obligations fall under this heading. There are two main forms of opportunism, the first of which is characteristic of relations within organizations, and the second of market transactions.
Shirking is work with less dedication and responsibility than required under the terms of the contract. When there is no possibility of effective control over an agent, he may begin to act based on his own interests, which do not necessarily coincide with the interests of the company that hired him. The problem becomes especially acute when people work together (as a "team") and personal contribution It is very difficult to identify each one.
Extortion (holding-up) is observed in cases where one of the agents made investments in specific assets. Then his partners have the opportunity to claim part of the income from these assets, threatening otherwise a break in relations (for this purpose, they may begin to insist on revising the price of the product received, improving its quality, increasing the volume of supplies, etc.). The threat of “extortion” undermines incentives to invest in specific assets.
Costs of "politicization". This general term can be used to describe the costs that accompany decision making within organizations. If participants are endowed with equal rights, then decisions are made on a collective basis, by voting. If they are located at different levels of the hierarchical ladder, then the superiors unilaterally make decisions that are binding on the subordinates.

Ronald Coase

The nineties of the 20th century brought success to economists in the study of markets, property, firms, and corporations. A unique synthesis of neoclassicism and institutionalism, “pure” theory and applied developments, macro- and microeconomic analysis was formed. The rapid implementation of theoretical results into practice makes us repeat the words of one of the outstanding physicists: “There is nothing more practical than a good theory.” The world of economists is talking about a new paradigm in science, capable of determining both the future of the economy itself and its application in a wide variety of areas of the economy. One of the troublemakers was the American Ronald Coase (Nobel laureate 1991).
Ronald Coase received his award “for pioneering work on the problems of transaction costs and property rights” at a very advanced age - an 80-year-old professor at the University of Chicago had retired more than 10 years ago. He was born in 1910 in Great Britain and graduated from the London School of Economics. After moving to the USA, he worked at the University of Virginia and the University of Chicago.
Coase's works serve as a brilliant refutation of the now seemingly irrefutable opinion that success in economic research can only be achieved by using mathematical methods, constructing multi-factor models. In Coase's works there are no formalized models, mathematical calculations, or even graphs and diagrams. However, they (only three articles published in 1937, 1946 and 1960) revolutionized the vision of economic reality, served as a source of paradigmatic changes in modern economic analysis, and gave rise to a whole series rapidly developing scientific concepts.
Coase's ideas were not immediately understood and accepted. Published in 1937, the article “The Nature of the Firm” did not make any impression at the time. The attention of scientists at that time was focused on the macroeconomic theory of Keynes, on works analyzing “market failures” and justifying the inevitability government regulation market system. Coase, in this and subsequent publications, approached the problems of the market, the firm, and the state from a completely different angle. In the end, his ideas began to cause serious objections from many American economists, especially professors at the University of Chicago, who were literally discouraged by the paradoxical approaches and conclusions of not the most eminent of scientists.
It seemed that the generally accepted concepts, known even to college students, about “market failures,” about the inevitability of government regulation of monopolies, education funding, and solutions to environmental problems, were turned on their heads. Coase, he writes, “was forced to express his thoughts more fully” by publishing “The Problem of Social Costs.” Since that time, the theories of “property rights” and “transaction costs” developed by the scientist began to gain recognition, and what is especially important, their application in practice turns out to be effective.

Coase theorem

An analysis of the problem of social costs led Coase to a conclusion that J. Stigler called the “Coase theorem” (Coase theorem). The idea is that if the property rights of all parties are carefully defined, and transaction costs are zero, the final result (maximizing the value of production) does not depend on changes in the distribution of property rights. Transaction costs are zero, which means:
Everyone knows, and they learn new things instantly and unambiguously. Everyone understands each other perfectly, that is, words are not needed. Everyone's expectations and interests are always aligned with everyone else. When conditions change, approval occurs instantly. Any opportunistic behavior is excluded.
Each product or resource has many substitutes. Under these conditions, “the initial distribution of property rights does not affect the structure of production at all, since ultimately each of the rights will end up in the hands of the owner who is able to offer the highest price for it on the basis of the most effective use this right"A comparison of a pricing system that includes liability for damage from negative external effects with a pricing system when there is no such liability led R. Coase to the seemingly paradoxical conclusion that if the participants can agree on their own, the costs of such negotiations are negligible ( transaction costs are zero), then in both cases, under conditions of perfect competition, the maximum possible value of production is achieved. However, when taking into account transaction costs, the desired result may not be achieved. The point is that high cost obtaining the necessary information, conducting negotiations and court cases may exceed the possible benefits from concluding a transaction. In addition, when assessing damage, significant differences in consumer preferences cannot be ruled out (for example, one person values the same damage much more than another). To account for these differences, the income effect clause was later introduced into the formulation of the Coase theorem.
Experimental studies have shown that the Coase theorem is true for a limited number of participants in a transaction (two or three). As the number of participants increases, transaction costs increase sharply and the assumption of their zero value ceases to be correct. It is interesting to note that the Coase theorem proves the meaning of transaction costs “by contradiction”. In reality, they play a huge role and it is surprising that until recently neoclassical economic theory did not notice them at all. A huge contribution to transaction theory was made by: O. Williamson, A. Alchiani, G. Demset, S. Grosman and others.

Conclusion

Transaction cost theorists have been able to identify the most important characteristics that define the essence of a firm. This is the formation of a complex network of contracts, the long-term nature of business relationships, production by a single “team”, investment in specific assets, and an administrative coordination mechanism using orders. All explanations that developed the ideas of R. Coase were based on the general idea of the company as a tool for saving transaction costs. According to the theory of transaction costs, this key principle explains not only the very fact of the existence of firms, but also many particular aspects of their functioning - financial structure, forms of management, organization of the labor process, etc. The fruitfulness of this approach was confirmed in the study of hybrid organizational forms, intermediate between the market and the firm, such as franchising. He contributed to a radical revision of ideas in the field of antitrust regulation, demonstrating that many atypical forms of business practice are explained not by the pursuit of monopoly advantages, but by the desire to save transaction costs. The theory of transaction costs has become widespread in our country. Modern representatives of which are Malakhov S., Kokorev V., Barsukova S.Yu., Shastiko A.E., Kapelyushnikov R.I. etc. For example, Malakhov considers the role of transaction costs in the Russian economy. Kokorev analyzes their dynamics. Barsukova highlights transaction costs in small businesses. Thanks to the transactional approach, modern economic theory has acquired greater realism, revealing a wide range of phenomena in business life that were previously completely out of sight.

Note 1

Ronald Harry Coase (1910 - 2013) - American economist of British origin, Nobel laureate.

Ronald Coase was born in Willesden, near London, into the family of a telegraph operator. He was the only child in the family.

Coase's parents had no education, but were quite literate and were fond of sports. Coase himself was interested in sports at the level of an ordinary boy; he was much more interested in his studies. As a child, he was a little weak in his legs, and therefore attended a special school for children with physical disabilities. Coase transferred to a classical high school at the age of 12, which is a year later than the required age. Later this circumstance affected his biography.

In 1927, Coase passed his history and chemistry exams with honors, which qualified him to continue his studies at university. However, he decided to continue his studies at school for another two years with the goal of independently mastering the first-year program of the Faculty of History at the University of London and then entering the university. But since this required knowledge of Latin, and Coase, due to the fact that he entered high school late, was unable to learn it, he decided to study the natural sciences, specializing in chemistry. But Coase soon became convinced that the chosen direction was wrong, and then the only option for continuing his studies was the direction of “commerce”.

After completing the course, Coase successfully transferred in 1929 to the London School of Economics (LSE), from which he graduated in 1932. He then taught at the University of Liverpool and then at the LSE.

During World War II, Coase worked for the War Department doing statistical research. After the end of the war, he returned to LSE, where in 1951 he became a Doctor of Science.

In 1951, Coase became a professor at the University at Buffalo and then at the University of Virginia; in 1964 - professor at the University of Chicago. At the same time, Coase combined teaching with work as editor of the Journal of Law and Economics.

Coase retired in 1982, but continued active scientific work as a professor emeritus.

Contribution to economic development

Note 2

Ronald Harry Coase is a laureate Nobel Prize in Economics 1991 "for discovering and clarifying the precise meaning of transaction costs and property rights in the institutional structure and functioning of the economy."

Coase's scientific works are devoted to such topics as the market and the costs of the market mechanism, the functioning of firms, the organization of public services, and the institutional structures of the economy.

In progress "The Nature of the Firm"(1937) Coase examined the process of emergence of specific costs in a market economy, which he called "transactional waste". In the article "The Problem of Social Costs"(1960) was the first to publish a theory called the Coase theorem. Coase showed that externalities can be converted into internal effects through agreement between the parties, provided that:

government intervention consists only of the specification of property rights;
transaction costs, other equal conditions, are equal to zero.

An important property that Coase discovered in the theory of industrial markets is called "Coase's conjecture". If there is no limitation in the range of goods (or its resources) in the market, then the monopoly producer is forced to reduce the price of the goods to the level of a perfectly competitive market, that is, without making a profit. Consumers are confident that the monopolist “will not go anywhere” and will eventually reduce the price to cost. In such a situation, the monopolist may try to use some techniques to make consumers believe that there will be no price reduction; for example, demonstratively destroy part of the unsold goods.

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MINISTRY OF EDUCATION AND SCIENCE OF RUSSIA

Federal State Budgetary Educational Institution of Higher Professional Education

"SAINT PETERSBURG STATE ECONOMIC UNIVERSITY OF SERVICE AND ECONOMICS"

FACULTY OF REGIONAL ECONOMICS AND MANAGEMENT

DEPARTMENT "General Economic Theory"

Discipline: Institutional Economics

Topic: R. Coase's theory

Completed:

Troshina Zinaida Vladimirovna

Speciality:

Accounting, analysis and audit

St. Petersburg 2014

Introduction

The theory of property rights took shape as a special section of bourgeois political economy in the 60s and 70s. Currently, its development continues not so much as an independent concept with clearly defined boundaries, but as a methodological and theoretical basis for three new areas of economic analysis - economics of law, new economic history and the theory of economic organizations. The family of these approaches is usually referred to by the terms “transactional economics” and “neo-institutionalism.”

One of those who stood at the sources of the theory of property rights was the famous American economist R. Coase. Until about the mid-1970s, property rights theory was on the periphery of Western economic thought. Then, on the general wave of the conservative shift, interest in it intensified, and the trends that grew on its basis gained popularity and academic respectability. In the early 1980s, the theory of property rights, previously developed almost exclusively by the efforts of American economists, became widespread in Western Europe, especially in Germany.

Unfortunately, the theory of property rights has not found any reflection at all in Russian critical literature. One can still come across the belief that bourgeois political economy ignores property relations or sees only their legal shell, that private property seems to it natural and the only possible one. To correct these misunderstandings it is necessary to analyze as completely as possible current state the entire range of relevant Western concepts. property rights Coase theorem

This is all the more justified if we take into account the topicality that the discussion of property problems has now acquired in our country. Therefore, familiarity with this range of theories could probably help deepen further scientific research in this area.

The object of research is the R. Coase theorem.

The subject of the study is the features of the application of R. Coase's theorem in modern conditions.

The purpose of the study is to study the features of the application of R. Coase’s theorem in modern conditions.

Chapter 1. R. Coase's theorem: essence, main provisions.

1.1 The essence of R. Coase’s theorem

Ronald Coase's article "The Problem of Social Cost" was published in 1960. The time of its appearance, the paradoxical nature of the main conclusion, a large number of dark places in the argumentation, which opened up rich possibilities for a variety of interpretations, gave rise to a huge wave of publications.

R. Coase's article turned into one of the most cited works in economics: in 1966-1970. there were 80 references to it, 1971-1975. - 286, 1978-1980 - 331. Now the Coase theorem is recognized in the West as one of the most important achievements of economic thought of the post-war period.

The Coase theorem is devoted to the problem of “external” (external) effects. This is the name for the by-products of any activity that do not accrue to the individual himself, but concern some third parties. They arise in particular when there is a violation of power number 9 from the “full definition” of property rights (abstinence from harmful use). The existence of externalities limits the degree of exclusivity of property rights.

A classic example is the noise of an airfield disturbing the peace of nearby residents, or factory smoke polluting the air in nearby farms.

Such situations arise when individuals, when making decisions, do not take into account the consequences of their actions for others. They underestimate either the costs or the benefits that will accrue to others.

Discrepancies arise between private and social costs (where social costs are equal to the sum of private and external costs) or between private and social benefits (where social benefits are equal to the sum of private and external benefits). Since any agent bases his decisions on a comparison of private benefits with private costs, this leads either to the overproduction of goods with negative external effects, or to the non-production of goods with positive external effects.

The distribution of resources turns out to be inefficient from the point of view of the entire society: “As a consequence, the scale of action may be too large or too small to achieve a social optimum.”

Thus, the Coase theorem puts forward a paradoxical statement: the efficiency and independence (invariance) of the distribution of resources in relation to the distribution of property rights (that is, the structure of production remains the same regardless of who owns what resource). The theorem is satisfied under two conditions: complete specification of property rights and zero transaction costs, which are understood as costs associated with searching for information, negotiating, drawing up contracts, and their legal protection.

The theorem affects the by-products of any activity that concern not its direct participants, but third parties. The existence of externalities leads to a discrepancy between private and social costs (according to the formula - social costs are equal to the sum of private and external, that is, imposed on third parties). In the case of negative external effects, private costs are lower than social ones; in the case of positive external effects, social costs are lower than private ones.

The logic of the Coase theorem is best explained with an example. Let's say that there is an agricultural farm and a cattle ranch in the neighborhood, and the rancher's livestock regularly enters the farmer's fields. If the rancher is not legally responsible for the grass caused by his herd, when deciding on the number of livestock, he will not take into account the damage he causes (that is, he will not bear the full “social costs of raising livestock.” But if the state requires the rancher to payment of a tax equal in magnitude to the losses incurred, then he will have an incentive to fully take into account the consequences of his actions; external effects will turn into internal ones for him (internalized).

Several important conclusions followed from the Coase theorem:

Firstly, that external effects are not one-sided, but two-sided. For example: Factory smoke damages nearby farms. But the air pollution ban that farmers are seeking will come at a cost to the factory owner: “...the social costs go both ways. When A harms B, the meaningful policy question is not simply how we should limit A. To eliminate the harm to B would harm A. So the correct question is whether A should be allowed to harm B, or whether A should be allowed to harm B. B harm A? The challenge is to avoid more serious damage." Thus, the legal formulation of the question of causation (who committed the action) should not be confused with the economic formulation of the question of efficiency (what distribution of responsibility minimizes costs from the point of view of society).

Secondly, the Coase theorem revealed the economic meaning of property rights. Their clear specifications to such an extent that all the results of each agent’s activity would seem to be his and only his, would turn any external effects into internal ones: “The main function of property rights is to provide incentives for greater internalization of externalities,” points out G. Demsetz. “Any costs or benefits associated with social interaction are potential externalities.”

Ultimately, the sources of externalities are vague or undefined property rights. It is no coincidence that the main field of conflicts in connection with external effects are resources that move from the category of unlimited to the category of rare (water, air), and for which therefore no property rights existed before in principle. Without the initial delimitation of rights, there can be no transactions for their transfer or recombination. A clear decision to grant property rights is often enough for externalities to disappear on their own. Therefore, an accurate specification of property rights opens the way to overcoming external situations and the associated suboptimal distribution of resources.

Third, the Coase theorem deflected market failures from blame. It turned out that if anyone “fails” in external situations, it is the state. After all, according to Coase, the way to overcome externalities lies through the creation of new property rights in those areas where they have not yet been established. Moreover, externalities are often generated by the state itself when it erects barriers to voluntary deals to internalize these effects.

From here, however, it does not follow that it is possible and necessary to overcome all cases of erosion of property rights. Sometimes this is technically impossible, sometimes it is economically unjustified. With all this, Western economists emphasize that the technical and organizational process constantly leads to the emergence of new ways and means of “internalizing” external costs. Thus, the introduction of cable television made it possible to establish and reliably protect the rights of television companies to the programs they create. However, the opposite is also true: scientific and technological progress continuously generates new externalities. Any discovery of a new resource and creation of a new product can turn into a source of external effects.

Fourth, the Coase theorem turned the standard charges against the market and private property inside out. Examples of environmental destruction in capitalist countries usually viewed as excesses of private property. The Coase theorem turns everything on its head: “Contrary to some popular beliefs,” write A. Alchan and G. Demsetz, “one can be convinced that private rights can be useful for society precisely because they encourage individuals to take into account social costs.” . The main cause of external effects therefore turns out to be not excessive, but insufficient development of private property. In terms of property rights, these are nothing more than unspecified and untradeable property rights. While the Pigovian tradition treats externalities as “market failures” requiring government intervention, property rights theorists propose the opposite solution to overcome them, namely, the expansion of market relations and further specification of property rights.

1.2 The variety of interpretations of the “Coase theorem” in the works of domestic and foreign economists.

There are quite a few formulations of the “Coase theorem” in economic thought. In particular, R. Coase himself cites them in his works. For example, J. Stigler’s formulation is as follows: “Under conditions of perfect competition, private and social costs will be equal.” Other wording options are given by D. Kuter:

1. The initial distribution of property titles does not matter from an efficiency or Pareto optimality point of view if they can be freely exchanged.

2. The initial distribution of property titles does not matter from an efficiency point of view if transaction costs are negligible.

3. The initial distribution of property titles is irrelevant from the point of view of efficiency under perfect competition.

Thus, the quintessence of the above formulations is the following statement: “at zero transaction costs, the final distribution of resources does not depend on their initial distribution and the specification of property rights.” In addition, R. Coase calls this allocation of resources optimal, maximizing the wealth and value of production.

The problem of internalizing external effects can be solved both by enlarging (aggregating) the subjects of rights and by fragmenting (disaggregating) the objects of appropriation and addressing them more accurately. In the example from the Coase theorem, the “internalization” of external effects can be accomplished not only by assigning the exclusive right to use a field to either a farmer or a rancher, but also by merging, vertically integrating their farms, and forming them into a single enterprise. In certain situations, the transformation of external effects into internal ones is generally achievable only when the bearer of the right is the entire society as a whole. Which method of internalization is more effective depends on the circumstances in each specific case.

Considering the arguments of previous critics of the theorem, R. Coase quite convincingly refuted them, using his favorite method of proof, which is different options interactions between farmer and herder.

O.Yu. Krasilnikov believes that the method outlined by R. Coase cannot serve as a convincing proof of the “Coase theorem”, since taking the absence of transaction costs as the initial condition, R. Coase, nevertheless, proves his theorem using these same costs. What else, if not transaction costs, are the money that a farmer pays to a cattle breeder for reducing the movement of livestock on his lands, or a cattle breeder to a farmer for increasing the movement of cattle with different specifications of property rights and profitability of production. “These costs cannot be called production (or transformation) at all. Otherwise, any costs associated with concluding and executing market transactions will have to be recognized as transformational,” says O.Yu. Krasilnikov.

According to the definition of A.E. Shatitko, “transformation costs are an element of production costs, the occurrence of which is associated with the use of resources for the production of a product through changing it physical fitness, as well as moving it in space and/or time.”

Also, the Coase theorem does not take into account many very important dynamics, such as, for example, scientific and technological progress economic development. In this regard, I would like to recall the words of R. Coase himself, who called neoclassical economic theory “blackboard economics.” At the same time, the above analysis shows the existence of this shortcoming and the reasoning of R. Coase himself.

For 50 years now, attempts have been ongoing to formulate the theorem of R. Coase. After the publication of the Coase theorem, in which the definition of the theorem was never given, many interpretations appeared. But the problem is that every attempt to formulate a theorem turns it into either a false statement or a tautology.

Let us dwell in more detail on the main interpretations of the theorem. Microeconomics argues that in the conditions of the modern market, resources are moved to where their use is most efficient. Developing this idea, Coase came to the conclusion that the rule of movement of resources extends to the movement of all kinds of rights. Indeed, in addition to the right of ownership of resources, there are rights to own land and real estate, the right to protection and education, the right to various compensations, and the right to demand compliance with the contract. There are three main interpretations of the Coase theorem that consistently attract interest and fascination.

From an efficiency point of view, it does not matter how rights are initially allocated, as long as they can be freely exchanged.

From an efficiency point of view, it makes no difference how rights are initially allocated, provided that the transaction costs of exchange are zero. Transaction costs refer to the effort and time spent on market transactions. Costs can be very high, for example, if a transaction is carried out by many market players located far from each other. Transaction costs reduce market efficiency.

From an efficiency point of view, it makes no difference how rights are initially allocated, as long as they are exchanged under the conditions of a perfectly competitive market. This means that in order to achieve the effectiveness of law, it is necessary to stimulate competition in every possible way, to ensure the existence of as many buyers and sellers as possible.

Coase, as an illustration of the theorem, cites the example, which became famous thanks to him, of the movement of the rights of market players. Near the farmers' fields there is a railway along which steam locomotives move, sparks flying from their pipes. Periodically, fires occur in the fields, destroying crops. Each of the parties can solve the problem, but this is associated with certain costs: farmers can reduce crops near railway, and the railway company to use spark arrestors or reduce the number of trains. Farmers have the right to redress by filing claims against the company, and the company has the right to operate the railroad. According to the Coase theorem, no matter how the law interprets the supremacy of one of the rights in this case, the market itself will determine the movement of rights towards greater efficiency. If the cost to the railroad company of banning trains is less than the cost to farmers, then the company may pay the farmer some money in exchange for an undertaking not to ban trains. Conversely, a company can sell the right to farmers and reduce or prohibit traffic on that site. Regardless of the initial allocation of rights, farmers and the railroad will bargain as long as a win is possible. The benefits of exchange are exhausted when rights are allocated efficiently.

Researchers always give examples of ineffective distribution of rights. Let's assume that only holders of resold state-owned enterprises are allowed to pollute the environment. coupons. It is clear that in the end, coupons, the holders of which were holders of non-polluting enterprises, will become the property of owners of dirty industries. As a result, the burden on the environment will increase and such a distribution of rights cannot be called effective.

Let's try to understand all these contradictions. Is it possible to increase competition and reduce costs at the same time? Examples of recent market developments confirm the possibility of such a scenario. Computerization of offices and warehouses has led to revolutionary cost reductions in the face of ever-increasing competition. The development of the Internet has allowed millions of new investors to enter and gain a foothold in the wholesale and retail at very reasonable costs. And there are many similar examples in history: the emergence of private ownership of the means of production allowed society to develop effectively with increasing competition. What unites these periods? They are united by the presence and active implementation of revolutionary innovations. Reasoning further, we can come to the conclusion that a perfectly competitive market is a market in which competition tends to infinity and costs to zero, that is, it is a market where innovation reigns - an innovative market. The economy is becoming more and more innovative and we are approaching a perfect market, in which borders and obstacles to the movement of goods and services will be erased, preferences and non-market advantages of individual investors will disappear.

As for the example of environmental pollution, it is necessary to indicate that after some time, the costs associated with pollution will increase (costs of environmental restoration) and the prices of coupons will increase. Dirty industries will incur more and more costs, which will force them to innovate and switch to the most environmentally friendly production, which means getting rid of coupons. So in this case there is no contradiction either.

Taking into account all of the above, the theorem will probably sound like this: from the point of view of efficiency, it does not matter how rights are initially distributed, provided that time and competition tend to infinity, and transaction costs tend to zero. And taking into account recent trends, namely: as society develops, competition increases and costs decrease, the theorem accepts next view: From the point of view of efficiency, it does not matter how rights are initially distributed, provided that time tends to infinity.

1.3 Main directions of criticism of R. Coase’s theorem

The theorem is true if the size of the expected damage from external effects is known exactly, but it is not true if the structure of preferences of the opposite side is unknown.

The Coase theorem was also subjected to experimental verification. Experimental studies have shown that it stops rising when the number of participants in the transaction exceeds two. At the same time, even with three participants, 80-90% of the outcome turns out to be optimal.

Finally, the Coase theorem can be accused of being unrealistic.

IN real economy some property rights are not well defined, and transaction costs are never zero.

But to say this is to miss Coase's main ideas. Its goal is to prove by contradiction the decisive importance of transaction costs. The Coase theorem essentially solves one of the “eternal” problems of political economy: are there conditions under which the laws of production and efficiency do not depend on the laws of distribution, and if so, what are they? The Coase theorem answers that in order for the process of production of goods and services and the process of income distribution to be autonomous and in no way connected with each other, transaction costs must be equal to zero (the blurriness of property rights is another designation for the fact that the costs of their specification and protection is very high).

Property relations begin to influence the production process when transaction costs are positive. Therefore, in the real world, production relations and property relations are always interconnected, because transaction costs are never zero. This is what makes them the central explanatory category of property rights theory.

Chapter 2. Application of the Coase theorem in practice

2.1 Illustration of the Coase theorem in a perfect economy using a competitive example

Coase's theorem real life very rarely useful. Rarely not never, as practice shows. Let us remember once again what Coase wrote about.

The Coase theorem states: “If property rights are clearly defined and transaction costs are zero, then the allocation of resources (production structure) will remain unchanged and efficient regardless of changes in the distribution of property rights.” The impracticality of this result is immediately obvious. After all, there are no zero transaction costs. Still, in rare cases the market can eliminate Coase externalities. Even in Russia:

OJSC Norilskgazprom has solved the problem of theft of gas condensate from a 600-kilometer pipeline. As the press service of the enterprise reported, this problem has always been very acute - the local indigenous population of Taimyr was involved in theft of condensate.

Reindeer herders opened the pipes and drained gas condensate directly from the gas pipeline that ran through the tundra. The quality of the condensate is unique - its composition is comparable to AI-80 gasoline, and the inhabitants of the tundra, who did not always have enough fuel, used it for various needs, including heating their homes. As a result, employees of the main pipeline department regularly had to drive around the tundra and carry out repairs in conditions of 50 degrees below zero and strong winds.

In order to prevent theft, Norilskgazprom employees guarded the pipeline on their own, but these measures turned out to be little effective due to its considerable length - 600 kilometers. Anton Myshakov, General Director of OJSC Norilskgazprom, found a way out of the situation: meetings were held in all tribal reindeer herding farms, at which the management of the enterprise offered cooperation to the indigenous population - the gas pipeline was divided into sections, and each tribal farm undertook to protect its part of the strategic object, which is the gas pipeline . Almost immediately, thefts dropped sharply, reindeer herders began to receive 600 liters of condensate per month for their needs, Norilskgazprom managed to reduce the costs of eliminating accidents, and the tundra remained clean.

I don’t know whether Anton Myshakov ever taught economics or whether he came to this himself, but the initiative certainly inspires respect. It’s not often that we come across such pure applications of “correct” economic theory.

In fact, Russian gas workers are certainly not the first. Quite a long time ago, a similar approach was used by the government of Zimbabwe as a means of combating poachers. No amount of increased security helped, because it only raised the price of ivory. As a result, the government gave ownership of the elephants to local residents. I don’t know how they managed to persuade the government to even try this, but the result was not long in coming. When elephants belong to someone, that someone protects them. The cost of catching poachers fell, and elephant deaths dropped sharply because a living elephant was more profitable than a dead one.

Conclusion

Evaluating economic approaches R. Coase and the theory of property rights, in general, it should be borne in mind that many Western economists are quite critical of it. This is partly due to her particular intellectual style, which could be called “precedent-driven.” Instead of building mathematical models, we take a single specific case from real business practice and scrupulously trace what can be learned from it using the tools of economic theory. But, of course, it's not just that. Some authors consider the conceptual apparatus of property rights to be nothing more than a duplication of terms, devoid of serious analytical meaning.

The immeasurability of transaction costs also causes a wary attitude towards them.

The theory of property rights often falls into a vicious logical circle. For example: what determines the level of transaction costs? From the existing distribution of property rights. What determines the prevailing system of property rights? The level and structure of transaction costs. Transaction costs determine the nature of property rights and at the same time are themselves determined by them.

The appearance of this kind of dead ends in the theory of property rights (and the R. Coase theorem) is not accidental. It does not draw a clear boundary between market competition in the usual sense and meta-competition of institutions. Unnoticed by property rights theorists themselves, leaps from one level of consideration to another lead to flaws in the logical structure of the concept.

Property rights theory shares with the entire neoclassical movement an innate tendency to justify the status quo. An example is the same idea of institutional meta-competition. If any form of economic organization exists, it means that it is effective, because in the process of competition the strongest, that is, the most effective, institutions survive. If any organizational forms are practically not found, it means they are ineffective. Everything that exists is effective.

For example, in the USA, where there has never been a shortage of various utopian projects, attempts have been made many times to organize things on the basis of common property, to live in communes. Since they turned out to be not viable in their entirety, it means that private property is a relatively effective institution.

However, the idea of meta-competition of institutions presupposes the existence of an effective institutional market. But how can we talk about this when even among “ordinary” markets there are almost none that would be recognized as efficient? “Survival” does not at all guarantee optimality. In the process of selection, be it biological or sociocultural evolution, it is not necessarily the most complex, developed, effective by some absolute standards species or groups that survive, but those relatively better adapted to the conditions of a strictly defined specific “ecological niche.” Depending on what this “niche” itself is, the winners may not be the most effective, and sometimes even the most ineffective, social institutions.

Nevertheless, it should be noted that Coase's influence on the development of economic thought was profound and varied. From his works new branches of economic science grew (economics of law, for example). In a broader sense, his ideas laid the theoretical foundation for the development of the neo-institutional movement.

References.

1. Big economic dictionary/ Ed. A.N. Azriliyana. - M.: Legal Culture Foundation, 1994.- P.112.

2. Oleynik A.N. Institutional economics. - M.: INFRA-M, 2000.-P.388.

3. Pigou A. Economic theory of welfare. - M.: 1985.-P.387.

4. USA: state and market. - M.: Nauka, 1990.-P.234.

5. Williamson O. Economic institutions of capitalism. Firms, markets and contracting relationships. - St. Petersburg: Lenizdat.1996.-P.354.

6. Heine P. Economic way of thinking. - M.: 1992.-P.322.

7. Shastitko A.E. Neo-institutional economic theory. - M.: Faculty of Economics TEIS.-1998.-P.496.

8. Browning P. Modern economic theories - bourgeois concepts. - M.: 1987.-P.346.

9. Bunkina M.K., Semenov A.M. Macroeconomics. - M.: INFRA-M, 2003.-P.437.

10. Introduction to market economy. - M.: Higher School, 1994.-P.322.

11. Kapelyushnikov R. Economic theory of property rights. - M.: 2002.-P.216.

12. Coase. R. Firm, market and law. - M.: business.-1993.-P.343.

13. Krasilnikov O.Yu. Critical remarks to the “Coase theorem” / modern problems of economic theory and national economy. - Saratov: hope.-2002.-P.22-27.

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Ronald Coase's work. Ronald Coase and transaction cost theory

Transaction cost theory

Concept and types of transactions

Transaction costs and their types.

Ronald Coase

Coase theorem

Conclusion

Contribution to economic development

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