Thoughts on economics and liberty

How Adam Smith’s ideas transformed Ronald Coase the socialist into one of the world’s greatest economists

This extract from the book Ronald H. Coase by Steven G. Medema is of some interest:

Coase was at that time a social¬ist, and he thought that studying economics (which was required for the commerce degree) would be quite interesting. During this preparation period, he studied economics, geography, French, English economic history and accounting. He passed his intermediate examination, and enrolled at the London School of Economics (LSE) in October 1929 to continue his work towards a bachelor of commerce degree.

It was during Coase’s second year at LSE that his career path was trans-formed. In 1930, Arnold Plant was appointed Professor of Commerce at LSE, and Coase began to attend his seminar. Plant’s effect on Coase was quick and deep:

I attended his lectures on business administration but it was what he said in his seminar, which I started to attend only five months before the final examinations, that was to change my view of the working of the economic system, or perhaps more accurately was to give me one. What Plant did was to introduce me to Adam Smith’s ‘invisible hand’. He made me aware of how a competitive economic system could be coordinated by the pricing system. But he did not merely influence my ideas. My encountering him changed my life. (Coase, 1991, p.4)

Changed his life indeed. Prior to hearing Plant’s seminars, Coase’s only real exposure to economics was at the Kilburn Grammar School while preparing for his intermediate examination. In fact, Coase did not take a single economics course while he was at LSE. Nor was he sorry for this, saying that it ‘gave me a freedom in thinking about economic problems which I might not otherwise have had’ (Coase, 1990a, p.3). That Coase came to economics, rather than being raised in it, may well account for much of the unique and original insight that he brought to economic problems.

Having passed his final examinations at LSE in 1931, and with one more year of residence being required for the degree, Coase had to decide what to do in his third year. He decided to study industrial law to complete a bachelor of science degree in economics. Had he followed through with this plan, he says, he almost certainly would have gone on to become a lawyer. However, the university awarded him the Sir Ernest Cassel Travel¬ling Scholarship for the 1931-2 school year — an award he attributes to Plant’s influence — and he decided to go to the US to study American industrial structures and, in particular, why organizational structures differ across industries. ‘Although I did not know it’, says Coase, ‘I was on the road to becoming an economist’ (Coase, 1991, p.5). It was this study, undertaken while he was still an undergraduate, that resulted in the insights that became ‘The Nature of the Firm’ (1937a), one of the articles cited by the Royal Swedish Academy of Sciences in awarding Coase the Nobel Prize.

But Plant’s influence went much further than this:

Until I met Plant my economic views were extremely woolly. From him I learned that producers maximize profits, that producers compete, and therefore that prices tend to equal costs and the composition of output to be that which consumers value most highly. Plant also explained that governments often served special interests, promoted monopoly rather than competition, and commonly imposed regulations which made matters worse. He made me aware of the benefits which flow from an economy directed by the pricing system. Clearly, I did not need Chicago. (Coase, 1988b, pp.6-7)

Elsewhere, Coase says of Plant that, notwithstanding his lack of interest in theoretical work, the theory he possessed, the theory of competition, was quite serviceable and, armed with it and a realistic view of what government could and would do, he was able to destroy many widely-held views and to pass on to his students an approach to economic policy which would protect them from much fashionable error and would enable them to devise policies more solidly based. (Coase, 1986, p.90).

Through Plant, he says, the students came to view the economic system as an essentially competitive system and to see many of the business practices which were attributed to the forces of monopoly as natural results of a competitive system (Kitch, 1983, p.214). As one moves through the pages of Coase’s career, one can see clearly the profound impression that these ideas, along with Plant’s approach of looking at real-world problems, made upon Coase.

Sanjeev Sabhlok

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