As the Economist once chided, “the economics profession was slow to recognize Ronald Coase’s genius. He first expounded his thinking about the firm in a lecture in Dundee in 1932, when he was just 21 years old. Nobody much listened. He published ‘The Nature of the Firm’ five years later. It went largely unread.” Today Coase is revered as a leader in the field of New Institutional Economics (NIE) and a pioneer in exploring transaction cost, a concept that transformed the field of economics.
This month’s Economic Reform Feature Service article draws from remarks by Nobel Laureate Oliver Williamson at “The Next Generation of Discovery: Research and Policy Change Inspired by Ronald Coase,” a celebration of Coase’s and relevant theorists’ work co-hosted by CIPE and the Ronald Coase Institute.
A leader in his own right within NIE, Oliver Williamson is a 2009 Nobel laureate in Economic Sciences with degrees from the Massachusetts Institute of Technology, Stanford University, and Carnegie Mellon University. Known for his analysis of economic governance, particularly the boundaries of the firm, he provided a theory of why some economic transactions take place within firms and other similar transactions take place between firms, or the marketplace. His theories are critical in answering: when should decision power be controlled inside an organization, and when should decisions be left to the market?
Williamson walks through Coase’s education in the early years – unable to qualify for a science degree due to a lack of Latin and mathematics, Coase decided on a commerce degree. A choice of occupation “singularly ill-suited, but what else was there for someone to do who did not know Latin and did not like mathematics?”
‘The Nature of the Firm,’ was published in 1937 by Economica. One of his most insightful observations is that “Outside of the firm price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-coordinator, who directs production.”
According to Coase, “the source of the gain from having a firm is that the operation of a market costs something, and that by forming an organization and allowing the allocation of resources to be determined administratively, these costs are saved.” Coase and Williamson emphasized the need to study why firms are formed and why they assume certain activities and not others. In the article, Williamson follows his thoughts on Coase’s legacy to the field of New Institutional Economics with a final “conversation” between himself and Coase that exemplifies the impact that these two great economists had on one another.
Stephanie Bandyk is a Program Assistant for Global Programs at CIPE.