Coasian economics

All over the world right wing 'think tanks' will be commemorating the work of economist Ronald Coase, who died on the second of September this year (2013) at the age of 102. Unfortunately his work has been used as an excuse to marginalise civil and human rights by making it legally acceptable for the interests of big business and the wealthy to over-rule everyone else’s financial, social and environmental interests. Coase's work is largely responsible for many of the problems of democracy, overpopulation and overdevelopment that are ruining more and more peoples' lives and freedom today. Many of its lesser supporters are naive followers of fashion and don't really understand what they are losing through their innocent embrace of 'efficiency' any more, perhaps, than did the followers of Chairman Mao's 'Great Leap Forward'. (This article is based on an extract from Sheila Newman's forthcoming book, Demography, Territory, Law 2: Land-tenure and the Origins of Capitalism in Britain, Countershock Press, probably early 2014.)

Industrial Capitalism has become a normative ethic in Britain and Anglophone societies. It has been conflated and massaged to fit a political idea that it represents a positive evolutionary development which is inevitable in human societies unless artificially or accidentally blocked. From this stems the notion of ‘developed’ and ‘developing’ societies, promoted almost without question in schools, churches and mainstream media. The presumption about the ‘developing’ societies (which were generally stable non-industrialised ones prior to the disruption of industrial development with or without colonization[1]) is that they were deprived and ‘stunted’. Industrial development in such a construction is presented as a form of normalization; a restoration to health and a normal growth curve. From this view it becomes ‘normal’ to ‘develop’ into an industrial capitalist society. Social costs are minimized in a kind of “Coasian” equation (see citation below) where all changes which increase available capital are treated as a positive benefit to the whole society. This logic justifies almost anything which will assist that transformation, notably changes to the land-tenure or property-law system. [2]

“In the eighteenth century, when the British economy entered an unparalleled era of expansion, Britain’s Parliament began operating according to Coasian principles and reorganized property rights en masse. In the nineteenth century, when most common-law doctrines reached their modern form, doctrines of equity (enforced through the Chancery Court) dominated the conveyance of land. These doctrines were designed to protect beneficial interests, not to maximize productivity. Efficiency became a dominant doctrine in the English legal system only after Parliamentary intervention.”(Bogart and Richardson, p.7)[3]

Coasian economic theory was originated by Ronald H. Coase in “The Problem of Social Cost”, Journal of Law and Economics, 3: 144, 1960. The theory assigns value arbitrarily, according to the highest dollar profit probability. It takes no heed of non-monetary values and therefore is unresponsive to social cost or individual equity. [4]

To the inhuman 'invisible hand', is attributed the responsibility and authority for the impacts of such decisions. But there is no redress against the ‘invisible hand’. As Block points out below, referring to property law: “Whatever the judge decided would endure; there could be no opportunity for mutually beneficial exchange” [after the decision was made].

“And what was the advice to the judiciary which emanated from this new outlook? Judges were to rule in such a way as to maximize the value of economic activity. Under a zero transactions cost regime, it really wouldn't matter -as far as the allocation of resources was concerned - which of two disputatious parties received the rights in question. If they were given to the person who valued them more, well and good. If not, the loser would be able to pay off the winner so as to enjoy their use. But in the real world of significant transactions costs, in contrast, the juridical determination was absolutely crucial. Whatever the judge decided would endure; there could be no opportunity for mutually beneficial exchange, ex post.” (Block: Property Rights: A Reply to Demsetz, p.63)

The impact on civil society has been enormous. No human value, no environmental value may prevail over a financial win. This is a recipe for corporate dominance. Block makes this clear:

“From these deliberations emerged, especially in the writings of his followers, the ‘Coasian’ public policy recommendation. The jurist must ignore tradition, property rights, ownership, and the niceties of Lockean homesteading theory upon which all were based, and instead make his award solely in order to maximize wealth. That is, he should find in favor of the disputant who values the rights in question more strongly; the one who, had he lost the court battle in the zero transactions cost world, would have successfully bribed the winner. [5]

NOTES

[1]
Newman, Sheila, Demography, Territory, Law: The Rules of Animal and Human Populations, Countershock Press, 2013.

[2] Block, Walter, 1995. “Ethics, Efficiency, Coasian Property Rights, and Psychic Income: A Reply to Demsetz,” in The Review of Austrian Economics, Vol.8, No. 2 (1995): 61-125, ISSN 0889-3047, http://miawa.org/journals/rae/pdf/rae8_2_4.pdf: “In this new view, property rights became the handmaiden of so called economic efficiency. The very determination of private property became dependent on cost considerations. Another way to put this is that in the pre-Coasian days, property rights were exogenous to economics. Thanks to Coase and his followers (Demsetz 1966, 1967; Posner 1986; Landes 1971, 1973, 1979),' this is no longer true. Now, if anything, economics is the independent variable; property rights have become indigenous on it.’ It is an indication of the ideological nature of the Nobel Prize of Economic Sciences that Ronald Coase (1910-2nd September 2013) won it in 1991 for work which has been used to argue for the primacy of economic ‘efficiency’ over social organisation in transaction costs and property rights for the institutional structure and functioning of the economy. His work has been used as an excuse to marginalise civil and human rights by making it legally acceptable for the interests of big business and the wealthy to over-rule everyone else’s financial, social and environmental interests. In other words, all conflicts can be resolved through money and if what you want to conserve does not make money, then if someone wants to destroy it to make money, then they will have that right. It is obvious that natural amenity, wildlife, houses with gardens, decent working conditions – anything that stands in the way of someone making more money – must fall away before the Coasian bulldozer. The theory does not stand up to natural science, the laws of thermodynamics and ecology, however it has been co-opted into everything from international aid and development to local planning.

[3] Bogart and Richardson, 2008, “Making Property Productive: Reorganizing Rights to Real and Equitable Estates in Britain, 1660 to 1830, NBER Working Paper No. 14107
Issued in June 2008. National Bureau of Economic Resarch, Cambridge, MA., p.2 http://www.nber.org/papers/w14107

[4] “Even mere preferability, let alone legal justice, runs into problems of interpersonal comparisons of utility. As we have seen, there is no warrant, anywhere within the corpus of value-free economics, for us to compare the utilities of one group of people-e.g., "worshippers" with another, "cancer patients'-and to claim that one outweighs the other.” Block, Walter, 1995, op.cit.

[5] Block, Walter, 1995, op.cit.