Coase

It was an unfortunate coincidence that I mentioned economist Ronald Coase just a few days before his passing in Blackboard Economics e.g. The title of the post is a term Coase coined and used often.

Coase had some interesting insights of subtle things that lie right under our noses, but we never know it.

Coase Links:

1. My original post about Coase’s Blackboard Economics.

2. Coase’s recent appearance on the EconTalk podcast.

3. Economist David Henderson on Coase.

 

Blackboard Economics and Stupidity

I really enjoyed and highly recommend this EconTalk podcast with Ronald Coase.

Coase explains why he wasn’t surprised it took 40 years for the FCC to adopt his recommendations to assign property rights to the airwaves:

No [I wasn’t surprised], not after you’ve studied how things actually operate. It’s a surprise that it took as little time as 40 years. No, it’s not possible to study how things are dealt with without realizing the importance of the stupidity of human behavior.

Economists often say, incentives matter. Coase is saying, stupidity matters. I agree.

Next Coase explains the problem with modern economics and his solution (emphasis mine):

Blackboard economics is economics which you can put on the blackboard, in which you study an imaginary system. It’s not empirically based at all. It’s not concerned with what really happens. It’s what you imagine could happen and what you imagined didn’t happen. So, I’ve been very critical of modern economics, which is too abstract. That’s called blackboard economics. It’s something you can put on the blackboard but that doesn’t exist.

I recommend more empirical work. Study what actually happens and start from there.

I don’t mean–the study that people do with a lot of statistics and so on, not finding out what really happens and getting conclusions based on the investigations, not on what actually happens but on bunches of statistics. My view is you should get down and study what actually happens. But economists don’t do that, by and large.

Here’s one example of focusing on the imaginary over the actual from my experience. As a young engineer, I was tasked with coming up with a transfer cost for the services that my department provided to the company.

My analysis included the value of renting the space we occupied. I figured if we didn’t occupy it, someone else could, so there was an opportunity cost there.

To estimate this, I called a real estate agent in charge of leasing the office/warehouse space across the street from our location. I asked him how much the lease would be for the amount of space that we occupied. He told me and I included that in my analysis.

When my director reviewed my work, he came across my floor space cost estimate and asked how I arrived at it. I told him it was the actual market rate in that area for office/warehouse space based on a quote from a real estate agent.  In other words, it’s what actual happens, as Coase says.

My director wasn’t happy. He wanted some sort of intrinsic value calculation for our real estate. He told me to contact our finance department so they could help me calculate that. He wanted to use blackboard economics to find the answer, rather than just using what actually happens.