Ronald Coase: from a school for children with disabilities to the Nobel Prize

Ronald Coase: from a school for children with disabilities to the Nobel Prize

 

Anna Demchenko , exclusively to VK

Today in Stockholm, Nobel Week ends. In the Swedish capital, the winner in economics will be announced. The amount of each Nobel Prize this year is one million U.S. dollars. The day before the announcement of the laureate for economics, Vestnik Kavkaza tells the story of Ronald Coase who received the prize in 1991. His discoveries and writings are very important, including for modern Russia.

 

Despite his undoubted success, Coase believed that his successes were the result of a string of coincidences: "In almost all cases, the things that I have done are determined by external factors and not by my personal choice. My success was 'granted' to me.

It is noteworthy that in his autobiography Coase speaks about his childhood and adolescence in lots of details and briefly mentioned about all that happened after 1932, which underlines the importance that he attached to his young years in shaping the future course of his life.

Ronald Coase was born at 3 hours 25 minutes of December 29, 1910 on the first floor of a detached house in Villesdene, a suburb of London. The exact time of his birth was immediately recorded to the nearest minute by his father. His father and mother worked at the post office - his father served as a telegraph operator, and his mother left the service when she married. They were ordinary people with little education - both left school at the age of 12 to go to work. Both were interested in sports: his mother played tennis until old age, and his father was engaged in football, cricket, and bowls, English as national sport, and he had a chance to win major championships. He even wrote articles for the trade publication "Bowls News" about his favorite sport. It would seem that there were no signs of the brilliant academic career of their son. However, despite some interest in sports shown by the boy in his childhood, his main passion has always been the study.

Ronald was the only child in the family; however, according to his own memoirs, he never felt bored alone . The tendency to mental activity, as well as clear introversion, manifested in him since childhood. Having learnt to play chess, he could sit for hours at the board playing for both opponents. Coase's range of interests was already very versatile – he read a lot of random books from the local public library. Even then, he showed his interest in science, but he was not able to distinguish a charlatan from a serious scholar, so read he the works of all authors indiscriminately.

When father took Ronald who was 11 years old to a phrenologist, he described the boy as follows: "You have a powerful intellect, and you know about it, though, perhaps, you tend to underestimate yourself... you will not float down the river like a sick fish... You have a great mental energy not being a passive instrument in the hands of other people. Although you are able to work with other people seeing in this potential benefits for yourself, you are more likely to work for yourself and think for yourself. However, you should be a bit more firm". He recommended Ronald to get involved in scientific and commercial activities related to banking, accounting, and as a hobby - plant and poultry breeding. The phrenologist recommended the boy to become more confident, focused, ambitious and less cautious. Coase pointed out that he really was at that time very shy and stressed that only a series of accidents could lead him to receive the Nobel Prize. It is noteworthy that, despite the conventional falsehood and scientific invalidity of phrenology, a particular phrenologist who analyzed the nature of Coase in some awesome way was able to guess many of his features, and, most surprisingly, his tendency to the study of the economy.


Ronald’s path to education was not easy - he suffered from weakness in his legs, prompting parents to believe that it is necessary to wear the iron support structures on his feet and be taught in a school for children with disabilities. In these circumstances, the boy developed a strong character and a desire for independence. Coase recalled: "My mother’s hero was Captain Oates, who, returning with Scott from the South Pole and feeling that his illness prevented others, said he would go out and take a walk outside in the snow to be never seen again. I always felt that I should not be a burden to others, although I did not always manage to do well in it". Having missed the exam at a local high school, he, however, admitted to Kilburn grammar school , where he received a good training . In 1927, Coase passed his final exams in history and chemistry with honors.

For the next two years, he remained for a special program at school to prepare for the intermediate examinations in the University of London as an external student. When it was time to decide what he wanted to study, his wide spread of interests affected this process. Ronald initially did not think about economics. He wanted to study history, but this was hampered by the fact that he entered Kilburn when he was 12 years old, not 11, and therefore he did not learn the Latin language. The second option was chemistry, but he soon realized that to specialize in the field of natural science he needed too deep knowledge of mathematics, the study of which he did not like. The only option left was economics. Ronald passed the exams, despite the fact that, in his own words, his knowledge in these subjects were primitive. He enrolled at the London School of Economics (LSE) in October 1929 , where he focused on the study of commerce and industry.

Coase believed that the extraordinary success that forever changed his life was the fact that Arnold Plant who previously taught at the University of Cape Town was appointed professor at the LSE is in 1930. Ronald attended his lectures in Business Administration and his workshop It was there that he learned in detail about the concept of the "invisible hand of the market ", which overturned his views on the economic processes . Plant’s influence at the LSE has played a crucial role in the formation of Ronald’s professional and scientific world and way.

He was just going to choose the industrial law as the main subject of the third year of study , which, according to Coase, could have led him to law, when due to Plant’s efforts he was granted a scholarship by Sir Ernest Cassel. Thanks to it, he spent 1931/1932 studying the structure of the U.S. industries, in the organization of which he noticed a significant difference. In 1932, according to the scientist, there was the beginning of his concept of economic analysis, transaction costs, and the theory of the firm.

After returning from the United States , Ronald taught at the School of Economics and Commerce in Dundee, where he gave a lecture which later became the basis of the article "Nature of the Firm", which earned him the 1991 Nobel Prize in economics . The scientist was so passionate about teaching and research that he published an article in 5 years only, in 1937. In the year of publication of the article there was another important event in Coase’s life - he married Marion Ruth Hartung , with whom he lived for more than 60 years; he lived only one year after her death. After completion of his work in Dundee in 1934, he taught at the University of Liverpool (1934-1935) and LSE (1935-1940). With the beginning of World War II, the scholar went to the civil service, where he was engaged in statistics in the Commission on forest areas and then worked in the central statistical office. In 1946, he again began to teach at the LSE, this time giving the key course "Principles of Economics". He then spent nine months in the U.S. for the Rockefeller scholarship studying the system of public broadcasting. Then, in 1950, Coase published a book " The British broadcasting: a study of monopoly". In 1951, Ronald emigrated to the U.S., where at first he taught at the University of Buffalo, then at the University of Virginia (1959-1964), and then at the University of Chicago (1964-1982).

Ronald Coase is considered the ancestor of the new institutional economics theory. This theory for the first time raised issues related to the explanation of market failure and tried to build some kind of model that would adequately describe the reality. Key innovations of Coase’s institutional theory consist in the fact that as a result of imperfect information, there are two effects - opportunistic behavior and bounded rationality .

The main innovation of Coase , for which he received the prize, was the introduction of the concept of transaction costs and the study of their nature. For the first time the term "transaction costs" was used by him in his work, "Nature of the Firm", in 1937 and developed in the article "Problem of Social Cost" in 1960 . Neoclassical economics did not consider transaction costs as a separate species and did not take them into account. Transaction costs are costs associated with contracting , and before Coase , they were not considered. It was believed that contracts worth nothing. People analyzed production costs, but they did not take into account that in order to negotiate a deal, we need some costs. First, each party should gather information about each other, learn the average market value of the product , after that, they should negotiate , that takes time and money , and monitor the performance of the contract (often payment for the goods and delivery are separated in time , and we cannot be exactly sure that the second party will fulfill the contract ) .

Transaction costs can be reduced increasing the effectiveness of institutions such as the police and courts of arbitration . The higher the level of law and order in the country is, the lower the transaction costs are, because if the parties are forced to increase the cost of checking the counterparty, the sellers compensate for the losses increasing the prices of their goods.

The problem of reducing transaction costs has become urgent for modern Russia, especially in light of the need to attract foreign investment, which is very relevant in relation to the country's accession to the WTO. Publishing the ranking of ease of doing business, the World Bank takes into account factors that indirectly reflect the transaction costs. Last year, Russia was in 120th place in this ranking.

The investment climate in Russia is not too favorable, including due to the low quality of some public institutions and stereotypes about Russia. Foreign investors are not sure whether their property rights will be respected, whether their assets will be nationalized, whether the terms of the contracts they signed with Russian partners will change and how the partners will carry out the contract. This discourages foreign investors from investing in the Russian economy. Even the relatively good economic policy indicators (relatively low tax rates, etc.) cannot compensate for the existing structural imbalances in the economy.

Partly, Russia is on the way to improve management practices that please the investors.

A year ago, Russia joined the WTO . By this step, the country deliberately restricts itself in the regulation of activity of foreign investors, thereby reducing transaction costs for foreign investors, which is considered to be an attractive factor for them. Russia is also trying to climb in ranking positions of "ease of doing business" of the WB (which is affected by, for example, the number of licensing procedures for starting a business - the fewer they are, the higher country is located in the ranking).


Coase's idea of transaction costs has become central for the analysis of many processes that classical economics has not taken into account and could not explain and which are relevant to modern Russia. Although the economic views of Ronald Coase were largely formed back in 1930s, his discoveries in the economy are popular to this day.

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