Victor Hwang '96 on Ronald Coase's Legacy

Excerpted from Forbes:

Yesterday, the world lost one of its great thinkers.  Ronald Coase, a legendary Nobel laureate in economics, passed away at the age of 102.  I was lucky to interact with him briefly last year. He was kind enough to review my book and give constructive feedback. However, Professor Coase influenced me far more than with a simple book review. Perhaps more than anyone, his work made my own career possible.

I consider Coase one of the world’s great innovation thinkers.  That’s not a conventional view, so I should explain. I went to law school at the University of Chicago, where Coase taught for most of his career. His ideas infected the entire school, and they still do. Coase argued that you cannot understand economics without understanding the relationships between people. And the relationships between people are governed by rules, whether existing ones (laws/norms) or new ones (contracts). The costs of forming such relationships – what he called transaction costs – are significant enough to shape whole economies.

The notion of transaction costs explains a lot.  When most people look at innovation ecosystems like Silicon Valley, for instance, they tend to think of the obvious raw inputs.  They see universities, entrepreneurs, companies, capital funds, incubators, and other tangible assets. However, what really makes innovation ecosystems tick are the relationships between people. That’s why a legal scholar might see Silicon Valley through a different lens than a neoclassical economist.

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