Question Assumptions

The economist Ronald Coase died today. I was saddened by the news because he touched my life in various ways.

I studied economics in college, but I discovered the field pretty late—my junior year. I had taken a class on economic development mainly because it satisfied two requirements and sounded kind of interesting. I loved it, and shortly thereafter changed my major. In one of my classes, we learned about Ronald Coase, and the simple elegance and power of his theories drew me further to economics. 

Later, I went on to participate in auctions of wireless spectrum by the U.S. and Canadian governments. In the process, I learned that he advocated for the process of allocating spectrum in this manner, providing the U.S. and other governments with the intellectual underpinnings for spectrum auctions.

Most of all, though, I remember being inspired because he wrote the essay “The Nature of the Firm”—the first of his two essays that would go on to change the field of economics and together earn him the Nobel Prize—while he was an undergraduate student. The paper reconciled a key theory of economics with the observed reality.

The contradiction it addressed is as follows. On the one hand, Adam Smith articulated the idea of the invisible hand—that the machinery of production should function without coordination. Prices would adjust, supply and demand would fall into balance, and exchange would take place. On the other hand, we see that firms exist. We see what Coase called “islands of conscious power in this ocean of unconscious power.”

Coase reconciled this conflict by describing the role of transaction costs. A firm exists because certain transactions have such high transaction costs that it makes sense for there to be a higher degree of coordination than can exist in market transactions. Firms are a collection of these transactions.

This was a tremendous insight. According to the Royal Swedish Academy of Sciences in announcing his Nobel Prize, “Coase may be said to have identified a new set of ‘elementary particles’ in the economic system.”

What I found so inspiring about this is that Coase must have been sitting in class, learning the principles behind the idea of the invisible hand, supply and demand, and so forth, thinking through the implications of it all, and at some point, it must have occurred to him that it just doesn’t make sense. 

He may have asked some tough questions of his professors and his peers. His professors, in a knowing, confident voice, may have talked down to him, thinking he’s just being difficult or just isn’t wrapping his head around the concepts properly. His peers may just not have cared. And, yet, the question must have bothered him. He must have really enjoyed what he was learning, and yet, here was a contradiction he couldn’t resolve. 

Rather than give up, convincing himself he must just not be getting it, or file it away, thinking it’s just not worth pursuing, he dug into the question. And eventually—through no small amount of tremendously hard work and after many painful conversations, I’m sure—he produced a groundbreaking work. And it wasn’t even groundbreaking immediately. It took a long time for the idea to catch. But eventually it did. 

And this wasn’t the only time this happened. The New York Times, in his obituary, recounts a fascinating story:

While teaching at Virginia, Professor Coase submitted his essay about the F.C.C. to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George J. Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler later wrote. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.” Professor Coase was asked to expand on the ideas in that essay for the journal. The result was “The Problem of Social Cost.”

When I first learned about Coase, I remember being inspired by his tenacity and confidence, his unwillingness to compromise on the questions he had, his unwillingness to let people hold on to a conventional wisdom that just didn’t make sense. 

Remembering this as I read about his death, I thought I’d write this to remind myself and others: question assumptions—and have the courage to follow where those questions take you, particularly if its scary.