So What?

Diary Entry: March 29, 2025

Okay, let’s just stop and think about the “Coase Theorem” itself. The part from chapters III and IV that everyone, including my JSD seminar, is obsessed with.

The theorem states: “in the absence of transaction costs, it does not matter what the law is,” because people will just bargain to the most efficient outcome.

Let’s just accept that. In a magical fantasy world where bargaining is free and effortless, the law doesn’t matter for efficiency.

My question is... SO WHAT?

How does that translate into this world? The real world? We live in a world that is defined by transaction costs. It costs a ton of money and time “to discover who it is that one wishes to deal with,” “to conduct negotiations,” “to draw up the contract,” and “to undertake the inspection needed to make sure that the terms of the contract are being observed”.

The theorem is completely unworkable. What is a judge supposed to do with it? “Well, Your Honor, in a fantasy world, this doesn’t matter...” Who cares?

How can this be the “most cited” idea in all of Law and Economics? It’s a statement about a world that doesn’t exist. It has zero practical value.

This is the most frustrating part. Coase knew it was a fantasy. He literally said this ideal world “is the world of modern economic theory, one which I was hoping to persuade economists to leave”. He wasn’t proposing this world; he was using it as a starting point to show how ridiculous it was!

This just confirms my suspicion. Everyone is citing the one part of the paper that is just a hypothetical. They’re all obsessed with the fantasy, but Coase himself was trying to get them to look at the real world.

So... if the theorem is practically useless... what happens when we do take into account the cost of market transactions?  What is in the rest of the paper? That has to be the real point.