The Nobel laureate economist Ronald Coase died last Monday at age 102. Coase’s important contribution to economics was in showing the importance of transactions costs in why people make particular choices.
He is most well-known by the “theorem” that bears his name, the Coase theorem. Developed in his 1960 paper “The Problem of Social Cost”, Coase argued in his “theorem” (named the Coase Theorem later by another Nobel laureate, George Stigler) that when transactions costs are sufficiently low and when property rights are well-defined, then private negotiations can solve the problem of external costs. He also argued something that he thought should have been obvious to economists: factors of production tend to be employed where they are valued the most regardless of who has the final say in where they are employed.
In “Theory of the Firm”, published in 1937, Coase argued for the reasons why firms exist as economic units. He argued that firms exist to minimize the transactions costs associated with being a seller in a market.
Both of these papers have a sports angle that I have touched on in the past. Sports economists have noted that the basic arguments made by Coase in his “theorem” actually appeared in the seminal article in the field, Simon Rottenberg’s “The Baseball Players’ Labor Market” which was published in 1956. When Rottenberg wrote his paper, there was no system of free agency in baseball as we know it today. Instead, players were essentially perpetually bound to their teams by the reserve clause. Once signed, players gave up the right to be the owner of their talent. Their teams owned that right, only relinquishing the right when they released players.
The teams argued that the reserve clause was necessary in order to more-or-less equalize the amount of talent between teams and to maintain competitive balance. Rottenberg, however, was skeptical that the reserve clause was anything more than a way to put a damper on player salaries. In what we now call the Invariance Hypothesis, Rottenberg argued that whether players had the final say on where they player or if teams had that right, players would tend to play for the teams that valued them the most. This is why, Rottenberg argued, the history of reserve-clause-era baseball is littered with dynasty teams such as the Yankees of the 30’s and 50’s.
Here are some more of my thoughts on Rottenberg vs. Coase.
I also believe that Theory of the Firm has some insights for sports economists. In this TSE post, I wrote:
Coase argued that firms, centrally-directed collections of resources, form as a way to lower transactions costs. They facilitate the costs of searching, information gathering, bargaining, and enforcing contracts. Firms form to lower the costs of making transactions and thus provide value to their customers.
Where this transactions-costs-lowering argument seems to fit the necessary condition for league formation is in the setting of the various rules that define a sport. For example, games can be played when the playing rules are unknown beforehand and determined on the spot, but this will generally be uninteresting to fans and frustrating to players. One can make similar claims about playoff determination and champion definition. And don’t forget about setting a playing chedule.
Calvinball may be fun to read about in comics, but it would be frustrating to play and watch.
Coase didn’t write a lot of papers, especially compared to the number that some of today’s researchers produce. He also eschewed the encroachment of math into economics, “blackboard economics” as he called it, believing that it took the human being as the subject of analysis out of the picture, along with the good and bad things that make us humans (see behavioral economics). So rather than resort to using math to shorten his papers, he wrote words and was sometimes a bit verbose. But his insights were profound, winning him a Nobel Prize in 1991.
Indeed, JC Bradbury once quipped on Facebook that if Coase had a Twitter account, he’d rarely post, he’d use all 140 characters each time, and they’d be the best posts in the world.
Surely his tweets would have been retweeted thousands of times and debated for a long time.
Coase is now gone, but he will not soon be forgotten.