Ronald Harry Coase, 1910-2013, was a British Economist and Professor Emeritus of Economics at the University of Chicago, where he also held the direction of the magazine “Journal of Law and Economics” from 1964 to 1982. Coase was awarded the Nobel Prize in Economic Sciences in 1991, for identifying and describing transaction costs and property rights for the institutional structure, and also explaining their role in the functioning of the economy.
Coase is considered father of the economic analysis of law and of the new institutional economics. As a member of the Chicago School, his ideas were influenced by this doctrine. Coase’s concept of “economics” was based in pragmatism, as something that has to be relevant and useful in the real world, and thus turned his back on excessive dogmatism, to what he refers as “blackboard economics”. He believed that you could not understand the behaviour of something without seeing and touching its reality.
In 1937 Coase published “The Nature of the Firm”, in which he stated that firms were created to act as a coordinating agency for a number of productive individuals. In this way, instead of operating independently, they do so within a global framework, avoiding tough negotiations and heavy costs, the so called transactions costs. He explained the reason of companies and of their different sizes through the idea that a company stops expanding when its growth causes its structure to be too complex, and this complexity has a multiplying effect on errors.
Coase also researched externalities and the social costs they underline. He published his article “The Problem of Social Cost”, 1960, in which he argues against the blame on externalities, as he believes this is unclear, and where he theorized on how to achieve an efficient market resource allocation. As the Coase theorem states, “the initial allocation of legal entitlements does not matter from an efficiency perspective so long as they can be freely exchanged” meaning that free exchange will solve market resources misallocation.
In the field of monopoly theory he developed the Coase conjecture. It states that monopolists that have durable-goods will lose market power because they will be incapable of maintaining their prices levels, as they will be seduced to end up decreasing prices, to reach all income levels.