The Currency of Justice and Freedom?
Transaction Costs and Trust

Reading Ronald Coase – Pt. I

Jonathan B. Wight

I've been reading Ronald Coase's, Essays on Economics and Economists (Chicago: University of Chicago Press, 1994) and finding it a delightful collection. In these articles, Coase displays the virtuous attributes that Frank Knight insists are needed in a serious scholar: integrity, competence, and humility, and one should also add--courage. Getting inside Coase's mind is easy because of his clear and uncluttered writing style. He is quick to point out the weaknesses in his own knowledge and argument, which is refreshing.

In one of the first essays, "How Should Economists Choose?" Coase takes on Milton Friedman's essay on "The Methodology of Positive Economics," and argues that Friedman's account of evaluating models based on their predictions is essentially a normative judgment about how economists ought to proceed:

When Friedman says that the "ultimate goal of a positive science is the development of a "theory" or "hypothesis" that yields valid and meaningful... predictions about phenomenon not yet observed," I cannot help mentioning that a science has no goals, only individuals have goals. (P. 18, emphasis added).

While Friedman's normative goal for science is prediction, Coase argues that in actuality, economists choose the models they endorse in an entirely different way based on whether a model makes more sense intuitively:

Economists, or at any rate enough of them, do not wait to discover whether a theory's predictions are accurate before making up their minds. Given that this is so, what part does testing a theory's predictions play in economics? First of all, it very often plays either no part or a very minor part." (p. 24)

Furthermore, empirical testing is rarely conclusive. Coase observes that "... if you torture the data enough, nature will always confess." (p. 27). On a related point, economists are in a competitive situation. Their research is done to bolster the theory that they already believe in. Hence, "what we are dealing with is a competitive process in which purveyors of the various theories attempt to sell their wares." (p. 28). (This chapter was first published in 1982, and thus presages Deirdre McCloskey's work on rhetoric.)

If scientists are self-interested, and work in a competitive market, will the invisible hand work according to the maxim "Greed is good?" Coase doesn't address this directly, but there are enough hints here to strongly infer an answer. Coase quotes Frank Knight, who argues that the "basic principle of science -- truth or objectivity -- is essentially a moral principle, in opposition to any form of self-interest."

And yet, economists have their own self-interests at stake, which include not only money, but perhaps even more important, status. Coase quotes Samuelson as writing: "In the long run, the economic scholar works for the only coin worth having -- our own applause." (p. 31)

This market for ideas would not work as well unless individual researchers adopted moral principles that constrain self-interest. Coase again cites Knight: "[T]he presuppositions of objectivity are integrity, competence and humility." (p. 15) In other words, science needs virtue.


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