Ronald Coase wasn't a household name, but he played a central role in the transition to the information economy. Decades before the Internet, Coase explained how the increasingly free flow of information would reduce the need for government regulations and corporate bureaucracy.
Coase, a University of Chicago law professor who won the 1991 Nobel Prize in Economics, began his research in 1931 as a visiting student from England with a simple question: Why had companies formed as large enterprises? He visited General Motors and U.S. Steel and realized that their large scale permitted the companies to reduce the costs of economic transactions. It was cheaper for companies to integrate vertically—Ford even owned rubber plantations for its tires—than to contract with third parties.
But now technology has made it more efficient to outsource many functions. Information that was once scarce is now plentiful, about everything from products and prices to business partners' reputations and customers' creditworthiness. The Internet collapsed transaction costs first in information-intensive industries such as financial markets, publishing and entertainment. "The Law of Disruption is relentlessly opening closed markets, exposing corporate waste and laughing in the face of government intervention," wrote Larry Downes and Chunka Mui in their 1998 book, "Unleashing the Killer App."
An undated handout photograph provided by the University of Chicago on 03 September 2013 shows the Clifton R. Musser Professor Emeritus of Economics, Ronald H. Coase, the 1991 Nobel Memorial Prize in Economics.
Coase used to say that his work made only obvious points, but to most of us they were obvious only in retrospect. In a law review article in 1959—before cable TV or mobile phones—Coase explained why the market was a better way to allocate broadcast spectrum than the "public interest" as defined by regulators:
"Quite apart from the misallocations which are the result of political pressures, an administrative agency which attempts to perform this function normally carried out by the pricing mechanism operates under two handicaps. First of all, it lacks the precise monetary measure of benefit and cost provided by the market. Second, it cannot, by the nature of things, be in possession of all the relevant information possessed by the managers of every business which uses or might use radio frequencies, to say nothing of the preferences of consumers for the various goods and services in the production of which radio frequencies could be used."
In 1959 he urged the FCC to sell broadcast spectrum instead of picking and choosing who deserved to operate TV channels and radio stations. The first question Coase got from a commissioner was: "Tell us, professor, is this all a big joke?"
In 1994 the FCC held its first spectrum auction. These auctions have raised tens of billions of dollars, allocated spectrum more efficiently, and removed bureaucrats from the selection process.
While Coase was not a technologist, he understood early how the Internet would create efficiencies and drive down transaction costs. "By improving the way the market works," he told Reason magazine in 1997, "you can produce immense benefits, not because it invents new technologies, but because it enables new technologies to be used."
Greater availability of information also diminishes the need for regulation. Coase's 1960 paper, "The Problem of Social Cost," became history's most frequently cited law-review article. What's now known as the Coase Theorem says that resources will flow to their most valuable use so long as transaction costs and regulatory barriers don't get in the way.
Then as now, many liberal economists lobby for government regulation of "natural monopolies." Coase doubted many exist. The example of lighthouses was once cited an obvious example of services that only government can provide. Coase published a paper detailing the successful history of privately owned lighthouses in Britain, which were funded by shipping fees until the government nationalized them.
Coase did not oppose regulation in theory, but the more he studied its practice, the more harm he saw. He explained why in the Reason interview: "The most probable explanation was that the government now operates on such a massive scale that it had reached the stage of what economists call negative marginal returns," he said. "Anything additional it does, it messes up."
That wisdom apparently needs to be relearned by each generation. In our time, we have the too-big-to-fail risk of the heavily regulated financial services industry and the too-complex-to-implement government health-care system. Antitrust, copyright and patent laws still lag far behind the dynamic pace of change caused by technology.
In his Nobel speech in 1991, Coase recounted the lag between new ideas and policy: "A scholar must be content with the knowledge that what is false in what he says will soon be exposed and, as for what is true, he can count on ultimately seeing it accepted, if only he lives long enough." He died last week at 102.
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