The old Chicago School of economics that was associated with Milton
Friedman, George Stigler, Gary Becker, Arnold Harberger, Sam Peltzman, and
others was famous within the economics profession for its intensely
combative, argumentative, and sometimes raucous seminars. Every speaker
who gave a presentation, even Nobel prize winners, was challenged,
questioned, and called out if he said something that someone thought to be
incorrect.
The professed purpose of having such a rough-and-tumble seminar format was
the relentless search for economic truth. As Professor Harberger
explained in an interview in the PBS series, The Commanding Heights,
if someone stood in front of his students at a Chicago seminar and said
something that was incorrect, Harberger believed it was his “duty” to “call
him on it, right then and there.” Otherwise, a room full of students
would be misled and miseducated. But everyone was friendly as can be in
the lunch room, said Harberger.
The Nobel laureate Ronald Coase, who my colleague Peter Klein has
described as one of the most influential economists of all time, and who
serves as a model for much of Peter’s own research, was treated especially
roughly at times by his Chicago colleagues (perhaps because he held a law
degree and not an economics degree). Yours truly recalls reading an
article by Coase describing the grilling he got before his famous “Coase
Theorem” paper was published in a Chicago journal (the Journal of Law and
Economics). In addition to the usual torture chamber/economics department
seminar experience, Coase was invited to Friedman’s home where Friedman and
several
other prominent Chicago economists gave him an additional grilling.
The famous University of Chicago economics department has housed about a
dozen Nobel prize winners, none of whom – including Friedman – was ever
exempted from intellectual challenges and questioning. If they were to
present and defend their version of free-market economics, this rigorous
seminar format was useful in forcing everyone to sharpen their
thinking. Indeed, the entire economics profession is based on some
(watered down!) version of this skeptical debate seminar format, which is on
display at most professional meetings were research papers are presented and
critiqued.
All of this is why it has been surprising to yours truly to hear numerous
critiques over the past several years of Murray Rothbard’s criticisms of some
of Ronald Coase’s work. First, a George Mason University economist
asked me why certain Austrian economists associated with the Mises Instiute,
such as Walter Block and the late Murray Rothbard, “have criticized
Coase.” I was taken aback by the suggestion that Coase – or anyone –
should be beyond criticism. Moreover, even if the critic is wrong and
Coase is right, well, so what? That’s what intellectual discourse is
supposed to be about. Ideas are challenged; sometimes the challenges
are successful and sometimes they are not.
More recently, I was invited to lunch in Baltimore with several members of
a prominent libertarian-oriented D.C. think tank (not the Cato Institute) who
asked me the same question – Why do the Rothbardian Austrian economists
criticize Coase? When did Ronald Coase become the Cult Leader of
Free-Market economists who is to be shielded from all criticism?
Then there was a Reason TV interview with Gene Epstein of Barron’s
entitled “Murray Rothbard’s Mixed Legacy.” When interviewer Nick
Gillespie asked Epstein about Rothbard’s economic legacy, Epstein was full of
lavish praise, but then accused Rothbard of “unnecessarily impugning Coase,”
of getting the Coase Theorem all wrong, and further accused Rothbard of being
“unfair” to un-named others whom he criticized in his intellectual
writings. Gillespie piped in to remind his audience that Coase was “a
Nobel prize-winning economist.” Well, so is Paul Krugman, who is
routinely criticized by Reason writers.
I suppose an even greater intellectual “sin” in the eyes of the
Reason/Cato/KochFoundation/Beltwaytarian crowd would be the critiques that
Walter Block and I have made of another Nobel laureate – James M. Buchanan –
for his Quixotic enterprise of writing dozens of books and articles about a
“voluntary theory of the state” under the rubric of “constitutional
economics.” We claim no originality in our critiques in this regard,
since this hoary idea has been criticized by scholars for literally hundreds
of years.
The Coase Theorem is very simple, although Coase originally explained it
in a very long-winded and lengthy article. It has to do with a negative
externality problem, such as pollution or, in Coase’s example, sparks from a
train setting fire to a farmer’s orchard. Government regulation or
legislation is not necessarily appropriate, argued Coase, as long as
transactions costs are low enough that the farmer and the railroad company
can bargain their way to a mutually beneficial solution. If the law
gives the railroad the right to pass by the farmer’s property, sparks and
all, then it is conceivable that the farmer will offer to pay the railroad something
less than the prospective damage to his crops to slow down and avoid
sparks. If, alternatively, the law gives the farmer the property right
to be free from spark damage caused by trains, then it is conceivable that
the railroad can offer to
pay the farmer an amount that will be agreeable to both sides.
That way, said Coase, the economically-efficient outcome can be achieved
by voluntary bargaining. Only the “distribution” of income is different
depending on how the law defines property rights.
In his essay,“Law,
Property Rights and Air Pollution,” Rothbard made several critiques of
the Coase Theorem based on elementary Austrian economic principles.
Coase ignored the unmeasurable or psychic costs, which like all costs, are
subjective. Since it is impossible for any outside observer such as an
economist to add up all of these subjective costs, the Coasian/Chicago
concept of “social transaction costs” is nonsensical, said Rothbard.
Moreover, like other Chicago Schoolers, Coase implicitly asserted that
economic efficiency is somehow the preeminent ethical norm that for some
unexplained reasons should trump all other ethical norms, such as fairness or
justice. There are other norms that one can talk about when discussing
what kind of legal system should be used to deal with these kinds of
conflicts, said Rothbard.
These criticisms of Coase are totally reasonable from the perspective of
Austrian economics. There is no evidence that Rothbard “got the Coase Theorem
wrong,” as Gene Epstein charged. It is Epstein who apparently got
Rothbard’s critique of Coase wrong.
It is hard to believe that the Reason/Cato/Koch Foundation/Beltwaytarian
(RCKFB) crowd believes that it is fair to question any scholar – especially
Rothbard and the Rothbardians – except for Ronald Coase. What,
then,
should we make of all of this feigned shock and disappointment, and talk of
“mixed legacies,” by the RCKFB crowd of free-market economists who would
commit the “traitorous” act of criticizing a small part of the writing of
another free-market economist? My guess is that it is just another lame
and laughingly-desperate attempt to smear and denigrate those of us who are
proud to wear the label of “Rothbardians.” Many of those who are not
familiar with the academic way of life may fall for it, but no reasonably
educated person should.
Gillespie may have let the cat out of the bag in his interview with
Epstein. After Epstein announced that “in the political arena” things
that Murray Rothbard did were “perverse,” Gillespie immediately added that
Rothbard “worked with
Ron Paul in the ‘80s.” Get it: 1) Rothbard supposedly made
crazy, uninformed, and “unfair” criticisms of “respectable” establishment/Republican
Party/Beltway think tank-connected free-market economists; 2) he engaged in
political “perversion”; and 3) he supported Ron Paul.
The Best of
Thomas DiLorenzo
