Coase on the Economists

21 November 2012 at 5:21 pm 5 comments

| Peter Klein |

Ronald Coase has a short piece in the December 2012 Harvard Business Review, “Saving Economics from the Economists” (thanks to Geoff Manne for the tip). Not bad for a fellow about to turn 102! I always learn from Coase, even when I don’t fully agree. Here Coase decries the irrelevance of contemporary economic theory, condemning economics for “giving up the real-world economy as its subject matter.” He also provides a killer quote: “Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates.”

I’m sure that’s true for many economists and for some branches of the field, such as Keynesian macroeconomics. But Coase seems to reject economic theorizing altogether, even the “causal-realist” approach popular in these parts. To be useful, he argues, economics should provide practical guidance for the businessperson. However, “[s]ince economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions.”

Well, that sounds about right to me. Economics provides general principles, or laws, about human action and interaction, mostly stated as “if-then” propositions. Applying the principles to concrete, historical cases requires Verstehen, and is the task of economic historians (as analysts) and entrepreneurs (as actors), not economic theorists. Deductive theory does not replace judgment. Without deductive theory, however, we’d have no principles to apply, and nothing to contribute to our understanding of the economy except — to quote Coase’s own critique of the Old Institutionalists — “a mass of descriptive material waiting for a theory, or a fire.” To be sure, Coase’s own inductive method has led to several brilliant insights. Coase himself has a knack for intuiting general principles from concrete cases (e.g., theorizing about transaction costs from observing automobile plants, or about property rights from studying the history of spectrum allocation), though not perfectly. But, as I noted before, Coase himself is probably the exception that proves the rule — namely that induction is a mess.

Entry filed under: - Klein -, History of Economic and Management Thought, Methods/Methodology/Theory of Science, New Institutional Economics, People. Tags: .

Micro-foundations All Over the Place … Pet Peeve: “Normative Theory”

5 Comments Add your own

  • 1. stevepostrel  |  21 November 2012 at 9:18 pm

    I wonder if Coase is aware of the work of van Reenen et al on management practices and productivity, and their experiments with disseminating basic “hygiene” practices like incentives to low-productivity firms in India. Or any of the work on high-performance work systems? And does he know anything about the TIMS crowd? Not to mention all the people doing economics of finance? I’d be interested to know what papers he’s been reading over the last several years.

    In general, I agree with you, Peter. Businessmen are like writers, consultants are like editors, and economists/business scholars are like critics. The same person may be good at more than one of these roles, but that crossover is not essential. A good critical theory might provide some guidance to writers and editors–screenwriter Michael Tolkin has gone so far as to lament that reverse-engineering Joseph Campbell has allowed screenwriters to “crack the code” and mechanically produce appealing stories–but as a rule you can’t substitute critical theory for imagination and craft.

  • 2. Coase on the problem of modern economics at Catallaxy Files  |  23 November 2012 at 10:08 pm

    [...] (HT: Organizations and Markets) [...]

  • 3. Levi Russell  |  28 November 2012 at 1:48 pm

    Great stuff, Peter. I am teaching a farm management class this semester and I have been selectively putting in some theory components to help drive the point home, even though the bulk of the class is focused on application.

  • [...] Coase on the Economists [...]

  • 5. The best is yet to come | GlobalEd  |  20 February 2013 at 3:01 pm

    [...] Coase on the Economists [...]

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