Ronald Coase is one of my favourite living economists (he is now 100 years old). His work on the significance of transactions costs and dealing with problems that these costs raise is fundamental to a proper understanding of the market economy and the institutions that support it. Alas, though his work was recognised with the receipt of the Nobel Prize in 1991 the implications of Coase’s ideas are not widely understood by contemporary economists and indeed they are often completely misrepresented by those who should know better (in my book Robust Political Economy I target Joseph Stiglitz as being particularly guilty of this charge).
One of the most interesting but neglected of Coase’s ideas is presented in a brief essay on ‘The Market For Goods and the Market For Ideas’ , originally published in the American Economic Review in 1974. In this essay, Coase points out the inconsistency of those who cite ‘imperfect’ and ‘asymmetric information’ as constituting a case for government regulation in markets for private goods and services, while remaining steadfast in their support for free speech in the political market for ideas. For its proponents though the ‘free market in ideas’ is plagued with various ‘imperfections’ – such as deception, misrepresentation and downright lying by politicians and pressure groups, coupled with the ignorance of the general public (i.e. voters), over time free speech and the competition it engenders offers the best prospect of ensuring that good ideas prevail over the bad. Attempts to regulate political speech to ensure that only ‘accurate’ and ‘truthful’ information is presented to the public are doomed to fail. Who would decide what is to count as ‘accurate’ and ‘truthful’, and who would ‘guard the guardians’ of public truth should they seek to abuse their authority?
If the above argument holds in the market for political ideas, however, then it is equally if not more valid in markets for private goods and services. As Coase notes, ‘It is hard to believe that the general public is in a better position to evaluate competing views on economic and social policy than to choose between different kinds of food’. Although consumer goods markets are plagued by imperfect information, misleading advertising and the existence of fraud, competition remains the best protector of consumer interests. Indeed, competition is likely to be more effective in the market for most goods and services because the costs of failing to be adequately informed are more likely to be concentrated on those who actually make bad choices– thus incentivising the critical scrutiny of advertising claims. In the market for ideas by contrast, failure to be adequately informed has externality characteristics – the decision to vote for a bad idea has consequences not only for the individual concerned but for the wider society at large. By making this point, Coase anticipated the argument made by Brennan and Lomasky (Democracy and Decision, Cambridge University Press, 1993) and more recently by Bryan Caplan (The Myth of the Rational Voter, Princeton University Press, 2007) that democratic politics is afflicted with the problem of ‘rational irrationality’ and that the ‘market for ideas’ is more likely to ‘fail’ than is the market for private goods.
What though is the best way of resolving the theoretical inconsistencies that Coase exposes? In his 1974 essay the man himself challenges economists and public policy analysts to choose one of the following options. The first would be to abandon free speech and concede the case for ‘expert rule’ in all spheres of life. In contemporary politics, this approach seems to be favoured by the acolytes of Cass Sunstein with their desire to regulate for ‘balance’ on the internet and other public media (no place for climate change sceptics etc.) – yet this approach has no answer to the question of ‘who should guard the guardians’. A second option attractive to many classical liberals would maintain the case for free speech in the market for ideas but would recognise that the argument for ‘de-regulation’ is equally if not more valid in the market for private goods and services. The third and final approach would recognise that ‘market failure’ in the realm of ideas is indeed more likely than in the sphere of private consumer choice and would thus argue for the de-regulation of economic markets, and increased regulation of free speech. He does not endorse this view per se, but the latter position might be implied by Bryan Caplan’s suggestion that greater influence should be given to economists in determining the contours of public policy.
That Ronald Coase was able to anticipate these issues in the early 70s is proof enough of the relevance of his work today. How though would Pileus readers answer Coase’s challenge?