The Economist on Ronald Coase

The man who showed why firms exist
The Economist
September 7, 2013

THE job of clever people is to ask difficult questions. The job of very clever people is to ask deceptively simple ones. Eighty years ago a young British economist wondered: why do companies exist? The answer that he gave remains as fascinating today as it was back then.

Ronald Coase lived an extraordinarily long and productive life (see Free exchange). In awarding him the Nobel prize for economics in 1991 the Swedish Academy singled out two papers for particular praise, one published in 1937 and based on a lecture which he gave in 1932 when he was only 21 years old, and one published in 1961. He published his last book, “How China Became Capitalist”, last year at the age of 101. Not bad for a London boy whose parents both left school at 12 and who was consigned to a special-needs school because he wore leg braces (it was only the timely intervention of a phrenologist who detected “considerable mental vigour” in the bumps on his head that redirected him to grammar school and thence to the London School of Economics).

But it is his work on the firm that marked him out for greatness. Most economists had been content to treat firms as black boxes. Mr Coase wondered what the black boxes were doing there in the first place. He used a scholarship that he won as an undergraduate to visit leading American firms such as Ford and General Motors. He summed up his thinking in his 1937 essay, “The Nature of the Firm”, which at first attracted no attention whatsoever, but continues to be cited to this day.