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Reason: The basic idea behind the Coase Theorem is that the market is efficient, that consumers are going to direct the resources to where these resources yield the highest value.
Coase: Roughly speaking, when you are dealing with business firms operating in a competitive system, you can assume that they're going to act rationally. Why? Because someone in a firm who buys things at $10 and sells them for $8.00 isn't going to last very long in that firm. I think that the market imposes a great discipline, and the discipline of the market makes the assumption of rationality in that field correct.
I find that people behave in ways that destroy themselves and their families, produce a lot of hardship, and when it comes to policy do the same thing. I hold the view of Frank Knight: In certain areas rationality is enforced; in other areas it's weakly enforced. You get more irrationality within the family and in consumer behavior than you get, say, in the behavior of firms in their purchases.
Reason: Now, this is a very un-Chicago view. You must've had some arguments with George Stigler or Gary Becker or Richard Posner at some point about this view. They think people are rational in their marriage, their honesty, or their sex life, or in crime and all those social contexts that Gary Becker writes about.
Coase: Oh yes. When you say it is un-Chicago, you mean that it is an unmodern Chicago view. Because Frank Knight was at Chicago, and I was brought up more on Knight than I was on any of the others. And my views were quite consistent with what he says. They're not consistent with what George Stigler, Gary Becker, and Richard Posner say. Posner condemns me because I don't think people maximize utility.
Reason: So you don't think if we doubled the penalty for crime, we'd see less crime?
Coase: Oh, I do. I don't say people are wholly irrational. I have said that almost the only thing we can say about consumer behavior is, if you raise the price of something, people will demand less. And that we know, but it doesn't follow that because a person does less foolishness when the price is high for foolishness that you don't have foolishness. The foolishness follows the universal law of demand. The greater the price you have to pay for being foolish, the less you do.
Reason: Though you are now known as a leading free market economist, you started your intellectual career as a socialist. Why and when did your political views change?
Coase: They changed gradually. What was most important was the work I did on the economics of public utilities at the London School of Economics. I studied the results of municipal operation of utilities and the effects of nationalization, particularly in the post office. This led to grave doubts about nationalization. It didn't produce the results people said it did. My views have always been driven by factual investigations. I've never started off--this is perhaps why I'm not a libertarian--with the idea that a human being has certain rights. I ask, "What are the rights which produce certain results?" I'm thinking in terms of production, the lives of people, standard of living, and so on. It has always been a factual business with me. I discovered that municipal operation didn't work as well as people said it would, and nationalization did not either.
Reason: You said you're not a libertarian. What do you consider your politics to be?
Coase: I really don't know. I don't reject any policy without considering what its results are. If someone says there's going to be regulation, I don't say that regulation will be bad. Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't.
Reason: Can you give us an example of what you consider to be a good regulation and then an example of what you consider to be a not-so-good regulation?
Coase: This is a very interesting question because one can't give an answer to it. When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies--perhaps all the studies--suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been. I was not willing to accept the view that all regulation was bound to produce these results. Therefore, what was my explanation for the results we had? I argued that the most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns. Anything additional it does, it messes up. But that doesn't mean that if we reduce the size of government considerably, we wouldn't find then that there were some activities it did well. Until we reduce the size of government, we won't know what they are.
Reason: What's an example of bad regulation?
Coase: I can't remember one that's good. Regulation of transport, regulation of agriculture-- agriculture is a, zoning is z. You know, you go from a to z, they are all bad. There were so many studies, and the result was quite universal: The effects were bad.