Coase: Yes, that's right. From 1838 or some such date, I can't remember it, the lighthouse people were bought out and compensation was given. Samuelson says that no one would build a lighthouse with the idea of making a fortune. Actually, people did build lighthouses and did make a fortune.
Reason: What about your article on the market for goods and the market for ideas in the American Economic Review in 1974? You created quite a stir with this and were interviewed by Time magazine. What did you say in that article, and why was it so controversial?
Coase: It was controversial because I said that the arguments for regulation of the market for goods and the regulation of the market for ideas are essentially the same, except that they're perhaps stronger in the area of ideas if you assume consumer ignorance. It's easier for people to discover that they have a bad can of peaches than it is for them to discover that they have a bad idea.
Reason: So if you think that the consumer, ignorant as he is, ought to be protected by a government regulator, then you should really believe that the government regulator ought to step in and police the speech of professors or politicians or pundits.
Coase: That's right. If the government is competent to do the one, it's competent to do the other.
Reason: Then there ought to be a federal philosophy commission.
Coase: That's right. The press was horrified by the idea. If the argument is exactly the same for regulating the press as for regulating peaches, this meant that I was arguing for regulation of the press.
Reason: You have to be careful with reductio ad absurdum arguments.
Coase: As they assumed that all regulation in the market for goods was fine, it never struck them that the argument was really the other way around.
Reason: You wrote another influential article called "The Nature of the Firm" in 1937. Explain what you found in that article.
Coase: I discovered there was something economists left out of their analysis of market competition, namely the costs of using the market, something which has become known--although I didn't invent the term--as "transaction costs."
Reason: Where you have transaction costs, you don't automatically get the invisible hand diverting resources where they do the most good?
Coase: That's right. People adopt other forms which they hope will produce the right result. They change the forms of contracts, taking account of it. They do lots of things. The firm itself is a response to that, but lots of contracts are as well. Even the form of markets, what you can trade: The rules and regulations of the submarket or produce exchange are designed to reduce transaction costs. You see these pictures of the way they do things: You wiggle your hands and this means you want to buy half a million tons of something for delivery in May at a certain price. And a person wiggles their hands, and the trade has gone through. You couldn't do this without having a terrific body of laws or regulations behind you so that people know what they're doing when they wiggle their hands. It can only happen quickly because the law has developed in such a way--in this case it's largely private law--so as to make transactions possible. You've got to be able to carry out transactions at costs less than the benefit which you are going to get. Every time people lower the costs of carrying out transactions, you get these extra benefits. How do we do it? That's what I'm interested in exploring now, and getting others to explore, of course.
Reason: People are very excited that transactions are taking place much more efficiently than ever before through new electronic means and better communication systems. Are you excited about these trends?
Coase: Yes, because I don't understand them. People talk about increases in improvements in technology, but just as important are improvements in the way in which people make contracts and deals. If you can lower the costs there, you can have more specialization and greater production. So that's what I'm interested in now. By improving the way the market works, you can produce immense benefits, not because it invents new technologies, but because it enables new technologies to be used. Without the ability to make efficient contracts, you can't use these new means. And a lot of effort is going, at the moment, into devising new ways of handling the problems, mainly by the lawyers.
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