Remembering Ronald Coase

Yesterday, I texted a non-economist friend to say how sad I was to learn of the death of Ronald H. Coase, who won the Nobel Prize in Economics in 1991. She wrote back, "Was it sudden or unexpected?" Well, I answered, he was 102 years old. So no. Not unexpected.

As for sudden, it did feel so to me. I haven't actually seen Prof. Coase since I moved from Chicago ten years ago. But I've just finished work on a new book with Paul Nunes on the new age of disruptive innovation (based on our March 2013 HBR article, "Big Bang Disruption"). That work brought me back, as so many things do, to Coase's early writings — in particular his two searingly critical yet insightful essays, "The Nature of the Firm" (1937) and "The Problem of Social Cost" (1960). In these last few months, Coase, his ideas, and the very large intellectual debt I owed to them were all very much in my thoughts. So, yes, his death struck me as sudden.

"The Problem of Social Cost," Coase once told me, was the reason he spent his career not in an economics department or a business school but at the University of Chicago School of Law. As The New York Times recounted in its obituary, during a famous dinner party Coase had to fight the entire economics department at Chicago to convince them that his novel theory on the relationship between property rights and legal rules — ever-since known as the Coase Theorem — was correct.

The group, which included Milton Friedman and George Stigler, was eventually convinced, but they didn't invite Coase to join the department. Yet "The Problem of Social Cost" has proven to be one of the most-cited articles in the history of economics.

The earlier essay, "The Nature of the Firm," is justly famous for its introduction to economic literature of the concept of market friction, or what Coase called "transaction costs." Transaction costs, Coase argued, explained why some interactions were left to the market and others were internalized in increasingly large, complex enterprises.

"The Nature of the Firm" was published in 1937, when giant multinationals such as General Motors were just coming into prominence. Coase had observed first-hand the efficiencies to be gained by internalizing market transactions. Having finished his coursework at the London School of Economics but with another year of required study to go, Coase secured a traveling scholarship, which he used to come to the United States to see for himself what firms were like — what they did and didn't do, and why.

This was perhaps his most radical contribution to modern economics. He always insisted that the more theoretical, formula-driven work that economists tended towards were of limited value. In articles, reviews, and speeches, he spent his entire career — all eighty years or so of it, up to and including one of his last publications, an essay in HBR in December 2012 — admonishing, extolling, and sometimes outright pleading with his colleagues to turn economics into a true social science, one driven by empirical research. (He gave up on traditional economics in 1996 and started his own group, the International Society for New Institutional Economics, which continues to this day.)

I had personal experience of Coase's passion for hands-on research — the beginning of a long and always surprising relationship. In the course of an independent study during my third year of law school at Chicago, I came across an interesting experiment going on at nearby Motorola, which had built software to "engineer" complex contracts.

The system was built to help lawyers select the most useful clauses and knit them together, simplifying the often-wasteful process of negotiation between Motorola and its business partners. If clauses had already been reviewed and agreed to in previous contracts, why not start with those rather than drafting from scratch? Why not, in other words, eliminate as many of the transaction costs as possible?

I arranged a visit to meet with Motorola's contracts team. And then I thought, why not invite Coase? He was long-since retired and had just won the Nobel Prize, but he still had an office at the law school, and still participated occasionally in activities of the school's law and economics program. So I wrote him a note and invited him to come along. To the astonishment of some of my faculty advisors, his secretary called a few days later to say he would be pleased to join me.

I picked Prof. Coase up at his home and drove him out to Motorola headquarters in suburban Chicago, where we spent the afternoon quizzing the lawyers and the system's developers, and where we had lunch in the company cafeteria. Coase, then a spry 80 year-old, asked the most interesting questions, and delighted our hosts with stories about the company's early history. At the end of the day, Coase thanked me for inviting him and for serving as chauffeur, and told me to let him know when I was next going to take to the field. I was stunned from beginning to end.

I graduated law school, but after a very brief time practicing at a Silicon Valley firm I returned to consulting, which I had done for a decade before. That in turn led to my first book, Unleashing the Killer App, which took an early look at how the Internet was changing the nature of business strategy.

But the insight that grounded Killer App came to me at a conference, listening to engineers talk about how open networking standards could simplify connections between devices and users. And I thought, ah, it's all about transaction costs. In my notes of the conference, I wrote down, simply, "Coase!"

Chapter Two of Killer App argued that Coase was the father of the new economy, where technology in the market was reducing transaction costs more quickly than technology inside firms, which couldn't adapt as quickly. The result, I said, was that firms would get smaller, or even virtual — a simple corollary to Coase's 1937 observation, which I called "The Law of Diminishing Firms."

I sent Coase a draft of the chapter, and he quickly sent back a stern handwritten note to say that I had misread some things. (Coase was notorious for his plain-spoken criticisms.) We should meet for lunch soon, he said, so he could set me straight. Of course I agreed immediately, and met him, tail tucked firmly between legs, at a nearby coffee shop a few days later. As it turned out, my sins were more venal than cardinal — I had erred mostly in a few biographical facts about Coase, which were easily corrected.

The revised chapter met his approval, or in any case did not generate any further disapproval. When I invited Coase to come to the launch party for the book, well, he came, and patiently answered questions from some very surprised attendees, who didn't expect a Nobel laureate to show up for a book party for a non-academic publication. I had long ceased being surprised by anything Coase did or did not do.

Since then, Chapter Two of every book I've written has been about the impact of Coasean economics on whatever I'm writing about, whether business strategy, technology deployment, or regulatory policy. But in truth, every chapter, every book, every blog post I've written is, in some sense, in debt to Coase. If not his insights, then certainly his work ethic.

Most of the obituaries, remembrances, and accolades he will deservedly receive in the coming weeks will focus on his groundbreaking work, his uncompromisingly critical mind, and his devotion to his field. I will read all of these. But I will be tempering these portraits of a daunting intellectual giant with fondness for the Ronald Coase I had the pleasure to know, a man who was inexplicably kind to me whenever I asked him for help.

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