Net Neutrality

Happy 100th Birthday, Ronald Coase, Nobel-winning Economist & Pathbreaking FCC Critic!

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Cato's David Boaz reminds us that today is the 100th birthday of Ronald Coase, winner of the 1991 Nobel prize for economics. He's best-known for the "Coase Theorem," whose origin lay in a 1959 study of how the Federal Communications Commission was screwing things up (the more things change…!). From the intro to a 1997 Reason interview with the man himself:

Coase, whose 1959 article on the Federal Communications Commission had led him to realize how property rights could be used to manage the airwaves, saw something different: The problem actually lay in an improper definition of legal rights. He noted that once property was well-defined and easily tradable, the efficient solution would follow. Ironically, the optimal social outcome would obtain no matter who owned the property. For instance, even if the railroad possessed the right to pollute, the farmer could pay it not to. Indeed, the farmer (really the farmer's customerswould pay whenever the benefit from mitigating pollution exceeded the cost created by pollution. Hence, whenever someone clearly possessed the right to pollute: Voila! Social efficiency! This became famously known as the Coase Theorem.

There you have it, ladies and germs, a full quarter of a century before Al "Grandpa" Lewis memorably uttered the phrase "Fuck the FCC" at a 1987 Howard Stern rally in New York, a serious economist coming up with a much more elegant and polite statement of how to get the government out of a business it needn't be in.

Some snippets from the interview, which was conducted by economist Thomas W. Hazlett, one of the best analysts on all things FCC-related, by the way:

Reason: You began teaching at the University of Virginia in the late 1950s, and by the early 1960s the administration there was not impressed with the work being done by yourself, Warren Nutter, James Buchanan, Gordon Tullock–four of the most famous and influential economists in the post-war era, two of whom [Coase and Buchanan] went on to win Nobel prizes. Yet the University of Virginia was not happy with what was happening in their economics department.

Coase: They thought the work we were doing was disreputable. They thought of us as right- wing extremists. My wife was at a cocktail party and heard me described as someone to the right of the John Birch Society. There was a great antagonism in the '50s and '60s to anyone who saw any advantage in a market system or in a nonregulated or relatively economically free system….

Reason: What were you surprised by when you studied the Federal Communications Commission?

Coase: I don't know that surprise is the right word. I looked to see what happened, and I discovered that the FCC was extremely inefficient, that the choices it made could not easily be justified, that a lot of the activities in which it engaged [were] an absolute charade. I was a little doubtful about pure markets for the use of the radio frequency spectrum at first, because there are a lot of things that we can imagine for which we can't have markets because the transaction costs are too high. I thought that perhaps the transaction costs were too high in this case. But then I discovered from the early history of broadcasting that property rights were being established, and it struck me that left alone they could have solved the problem with [signal] interference, which was the main problem they talked about. The period of broadcasting chaos arose because people didn't have well-defined property rights. So I saw no difficulty in bringing about a market in this area.

Coase's work is distinguished by an interest in what actually happens (or happened) in the real world, as opposed to what should happen (or have happened) based on theories. That interest helped create the Journal of Law and Economics (which spawned an entire interdisciplinary movement). But it also emphasized, well, you know, reality:

Reason: Isn't it shocking that economists didn't spend more time doing this kind of work before 1964?

Coase: Well, I'm not that easily shocked. Economics has been becoming more and more abstract, less and less related to what goes on in the real world. In fact, economists have devoted themselves to studying imaginary systems, and they don't distinguish between the imaginary system and the real world. That's what modern economics has been and continues to be. All the prestige goes to people who produce the most abstract results about an economic system that doesn't exist.

Though not a doctrinaire libertarian (read the interview!), Coase's interest in actual history led to the discovery of one of the great hobbyhorses of us beautiful, supposedly ascendant libtards: That lighthouses, often held us as the quintessential "public good" that could only be built and maintained by governments via taxes, had in fact been privately owned and operated in many cases:

Reason: What can you tell us about lighthouses?

Coase: Economists had always used this as a service that had to be provided by government. How could a private provider ever be paid for it? So without government operation you wouldn't get lighthouses. My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there's a long period in which lighthouses were provided by private enterprise. They were financed by private people, they were built by private people, they were operated by the people who had the rights to the lighthouses, which they could bequeath to others and sell.

Some have said what happened in lighthouses wasn't really private enterprise. The government was involved in some way in setting the rights and so on. I think that's humbug because you could say that there's no private property in houses by that logic, since you can't transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government.

So thank you, Ronald Coase. Wherever FCC jefe Julius Genachowski is there, telling us he'll only use a "light touch" on teh Internets, you'll be there to explain that the FCC isn't the solution, it's the problem. Wherever a cop is explaining that you can't just kick people off the sidewalks because they can only be operated and maintained by the state, you'll be there with a convincing argument that the clear demarcation of property rights has historically provided the best possible outcomes for the greatest amount of people. And wherever people are ragging on lawyers, you'll be there, too, with a stunningly persuasive rap about how most of what lawyers do is reduce transaction costs, thus leading to more economic specialization and increases in overall output.

Whole interview here.

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35 responses to “Happy 100th Birthday, Ronald Coase, Nobel-winning Economist & Pathbreaking FCC Critic!

  1. COASE COASE COASE COASE COASE COASE
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    obligatory.

  2. In addition to the cursing the FCC, Grandpa Munster looks like he should be condescending to humans and insulting Narn.

    1. …while ordering around his oafish, frat-boy nephew.

  3. So wait… Was Coase on the Munsters or not?

    1. I think he played Grandma Munster.

  4. “For instance, even if the railroad possessed the right to pollute, the farmer could pay it not to.”

    I’ve always been curious at how the libertarian fundamentalist deontologists can defend Coasian thought like this. I mean, I could dump my trash on your land and you could pay me not to and I would stop. WTF?

    It’s especially funny to see ultra-fundies like robc worship the guy who thought maximizing (optimal social outcome) was more important than who owned what in determining disputes.

    1. You may wish to look up Rothbard, Block and other libertarian writers, who have criticized Coase’s Theorem.

      It’s utilitarian basis definitely undercuts the concept of property rights.

    2. You are missing the point, again. The point is that it does not matter whether the farmer has the right to unpolluted land, or if the railroad has the right to pollute. As between the two, they will determine the optimal level of pollution.

      So what the fuck are you talking about?

      1. You are missing the point, again. The point is that it does not matter whether the farmer has the right to unpolluted land, or if the railroad has the right to pollute. As between the two, they will determine the optimal level of pollution.

        So what the fuck are you talking about?

        No, the problem is that Coase’s Theorem argues that the railroad can damage the farmers property AND also be awarded a payment from the farmer to stop such pollution. The concepts of property rights are ignored and only “social optimal maximization” or “economic efficiency” are calculated. Such an theory gives us decisions like Kelo. YOU are not using your property to it’s most efficient use (determined by judicial fiat), so it can be transfered to those who will use it more efficiently.

        1. dammit, it’s a concept, not a political philosophy, and you are not getting it any more than MNG is. The theorem does not “argue that the railroad can damage the farmers property AND also be awarded a payment from the farmer to stop such pollution.” Stop your sloppy thinking, please. The idea is that who has the right is immaterial for determining the optimal level of pollution. The theorem is not about who should have some right and why.

          1. dammit, it’s a concept, not a political philosophy, and you are not getting it any more than MNG is. The theorem does not “argue that the railroad can damage the farmers property AND also be awarded a payment from the farmer to stop such pollution.” Stop your sloppy thinking, please. The idea is that who has the right is immaterial for determining the optimal level of pollution. The theorem is not about who should have some right and why.

            Coase’s Theorem undercuts property rights, not increasing towards “well defined” property rights as this article claims. Under his theorem, your property can be damaged by other agents and the judicial determination should be based on “economic efficiency”. An example by Coase was of a cattle owner and a neighboring farm. If the cattle strayed to the farm and consumed some of it’s crops, Coase argues that the farmer is not necessarily due payments for his lost crops, until one determines which is of greater value: the meat or the crops.

            Coase’s Theorem tramples the concept of property.

            1. Under his theorem, your property can be damaged by other agents and the judicial determination should be based on “economic efficiency”.

              Only if the law is based on “economic efficiency”. Can you name a place with law like that? Thought not.

              What Coase’s theorem says is that perhaps, rather than take the agents harming your property to court, you should ask them to pay you an amount that equals or exceeds the damages. If the damages are worth whatever the agents are doing that causes the damage, they’ll pay up. If not, you sue them for damaging your property, in a court that does not have the words “Coase Thorem” in the law books on its shelves, and win.

            2. You are still not getting it. Coase does not argue “that the farmer is not necessarily due payments for his lost crops, until one determines which is of greater value: the meat or the crops.” Again, the frigging point in that example is not what the farmer or anyone else is entitled to. It’s about what happens if the farmer in fact has the right to confiscate the cows if they damage his farm, what happens if the rancher has the right to have the cows eat the crops, and how the efficient solution is reached in each case.

              This is the ENTIRE point. It is not about determining whether meat or crops are more valuable. That is what the parties are doing when they are bargaining. “One” is not deciding what is worth more, meat or crops. The parties are.

              If you understand this at some point, please thank me for my efforts.

                1. ph is right. If you haven’t read and don’t understand Coase, and what his famous theorum explains, then you should probably stay out of the conversation. It has nothing to do with the superiority of rights.

            3. If the cattle strayed to the farm and consumed some of it’s crops, Coase argues that the farmer is not necessarily due payments for his lost crops, until one determines which is of greater value: the meat or the crops.

              That isnt even remotely what Coase’s theory says. It says that without transaction costs, it doesnt matter if the farmer has the right to grow crops or if the rancher has the right to free ranging cattle. Whichever way the property rights are defined, the efficient solution will be worked out.

              If a solution isnt worked out and the farmer sues the rancher, then the courts will look at the law. If the rancher has the property right, he will win, if not, the farmer will win his suit.

              1. Now, math time:

                Assumption: cattler eat $1000 worth of farmer’s plants.
                Situation A, farmer has property rights.
                Situation B, rancher has property rights.
                Situation 1, fence costs $500.
                Situation 2, fence costs $1500.

                A1: rancher will spend $500 to keep cattle out of field.
                A2: rancher will pay farmer $1000 for damage.
                B1: farmer will build fence to keep cattle out of field.
                B2: farmer will suck it up and deal with $1000 in lost crops.

                1. Obviously, most of us agree that the just situation is that the farmer has property rights to his plants on his land. Coase doesnt say otherwise, just says that the efficient solution will be reached either way.

    3. It’s an economic theorem, not a statement of rights.

      It simply says that, whatever the initial allocation of property rights may be, the result is economically efficient.

    4. Not that I necessarily agree with this, but the point is that the society as a whole ends up paying exactly the same. Either the railroad customers pay for the pollution, or the farmers’ customers pay for the pollution. The cost to society ends up being the same.

      In libertopia no one has the right to pollute. What would end up is that the farmer’s would sue the railroads, and the railroads’ customers would end up paying for the pollution instead of the farmers’ customer.

      The Coase Theorem is an economic theorem, and makes no moral pronouncements. It merely describes an aspect of societal behavior.

    5. “I mean, I could dump my trash on your land and you could pay me not to and I would stop. WTF?”

      No company has been given a right to dump trash on your land. However, as a general matter of law, you don’t have property rights to the portion of atmosphere which covers your land.

      For very practical physical reasons, the air is treated in general as a commons. Since it is a commons, conflicts will arise when the use of the commons benefits one party at the expense of another (or, put in reverse, restriction on the use of the commons benefits the second party at the expense of the first — a bit of perspective that many supporters of regulation lack).

      Since neither party has more of a fundamental moral claim to the use of the commons than the other, some conflict resolution mechanism is necessary. For practical reasons, virtual property rights in a market can often achieve maximum utility better than, say, democracy.

  5. “Some have said what happened in lighthouses wasn’t really private enterprise. The government was involved in some way in setting the rights and so on. I think that’s humbug because you could say that there’s no private property in houses by that logic, since you can’t transfer your rights to a house without the examination of title and registration and without obeying a whole series of regulations, many enforced by government.”

    My Property class (loosely) indeed operated under this theory, to my consternation. The semantics aren’t completely on point, but the philosophy behind granted rights and government intervention was. So this is hardly taken for granted.

  6. Interesting. I’d never heard of him.

    Think I’ll refrain from defending lawyers, though. They’re not exactly an endangered species and the competent ones can defend themselves just fine.

    1. Interesting. I’d never heard of him.

      Huh. And I have a catch phrase because of him.

      1. Of Coase you do!

  7. The lighthouses brings up my pet theory on the origin of government, and why we are so reluctant to get rid of it. The purpose of government isn’t to protect our lives, liberties and properties. Instead government simplifies the problem of addressing economic externalities. While a free society can adequately deal with externalities, it’s so much easier to use coercion instead. Heck, I might even suggest that it’s more efficient.

    Negative externalities is where this is most easily seen. It’s why our ancestors first hired the town sheriff and gave him a monopoly on legal violence. A government law can be more efficient than waiting for a social convention to embed itself.

    But also positive externalities. Once you have a government set up to solve negative externalities, using it to address positive externalities is a no brainer, and is the source of most government growth. Apropos the lighthouse. It’s far easier to get government to build the lighthouse than to get all the ship captains to coordinate. That there were private lighthouses does not disprove this. In fact, government financed lighthouses are so more efficient that they crowded out private lighthouses. Ditto for roads.

    The anarchist goal of a true free society may be impossible for just this reason. The path of government offers so much less resistance.

    1. Except Coase contradicts that in that interview. It might be true at a certain minimal level of government (the sheriff), but as he points out, at the current size of government, all marginal returns on regulation are negative.

      There is some point between the Sheriff and Obamacare where we passed that point. Im not sure which side of the line the lighthouse is on, but shrink government back to the size when public/private lighthouses both existed and we will be on the good side of the line.

      Of course, I cant support anarchy because it is impossible (but not necessarily for the reason you say). Minarchy is the only thing that makes sense and Coase supplies supporting evidence.

      1. This is sort of like the Laffer curve peak argument. I dont support taxing at the peak of the curve but its fucking stupid to be on the back side of the peak. Same here, I dont think we need to regulate up until the marginal return is zero, but its damn stupid to be past that point.

    2. My biggest problem with the “government as a solution to externalities” view is that rewarding the government while punishing violators does little to improve the lives of the victims. In a court of law, where externalities should be dealt with, all parties present a case, and the victims are compensated by the violators. Compensating the government (or using rules, regs, and taxes to redistribute funds to government priorities) doesn’t inherently make society better off, and it certainly doesn’t necessarily compensate the true victims. In this regard, government regulation and externality taxes are not an efficient method of solving externalities. THe issue is transformed from an externality problem to a dispute between the government and those with a differing agenda.

      As far as positive externalities are concerned, you said, “It’s far easier to get government to build the lighthouse than to get all the ship captains to coordinate. That there were private lighthouses does not disprove this. In fact, government financed lighthouses are so more efficient that they crowded out private lighthouses. Ditto for roads.”

      Your example of roads disproves your point. THe government subsidization of roads has led to increased sprawl necessitating more roads that increases the problem. THe proliferation of government roads, which are built as commons, has led to more gridlock than would exist under a more limited private road infrastructure. PUblic roads have also simply transferred users from alternative forms of transportation. I don’t deny that the government can set up roadways faster than the private sector, as, after all, the government has an endless amount of money that it can steal from people, something that no private company has. However, the government isn’t adequately equipped to determine whether building more roads is an optimal solution compared to the alternatives, nor does it seem to care. That is the essence of government inefficiency in dealing with positive externalities. Every government based public works program is supposed to provide positive externalities to the public, but as every great public works project has revealed, tanstaafl.

  8. Who needs justice when we’ve got social efficiency?

    1. Sounds sorta like that “social justice”! I say shootem’ in the back!

  9. *snapping rubber glove*

    A light touch indeed!

  10. Cato’s David Boaz reminds us that today is the 100th birthday of Ronald Coase

    The David Boaz Cato link does not go to an article about Coase.

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