Where Do Caves Go?

Diary Entry: March 9, 2025

I’ve been going at this all wrong. I’ve been obsessed with the 1960 Problem of Social Cost paper, but I keep finding clues that the real secret is in his 1959 paper, The Federal Communications Commission.

I pulled it up again, this time reading it as the prequel. And there it is, right in a footnote in the 1960 paper, Coase admits it. He says the argument in The Problem of Social Cost was already “implicit” in the FCC paper. He only wrote the 1960 one because people “seemed to suggest that it would be desirable to deal with the question in a more explicit way”.

So, what is the argument in the FCC paper?

On the surface, it’s just a dry history of American broadcast regulation. It goes through the whole timeline: the 1912 Radio Act, Herbert Hoover, the FRC in 1927, and finally the FCC in 1934. I started to skim, thinking this was all just boring background.

But that can’t be it. That’s not the revolutionary “implicit argument.”

And then I found it. The core of the paper isn’t the history; it’s his solution. He argues that the whole system of government licensing is arbitrary and wrong. He says the government should just sell the frequencies through open auctions.

But here is the real genius, the part that connects everything. He argues that it doesn’t matter who gets the frequency in the “initial allocation”. The person who wins the auction is just the “initial owner”. The real user — the “ultimate user” — is an “economic one”. He’s saying that, just like any other resource, the frequency will “naturally gravitate toward their most valuable use”. Someone will buy it and flip it to someone who values it more.

And to illustrate this, he uses the cave analogy.

My God. It’s the property theory again.

He says a cave might legally belong to its discoverer, but that doesn’t mean “caves, in general, belong permanently... to their discoverers”. Ownership “eventually transfers to those who value them most”. Then he lands the punch: “This proposition... could also be applied to the right to emit electrical radiations”.

He’s not just talking about auctions. He’s talking about a fundamental theory of property.

He says the real problem with broadcasting, the “real cause of the trouble,” was that “no property rights were created in these scarce frequencies”. He says a private enterprise system “cannot function properly unless property rights are created in resources”.

This is it. This has to be it. The “misunderstood” part of Coase isn’t the theorem. It’s his entire redefinition of property. And he laid it all out in 1959.