From the Firm to Economic Policy: The Problem of Coase's Cost

Abstract

One of Ronald Coase's insights was to extend the economic theory of choice to include the policy choice among institutional arrangements, which had to be analyzed with the same framework as the producer's choice. Both choices, he argued, are amenable to an opportunity-cost approach. The similarity he points to, however, is somewhat limited: while some of his articles from the 1930s stressed the subjectivity of producers' decisions, his later criticisms of standard policies, as well as the method he suggests for the design of policy, are based on the idea that costs are objective and measurable. Are the subjective aspects of the production decision reconcilable with the objective aspects of the policy decision in Coase's analysis? I shall argue that the framework he adopts is objectivist or subjectivist depending on the nature of the criticism he is leveling against standard theory and on the type of decision he is studying. Eventually he did propose a univocal analysis—an objectivist one—of the producer's decision between making and buying and the policy decision among institutional arrangements. This essay initiates a study of Coase's theory of decision. It returns to his subjectivist account of choice and contributes to solving the apparent contradiction between the subjectivist young Coase and the more mature objectivist scholar. It thereby sets out the diversity of the criticisms that Coase levels against standard theory and shows the evolution of his strategy. Ultimately, the problem of the difference between Coase's analyses of production decisions and policy decisions is more subtle than simply being an apparent contradiction: it turns on the subjectivity of individual decisions having no consequence for his analysis of policy.