Ronald Coase | On Externalities, the Firm, and the State of Economics (MP3 audio)| May 21, 2012 | EconTalk

In Ronald Coase interview, surprised to hear the “price system is a very expensive system”, agreeing that “firms act like socialists, because it’s cheaper”. On the recording, around 27:00:

Ronald Coase

Roberts: How did you come to write that paper as an undergraduate?

Coase: I was interested in how firms actually operate. And if you start studying how firms actually operate, you find that they are not concerned with prices directly, at all.

A person who is working in a firm does what he’s told. That’s the way it operates.

Roberts: So, a firm is an island of socialism in a capitalist world.

Coase: Oh, when I was a socialist at that time, I had some influence on the items starting with the views that I now have. I was a socialist. My parents voted for the Labour Party. And one Ernest Bevin, who was General Secretary of the Transport and General Workers Union, which was the largest union in Britain. In those early days, I was a socialist.

And that may have had some effect in leading me to the Nature of the Firm. I don’t know. Very likely.

Roberts: So your insight was that firms act like socialists, because it’s cheaper.

Coase: That’s right.

Roberts: And it’s cheaper because it’s not free to use the price system.

Coase: It’s cheaper because the price system is a very expensive system. If you think of all of the things you have to know in order to make a bargain, it’s obvious it’s not a cheap system. In a system that avoids negotiations, it’s one that saves a lot of costs.

Roberts: So, one of the things that I love about that paper is it forces you to think about these costs, which you might not notice. It forces you to notice that some systems that you think might not work so well, actually work better than you think. But it’s hard to test those ideas, right? One of the implications of the paper is that when transaction costs are high, you’re more likely to use command-and-control, but it’s hard to measure transaction costs. It’s hard to quantify the theory. Is that correct?

Coase: Yes.

Roberts: Or is it irrelevant?

Coase: No, it’s very relevant. But the state of economics is that people don’t try to measure these, or try to study them. People try to engage in discussion and explanation without any real knowledge of what happens in the real world.

On the Econtalk page, in addition to the downloadable audio, there’s some text highlights from the talk.  Here’s the description of the interview.

Nobel Laureate Ronald Coase of the University of Chicago talks with EconTalk host Russ Roberts about his career, the current state of economics, and the Chinese economy. Coase, born in 1910, reflects on his youth, his two great papers, “The Nature of the Firm” and “The Problem of Social Cost”. At the end of conversation he discusses his new book on China, How China Became Capitalist (co-authored with Ning Wang), and the future of the Chinese and world economies.

[MP3 audio]

Coase on Externalities, the Firm, and the State of Economics | EconTalk | Library of Economics and Liberty at http://www.econtalk.org/archives/2012/05/coase_on_extern.html.

Some of the content from this interview turns up on “Ronald H. Coase” | The Concise Encyclopedia of Economics | The Library of Economics and Liberty, at http://www.econlib.org/library/Enc/bios/Coase.html

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