The Feather and the Wrecking Ball

Diary Entry: January 2, 2025

I’ve hit a wall with the “Coase Theorem.” Not the idea itself, but the way everyone else talks about it. I feel like I’m watching a game of telephone where the original message has been garnered into a mathematical formula that Coase himself would probably hate.

I’m trying to pin down his methodology. It’s slippery. In economics, there’s this tension between Milton Friedman’s view — that assumptions don’t need to be realistic as long as the theory predicts outcomes — and the opposing view that economics needs to describe the actual world. Coase seems to walk a tightrope between them, and I think I finally clicked on how he does it.

He uses “unrealistic” assumptions, but not for the reasons Friedman does. Coase strips the world down to zero transaction costs not to build a fantasy land, but to create a control group.

I was thinking about the physics analogy today — the one about gravity. A physicist says a feather and a hammer fall at the same speed. In the real world, that’s obviously false; the feather floats. But the physicist isn’t lying, and he isn’t describing a magical world. He’s describing a vacuum to isolate the force of gravity. Once you understand gravity, you can introduce air resistance (friction) to understand why the feather floats.

Coase is doing the exact same thing. The “world without transaction costs” is the vacuum. In that world, the initial allocation of rights doesn’t matter because resources will always flow to the highest value user — the “cave” will always end up with the person who pays the most for it. But Coase knows we don’t live in a vacuum. He knows the air resistance is heavy.

The methodology isn’t about the vacuum; it’s about the air resistance!

It seems so obvious now, but reading his critics, you’d think Coase believed in a friction-free utopia. He didn’t. He was obsessed with the friction. He wanted us to see that because transaction costs are positive (because there is air resistance), the initial allocation of rights (the law) matters immensely.

This feels like the key to his whole intellectual project. He carefully selects assumptions to make the theory workable, not just to make the math pretty. He’s looking for the mechanism. Whether it’s pricing radio frequencies or deciding who owns a cave, he’s asking: “If we strip away the noise, what is the economic gravity at work here?”

It’s a brilliant, almost humble methodology. He admits the complexity of the world (unlike the blackboard economists he criticized) but refuses to be paralyzed by it. He isolates the signal from the noise. I need to stop looking for a dogma in his work and start looking at his technique. He’s not telling us what to think; he’s showing us how to strip the engine down to see which piston is firing.