Of Coase and Coercion

A note to myself, but you're invited to listen in and comment if you'd like. [Update: comments glitch fixed.]

If I were teaching a first year legal “toolbox” course, I'd certainly teach Coase as part of it. And I'd include something like this too: Unenumerated: The Coase Theorem is false: contracts depend on tort law.

The proof that the Coase Theorem is false is actually quite simple: the assumptions of the Theorem contradict each other. The assumption that transactions are voluntary contradicts the assumption that any prior allocation of rights is possible, including rights that allow one party to coerce another. In fact, for the Theorem to at all make sense, a very large and crucial set of prior rights allocations must be excluded — namely any that allow any party to coerce another.

But we can't generally solve externalities problems by bargaining under this revised assumption. Externalities cannot be neatly distinguished from coercive acts, as extending one of Coase's own examples illustrates. In this example we have a railroad with a train that, passing by a farmer's wheat field, gives off sparks, which may start a fire in the field. In Coase's account, the prior allocation of rights might give the railroad the right to give off sparks, in which case the farmer must either plant his wheat far enough away from the railroad (wasting land) or buy the right to be free from sparks from the railroad. The prior allocation might instead already give the farmer the right to be completely free from sparks, in which case the railroad can either buy the right to emit sparks from the farmer or install spark-suppressors. If these are the two possible prior allocations of rights, Coase concluded that the railroad and the farmer will in the absence of transaction costs bargain to the most economically efficient outcome: if it costs less for the railroad to reduce the sparks than for the farmer to keep an unplanted firebreak, bargaining will achieve this outcome, and if the reverse, bargaining will achieve the reverse outcome, regardless of whether the farmer initially had the right to be free from sparks. So far, so good — it seems, on the surface, that if bargaining is costless an efficient outcome will be achieved.

The problem is that these are not the only prior allocations possible. The Coase Theorem is supposed to work under any other allocation of prior rights. But it doesn't. It fails for a large and crucially important class of prior allocations: namely any that allow one party to coerce another.

But I don't teach a first year “toolbox” course. Indeed, we don't have such a course. (We have “Elements” which — I'm told — is about how to read lines of cases, something which is important but different.)

I do, however, teach a Jurisprudence course of my own devising. I do “Of Coase and Cattle” there. Should I add something like this? It would be a distraction from where I'm trying to go, but maybe a useful one.

Then again, if I really let myself get distracted, I'd soon be trying to explain why the solution to the problem here is Habermassian, not libertarian. And that would take me very far from where the course is currently designed to go. But maybe I should bite the bullet and take it there? But that would make it much more of a philosophy course, and much less of an analytic jurisprudence course, than I intend it to be.

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8 Responses to Of Coase and Coercion

  1. Can you expound on what you mean by, “the solution to the problem here is Habermassian, not libertarian?”

  2. Michael says:

    Why, yes. See Habermas@discourse.net: Toward a Critical Theory of Cyberspace. ;>.

    Seriously: I find little attractive in anarchism. I accept as an empirical reality that not everyone will be on board for any serious communitarian/collective program. If we’re to have the sort of order that makes for peace and prosperity that requires at least cops, and taxes, and usually an army. And that means that there will have to be some degree of coercion, if only to lock up the axe murderers.

    Habermas offers an outline of how we test our implementations of those intuitions for legitimacy that seems to me more promising than the other alternatives on offer.

  3. matt says:

    In a very nice jurisprudence course I took from Claire Finkelstein several years ago now we had a section on the Coase theorem and what is says and doesn’t say and how it is and isn’t important. We also read Richard Posner’s attempt to use “wealth maximization” as a theory of value and Ronald Dworkin’s spanking of him on this. (Posner accepted it and no longer says wealth maximization is a theory of value. We should maximize wealth on his account, but why, other than naked power and self interest, is no longer clear.)

  4. John Flood says:

    Of course there is always Thaler’s and Sunstein’s “Nudge” theory which is currently going down well with the Conservative Party in the UK as the solution to the partial-libertarian state. Not too sure about this, however.

  5. Pat Gudridge says:

    Am I wrong? Years ago fans of the Coase Theorem argued — at least to (at) me — that the importance of the Theorem lay in its presuppositions — in particular, its assumptions that contracting was cost-free and uncoerced. These assumptions were obviously not always true but the effort to describe circumstances in which (the ways in which) costs and coercions manifest themselves could become more pointed and more persuasive. Or so the argument ran. Coase fans (then) would accept (and indeed themselves assert) that contracts suppose tort definitions and prohibitions of fraud and coercion. (Your point, right?) Me myself, I’ve always thought that the appeal of the Coase Theorem lay in important part in its cheerful subversion of rights essentialism and more fundamentally assumptions about the rootedness of any one version of legal order. Have I missed your point?

  6. Focus People says:

    Once again, a bunch of law professors arguing about theoretical crap that three judges and no jurors are ever going to understand enough to be useful in practice.

    How about all the professors that want to teach Coase, head on over to the econ department, and those that want to teach LAW and USEFUL stuff for people about to be lawyers, populate the law school.

    “You see Your Honor, Ronald Coase said it best when he said that if all sides had perfect information…”

    Whatever. This is why law school is such a laughing stock among practicing lawyers.

  7. Michael says:

    I don’t know whether to suggest that people should only post while sober, or take the above bh “Focus People” seriously.

    Oh well, here goes:

    Only a person with an incredibly crabbed view of what lawyers do — the sort of tunnel vision that thinks DUI defense is the whole of the law — could possibly believe that lawyers today don’t need to know about the Coase Theorem.

    Let’s start with the litigators — although litigation is by no means the whole of the law. I can assure you that the judges are aware of the Coase Theorem, and that any time you are arguing to a judge that your client behaved reasonably it’s going to be something that at least some judges are thinking about. This is triply true if you go to the Court of Appeal, or if ever find yourself arguing about whether an existing tort rule should be extended or trimmed.

    Lawyers do lots of things besides try cases to juries. Those who find themselves involved in the legislative process, as Representatives, staff, or lobbyists, will need to understand the Coase framework because that is part of the language in debates over legislation take place.

    And let me tell you, if you should ever have the good fortune to argue to the DC Circuit, there are much worse things you could find yourself saying than, “You see Your Honor, Ronald Coase said it best when he said that if all sides had perfect information…”

    Part of what even a half-decent law school does (should do) is train lawyers to take part in law reform. Understanding the virtues and limitations of the Coase framework is a valuable tool for anyone intending to be an engaged part of the legal reform process.

    Let the scoffers laugh all they like. As someone said recently (in another context), “It’s like these guys take pride in being ignorant.”

  8. If that’s where you’re going with it, I’m not sure I like this particular essay. Its implicit definition of “coerce” is . . . strange.

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