Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase was educated at the London School of Economics, where he was a member of the faculty until 1951. He was the Clifton R. Musser Professor of Economics at the University of Chicago Law School, where he arrived in 1964 and remained for the rest of his life. He received the Nobel Memorial Prize in Economic Sciences in 1991.
Coase believed economists should study real-world wealth creation, in the manner of Adam Smith, stating, "It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy." He believed economic study should reduce emphasis on price theory or theoretical markets and instead focus on real markets. He established the case for the corporation as a means to pay the costs of operating a marketplace. Coase is best known for two articles: "The Nature of the Firm" (1937), which introduces the concept of transaction costs to explain the nature and limits of firms; and "The Problem of Social Cost" (1960), which suggests that well-defined property rights could overcome the problems of externalities if it were not for transaction costs (see Coase theorem). Additionally, Coase's transaction costs approach has been influential in modern organizational economics, where it was re-introduced by Oliver E. Williamson.
Ronald Harry Coase was born in Willesden, a suburb of London, on 29 December 1910. His father, Henry Joseph Coase (1884–1973) was a telegraphist for the post office, as was his mother, Rosalie Elizabeth Coase (née Giles; 1882–1972), before marriage. As a child, Coase had a weakness in his legs, for which he was required to wear leg-irons. Due to this problem, he attended the school for physical defectives. At the age of 12, he was able to enter Kilburn Grammar School on scholarship. At Kilburn, he studied for the intermediate examination of the University of London as an external student in 1927–29.
Coase then continued his studies at the University of London, enrolling as an internal student of the London School of Economics, where he took courses with Arnold Plant and received a Bachelor of Commerce degree in 1932. During his undergraduate studies, Coase received the Sir Ernest Cassel Travelling Scholarship which he used to visit the University of Chicago in 1931–1932 studying with Frank Knight and Jacob Viner. Coase's colleagues would later admit that they did not remember this first visit. Between 1932 and 1934, Coase was an assistant lecturer at the Dundee School of Economics and Commerce, which later became part of the University of Dundee. Subsequently, Coase was an assistant lecturer in commerce at the University of Liverpool between 1934 and 1935 before returning to London School of Economics as a member of staff until 1951 in which year he was awarded an earned doctorate in economics from the University of London. He then started to work at the University at Buffalo and retained his British citizenship after moving to the United States in the 1950s. In 1958, he moved to the University of Virginia. Coase settled at the University of Chicago in 1964 and became the co-editor of the Journal of Law and Economics with Aaron Director. He was also for a time a trustee of the Philadelphia Society. He received the Nobel Prize in Economics in 1991.
Nearing his 100th birthday, Coase was working on a book concerning the rise of the economies of China and Vietnam. In an interview, Coase explained the mission of the Coase China Society and his vision of economics and the part to be played by Chinese economists. This became "How China Became Capitalist" (2012) co-authored with Ning Wang. Coase was honoured and received an honorary doctorate from the university at Buffalo Department of Economics in May 2012.
Coase married Marian Ruth Hartung of Chicago, Illinois in Willesden, England, 7 August 1937. Although they were unable to have children, they were married 75 years until her death on 17 October 2012, making him one of the longest-married Nobel Prize laureates. Coase himself died in Chicago on 2 September 2013, at the age of 102. Both are buried at Graceland Cemetery in Chicago.
He was praised across the political spectrum, with Slate calling him "one of the most distinguished economists in the world" and Forbes calling him "the greatest of the many great University of Chicago economists". The Washington Post called his work over eight decades "impossible to summarize" while recommending five of his papers to read.
In "The Nature of the Firm" (1937), a brief but highly influential essay, Coase attempts to explain why the economy features a number of business firms instead of consisting exclusively of a multitude of independent, self-employed people who contract with one another. Given that "production could be carried on without any organization [that is, firms] at all", Coase asks, why and under what conditions should we expect firms to emerge?
Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase's analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
The traditional economic theory of the time (in the tradition of Adam Smith) suggested that, because the market is "efficient" (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.
Coase noted, however, a number of transaction costs involved in using the market; the cost of obtaining a good or service via the market actually exceeds the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something from another party. This suggests that firms will arise which can internalise the production of goods and services required to deliver a product, thus avoiding these costs. This argument sets the stage for the later contributions by Oliver Williamson: markets and hierarchies are alternative co-ordination mechanisms for economic transactions.
There is a natural limit to what a firm can produce internally, however. Coase notices "decreasing returns to the entrepreneur function", including increasing overhead costs and increasing propensity for an overwhelmed manager to make mistakes in resource allocation. These factors become countervailing costs to the use of the firm.
Coase argues that the size of a firm (as measured by how many contractual relations are "internal" to the firm and how many "external") is a result of finding an optimal balance between the competing tendencies of the costs outlined above. In general, making the firm larger will initially be advantageous, but the decreasing returns indicated above will eventually kick in, preventing the firm from growing indefinitely.
Other things being equal, therefore, a firm will tend to be larger:
the lower the costs of organising and the slower these costs rise with an increase in the number of transactions organised
the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organised
the greater the lowering (or the smaller the rise) in the supply price of factors of production to firms of larger size
The first two costs will increase with the spatial distribution of the transactions organised and the dissimilarity of the transactions. This explains why firms tend to either be in different geographic locations or to perform different functions. Additionally, technology changes that mitigate the cost of organising transactions across space may allow firms to become larger – the advent of the telephone and of cheap air travel, for example, would be expected to increase the size of firms.