Coase and the 800 Pound Man

Cite this Article
Thomas A. Lambert, Coase and the 800 Pound Man, Truth on the Market (September 15, 2010),

Ronald Coase has been on my mind quite a bit lately.  His ideas have made a couple of recent appearances in my business organizations class.  As I’ve explained before, we spend the first day of Bus Orgs contrasting F.A. Hayek’s The Use of Knowledge in Society, which argues that central planning is destined to fail because planners cannot gather and process all the information they need to allocate resources efficiently and that prices provide such information in a free market system, with Coase’s The Nature of the Firm, which observes that “the distinguishing mark of the firm is the supersession of the price mechanism.”  Last week, we discussed the Coase theorem in connection with our consideration of the disgorgement remedy for breach of fiduciary duty.  (Here’s a summary of that discussion.)  The Coase theorem also came up in a recent discussion I had with some friends about whether non-smokers were “victims” of smokers in the few restaurants and bars that still permit smoking.  (I discussed that issue here.)

I thought of Coase again when I read the op-ed by Arthur Brooks and Paul Ryan in Monday’s WSJ.  In recent months, Brooks and Ryan have been arguing that our government is too large for most Americans’ tastes.  New York Times columnist David Brooks summarizes their ideas as follows:

[Arthur] Brooks (no relation) argues [in his book, “The Battle: How the Fight Between Free Enterprise and Big Government Will Shape America’s Future”] that Americans are a uniquely entrepreneurial people. A nation of immigrants, “America’s vast success might be explained in part by our genetic predisposition to embrace risks with potentially explosive rewards.”

Citing an array of polling data, Brooks argues that 70 percent of Americans embraces this free-market and entrepreneurial vision of their country. But 30 percent prefers a more government-centric, European-style vision. The battle, Brooks concludes, is between the 70 percent, trying to reclaim the country, and the 30 percent, which is now expanding the federal role on an array of fronts.

Paul Ryan, the most intellectually ambitious Republican in Congress, lavishly cites Brooks’s book. Over the past few years, Ryan has been promoting a roadmap to comprehensively reform the nation’s tax and welfare system. On the tax side, he would sweep away most of the special-interest-favoring tax credits and subsidies and give people a chance to join a simple tax system with only two rates.

On the welfare-state side, he’d sweep away most subsidies to the middle and upper classes, like the tax exemption on employee health plans. He’d essentially voucherize federal benefits, like health care and Social Security, and increase federal subsidies for people down the income scale.

David Brooks is skeptical:

The weakness of the Brooks and Ryan approach is that their sociology is off a bit. America is not a nation of risk-embracing pioneers. It is a nation of heroic bourgeois families who want to thrive within a secure social order. The economic debate is not as Manichaean as the culture war since most people are split down the middle and because it’s easier to compromise on money than on life.

In Monday’s op-ed, titled “The Size of Government and the Choice This Fall,” Brooks (Arthur) and Ryan respond to David Brooks’ suggestion that, for all their talk of the virtues of “freedom” and “entrepreneurship,” Americans really want a welfare state (albeit a capitalist one):

[T]hese claims miss the point. What we must choose is our aspiration, not whether we want to zero out the state. Nobody wants to privatize the Army or take away Grandma’s Social Security check. Even Friedrich Hayek in his famous book, “The Road to Serfdom,” reminded us that the state has legitimate — and critical — functions, from rectifying market failures to securing some minimum standard of living.

However, finding the right level of government for Americans is simply impossible unless we decide which ideal we prefer: a free enterprise society with a solid but limited safety net, or a cradle-to-grave, redistributive welfare state. Most Americans believe in assisting those temporarily down on their luck and those who cannot help themselves, as well as a public-private system of pensions for a secure retirement. But a clear majority believes that income redistribution and government care should be the exception and not the rule.

Brooks and Ryan then go on to assert that because our political leaders have “focus[ed] on individual spending issues and programs while ignoring the big picture of America’s free enterprise culture,” the free enterprise system most Americans prefer is on the verge of suffering death by a thousand cuts:

Why not lift the safety net a few rungs higher up the income ladder? Go ahead, slap a little tariff on some Chinese goods in the name of protecting a favored industry. More generous pensions for teachers? Hey, it’s only a few million tax dollars—and think of the kids, after all.

Individually, these things might sound fine. Multiply them and add them all up, though, and you have a system that most Americans manifestly oppose—one that creates a crushing burden of debt and teaches our children and grandchildren that government is the solution to all our problems. Seventy percent of us want stronger free enterprise, but the other 30% keep moving us closer toward an unacceptably statist America—one acceptable government program at a time.

Brooks’ and Ryan’s central point thus seems to be that our political leaders have grown government, one program at a time, to the point at which even those Americans who would not classify themselves as libertarians or classical liberals or “economic conservatives” — even David Brooks’ “heroic bourgeois families [?!] who want to thrive within a secure social order” — believe we’ve gone too far.  The 70% of Americans who generally favor an economic systemt that favors free enterprise and entrepreneurship need not settle on precise criteria for appropriate government intervention in order to agree that our government is currently too big. They can reach, as Cass Sunstein might put it, an “incompletely theorized agreement.”

So what does this have to do with Coase?

Before I went to law school, I had the pleasure of working as a research fellow at what was then called the Center for the Study of American Business (now the Murray Weidenbaum Center on the Economy, Government, and Public Policy) at Washington University in St. Louis.  Coase gave a talk at Wash U and then stopped by the Center for an informal brown bag with some Center staff.  The Nature of the Firm famously theorized about the optimal size of business firms, and one of my colleagues asked Coase if he any similar theories about the optimal size of government.

Coase responded:  “Your question is a bit like asking what is the optimal weight of an 800 pound man.  All one could say is, ‘less.'”

Well said, professor.

[Incidentally, I have shared this memory of Coase only one other time — in my admission essay to Yale Law School.  Didn’t get in.]