Kenneth Arrow: Directions of Research in the Coasean Tradition

Last year, CIPE and the U.S. Chamber of Commerce partnered with the Ronald Coase Institute to host a conference that celebrated the legacy of Ronald Coase and review research inspired by his work. Ronald Coase is perhaps best known for his explanation of the importance of transaction costs, property rights, and institutions to the functioning of an economy. A primary thought leader for new institutional economics, he received the Alfred Nobel Memorial Prize in Economic Sciences in 1991.

To recognize the anniversary of the conference, “The Next Generation of Discovery: Research and Policy Change Inspired by Ronald Coase,” CIPE focused this month’s Economic Reform Feature Service article on remarks given by Nobel Laureate and Professor of Economics Emeritus at Stanford University Kenneth Arrow.

To quote Arrow in his opening remarks, Ronald Coase’s work was “provocative, so undriven by fads.” In taking his own independent course, Coase challenged assumptions and norms, and left behind a wealth of insights that continue to influence today’s economic research agenda in a range of fields.

Arrow’s comments focused on the possibilities of where the community of economists and development practitioners might embark upon or continue research efforts. In his speech, Arrow leaves us with a few thought provoking questions – and potential research ideas to take forward, including:

• Prices and market transactions do play a basic role in the economy. In fact, they play an unquestioned role in Coase’s account with regard to interfirm communications and interfirm transactions: delivery of goods, services, the exchange of money for goods, or the exchange for commitment to deliver the goods within a certain length of time. These are carried out in the market within a price system. Why then does interfirm communication take place with prices while intrafirm allocations seem to have something that is clearly superior (superior from the point of view of the operation of the firm, which presumably means superior in minimizing costs or increasing profits)?
• If the price system is not so good within the firm, and we have other methods of allocation – authoritative methods – why don’t they work on the scale of the economy?
• Prices are imperfect. While they do reveal scarcities and lack of scarcity, they are not perfect signals. There are all sorts of reasons why commodities are too complicated to be fully expressed by prices.

Read Arrow’s full speech on the future directions of research in the Coasean tradition in this month’s Economic Reform Feature Service article.

Stephanie Bandyk is a Program Assistant for Global Programs.