The world was saddened this week by the passing of Ronald Coase, who won a Nobel prize for his groundbreaking work providing clarity and insight on a range of questions of economic behavior. His paper The Nature of the Firm looked at why people would choose to create firms rather than be individual market participants, introducing the concept of transaction costs to economic theory. His later study of transaction costs in the context of externalities, in The Problem of Social Cost, informs many of the ideas underpinning CIPE’s work.
He is often remembered from one assertion in that paper, later named the Coase Theorem, that if property rights were well defined and transaction costs zero, resources would easily flow to their best use, and the problem of externalities would be easily remedied. But in fact, as pointed out in an obituary by the institute that bears his name, he was much more concerned with the messy real world, where transaction costs are high and property rights are not so well defined.
Those interests helped bring about a new field of research, New Institutional Economics, which builds on classical economic theory but emphasizes “how things work” in practice. Economic actors are affected by a range of institutions – the “rules of the game” – including both formal laws and unwritten norms and enforcement mechanisms that govern behavior. These institutions can function well to promote healthy markets, or they can create distortions in the market and lead to less-than-optimal outcomes.
Much of what CIPE and its partners do in our programs around the world involves looking at those institutions: how they arise, how they function, how they constrain or promote economic activity, and what civil society actors – often in CIPE’s case business associations and think tanks – can do to develop healthy institutions.
Coase also famously shunned the mathematical theorizing that makes up so much of contemporary economic research, preferring to write with simple and clear examples. That approach presents a kind of challenge to those who seek to promote economic and political reform around the world, including CIPE’s partners: how to present complex ideas to policymakers and the general public in an accessible way, that promotes discussion, and ensures that all stakeholders can understand the issue and have a say in the debate.
Marc Schleifer is Senior Program Officer for South Asia at CIPE.