A few weeks ago, the Harvard Business Review published a short article by Ronald H. Coase — 1991 winner of the Nobel Memorial Prize in Economics —, where he laments the direction that some economists have taken in the discipline. (For some other commentary on Coase’s piece see Kuehn [27/11] and Boettke [26/11].) While, as contextualized by the language used in the piece, I subtly disagree with some of Coase’s arguments, ultimately I think my way of thinking is more-or-less aligned with his. Mainly, my issue is that he eschews the theory of prices and resource allocation, complaining that it’s “static” and too abstract to be useful in application. I disagree — with the caveat that he may be right when it concerns certain microeconomists —, because to me the theory of the market process (resource allocation) is about dynamism and change. While the theory of resource allocation, or what Austrians like to call the “market process,” will occupy most of this post’s attention, I also disagree with the idea that economists ought to provide entrepreneurs with useful decision-making information.
Briefly addressing that final point above (about the application of economics to business), it should be acknowledged that business deals with how to solve certain problems of resource allocation within the firm, management, et cetera. These rely heavily on local knowledge — knowledge which is transmitted imperfectly through various “signals” and media. These are very specific instances of resource allocation, and I’m not sure economists should preoccupy themselves with these subjects. Rather, economics deals more with “general” trends, or laws even, that help explain certain manifestations of human action. So, that economics might not be very useful to a business man or entrepreneur is not that big of an issue to me. I see the two fields as somewhat separate, even if they can interact with and overlap each other.
The same applies to economics and other fields, including sociology. Economists oftentimes get accused of practicing “economism,” which refers to the application of economics to fields or subjects that can’t be fully explained by economic theory. While these accusations may have grounding, the truth is that economics itself is a field oftentimes invaded by other forms of the study of man. I see concepts like “spontaneous order” and bodies of theory like that provided by New Institutional economics as evidence of the influence of sociology, psychology, et cetera. In fact, several phenomena which scientists might like to classify as “economics” can only really be explained through the use of various different angles and methods.
Diverging temporarily from the main point, the importance of history and sociology in explaining complex economic phenomena such as institutional development and changes in the pricing process have pushed me to explore theory that people conventionally interpret as being well outside of the realm of economics. This is one reason that I’m glad, in some ways, that I earned my first degree in political science. I oftentimes like to make fun of myself for earning a “worthless” degree, but in a purely scholarly context political science isn’t “worthless,” at all. Ironically, as an Austrian who unquestionably rejects Marxist economic theory, I do confess to being incredibly interested in Marxist sociology and philosophy, in large part because Marxists — classical, structuralist, or otherwise — recognize the importance of historically contingent factors. In fact, guided by a friend, I’ve recently acquired Marx’s and Engel’s The German Ideology, to better understand the concept of historical materialism.
I see Coase squarely within the ranks of economists who recognize the sociological aspects of economic problems. While I’m not well read on the history of thought of New Institutionalism, Coase is clearly, at least, one of the greatest influences on this school, at least those of which are in the economics profession. A good book, which is a collection of his various essays, with a good introduction to Coase’s “instutionalist” approach is The Firm, the Market, and the Law (another good introduction, by Coase himself, is his 1992 article for the American Economic Review). There are other economists, many of whom are within the infamous “mainstream,” who also fit this category. While I don’t claim real familiarity with his work (yet), Douglass North (1993 co-recipient of the Nobel prize) is an obvious candidate (see Understanding the Process of Economic Change). Also, 2009 Nobel prize recipients Oliver Williamson and Elinor Ostrom should be mentioned.
To me, their insights are directly applicable to the theory of the pricing, and market, processes. In fact, I consider relevant work as being in the same vein. I don’t see price theory as being “static,” even if that’s how many microeconomists practice it (although, less and less as time goes on). Institutions are relevant to resource allocation, making institutional change a vital part of the market process. In fact, I interpret Coase’s older work, on the firm and on social costs, within this context. This explains my bewilderment in previous posts on the treatment of resource allocation in popular books and textbooks: resource allocation can’t be studied without reference to contingent institutions.
Hopefully this also sheds some light on some controversy surrounding my recent post on fiscal stimulus, the socialist calculation debate, and resource allocation. Several commenter argue that I assume things like “perfect information” and “perfect competition.” Nothing could be further from the truth. This is not only true implicitly, but also explicitly: in my presentation in Madrid on free banking, I argue that imperfection is precisely the reason why we ought to prefer the market process over alternatives. Changes in institutions — shaped and constrained by other so-called “market forces” — are caused by changes in action by those seeking to deal with the world’s imperfections. One of the greatest lures to studying the market process, and spontaneous order, is to know how decentralized action can lead to market outcomes that are better built around the burden of imperfection. A corollary is studying why alternative forms of institutional development lead to “substandard” outcomes.
My “disagreement” with Coase is not so much in his approach, as mine is extremely similar to his. I’m reacting to his negative framing of price theory. I see price theory and the market process as deeply involved with the study of change, including shifting institutions. If one can criticize some aspects of price theory it would be for not assimilating dynamic facets of the problem; but, some price theorists have (and continue to do so), and the fact is that the two are related and oftentimes applied to the same issues. I don’t think there can be an accurate theory of prices and the market process without considering institutional and historical factors.