Ronald H. Coase

Abstract

As a student at the London School of Economics (LSE), Ronald Coase posed a seemingly naive question that would, in time, fundamentally change the face of economics and earn him the Nobel Prize: ‘Why do firms exist?’ The import of this simple question derived not only from the response Coase proposed, that is, that firms exist to economize on the costs of using the market, but also from the analytic perspective underlying both the question and the process by which Coase arrived at his conclusion. Coase’s insight and approach to understanding the economic system provided the theoretical foundation for Transaction Cost Economics and much of organizational economics more generally. Much has been written of Coase’s days as a student at the LSE and lecturer at the Dundee School of Economics and Commerce, most notably Coase’s (1991) autobiographical lectures on the origin, meaning and influence of his 1937 paper, ‘The Nature of the Firm’. One of the most striking realizations for many students is that the basic ideas contained in the 1937 paper had been developed in 1932 when Coase traveled to the United States as a mere 21 year-old, having received a scholarship to study ‘vertical and lateral integration in industry’ (Coase, 1991, p.38). That the ideas of such a young person with very little formal economics training could have such significant implications for an entire discipline should be an encouragement to students and young professionals. It should also serve as a reminder to the profession as a whole to be careful of overlooking the most basic of its assumptions.