If the Cap Fits, Wear It

Diary Entry: April 1, 2025

The “So What?” problem of the theorem keeps bringing me back to Pigou. Coase frames his entire 1960 paper as a takedown of Pigou’s “government intervention” approach.

But I’m re-reading my research, and the whole premise of their “fight” is falling apart.

First, as I realized before, Coase agrees with Pigou’s math. He explicitly “acknowledges that Pigou’s ‘analysis as such is correct’.“ He doesn’t dispute the calculation of externalities.

Second, I’ve been digging into what Pigou actually wrote, and the caricature Coase paints of him is just... wrong. Coase presents Pigou as this guy who wants government to jump in and tax everything. But Pigou also allowed for “contractual improvements”!

My research shows that Pigou only treated externalities as flaws needing correction in cases where “no contract is possible” or “the contract is unsatisfactory”. Coase just ignores this. He does not address Pigou’s first type of divergence, where contractual improvement is possible.

So... let me get this straight.

Coase agrees with Pigou’s calculations. And Pigou also believed in private contracts when they were possible.

So... what exactly is Coase “debunking”?

This has to be a smokescreen. The vicious attack on Pigou makes no sense if they fundamentally agree on so much. It’s a diversion. Coase is using Pigou as a “whipping boy” to hide his real target. And I’m more and more convinced that target is Adam Smith.