The Pointlessness of Pareto: Carrying Coase Further

Abstract

Some fifty-five years ago, in a seminal article called The Nature of the Firm, a young socialist named Ronald Coase sought to explain the existence of firms, of organizations within which markets were replaced by hierarchy and command. Twenty-five years later, in The Problem of Social Cost, Ronald Coase, by then a middle-aged libertarian, indicated how markets could replace hierarchy and command structures to the perceived benefit of those who organized them. Five years ago, at a conference marking the fiftieth anniversary of The Nature of the Firm, Professor Coase described the insight which allowed him to explain the existence of firms in this way: The solution was to realize that there were costs of making transactions in a market economy and that it was necessary to incorporate them into the analysis. This was not done in economics at that time—nor, I may add, is it in most present-day economic theory.