Small Bus Econ (2013) 40:173–184 DOI 10.1007/s11187-012-9468-2
Coase on entrepreneurship Siri Terjesen • Ning Wang
Accepted: 28 November 2012 / Published online: 22 December 2012 Springer Science+Business Media New York 2012
Abstract Following a short biography of Nobel Laureate economist Ronald H. Coase, this two part interview explores (1) Coase’s life history and thoughts on academic scholarship and (2) Coase’s perspective on the field of entrepreneurship. Coase describes his experiences during his visiting scholarship to America in 1932, early career at the London School of Economics, and government work during World War II. He discusses the virtues of scholarship and the role of technology. In the second part of the interview, Coase views entrepreneurship as a vital source of endogenous change in the economy and outlines the importance of investigating the structure of production, and other important research and policy questions. Coase elaborates on how entrepreneurship has changed over time, and describes his most recent work on entrepreneurship in China. The interview concludes with Coase’s thoughts on the evolution of scholarship and his efforts to advance the field.
Siri Terjesen and Ning Wang contributed equally. S. Terjesen (&) Department of Management and Entrepreneurship, Kelley School of Business, Indiana University, 1309 E. 10th St., Bloomington, IN 47405, USA e-mail:
[email protected] N. Wang School of Politics and Global Studies, Arizona State University, P.O. Box 873902, Tempe, AZ 85287, USA e-mail:
[email protected]
Keywords Coase Economics Entrepreneurship Interview Scholarship JEL Classifications
A11 B25 B31 L26 N01
1 Background Ronald H. Coase received the Nobel Prize in Economics in 1991 for his ‘‘discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy’’ (The Royal Swedish Academy of Sciences 1991). Coase’s groundbreaking work on the nature of the firm and the role of property rights in the functioning of the market economy has profoundly influenced the development of modern economics. Coase is the founding father of new institutional economics and pioneered interdisciplinary work across law and economics. Coase’s ideas are fundamental in the study of economics, law, management, sociology, political science, and other related fields (Williamson 1985; Werin 1991; Medema 1994; Alvarez and Busenitz 2001; Madhok 2002; Wang 2003, 2010a, b, etc.). Indeed, within entrepreneurship, transaction cost theory is essential to the field (Minniti and Levesque 2008); and is especially utilized when investigating institutions in studies with two or more countries (Terjesen et al. 2011). More recently, Coase and his collaborator Ning Wang explored the creative role of entrepreneurship in
123
174
the economy, offering a distinct perspective on the study of entrepreneurship (Coase and Wang 2011). In their view, entrepreneurship is a critical Schumpeterian force introducing institutional, organizational, and product changes in the economy. They point to the study of the structure of production as a viable research program for economics, in which entrepreneurship is recognized as a vital source of endogenous change within the economy. While choice and resource allocation are taken as the paradigmatic foci in neoclassical economics, Coase and Wang are keenly interested in production, a focus allowing them to bring the study of entrepreneurship and innovation back to the center of economics (see also Coase and Wang 2012a). Coase is both a master and a maverick of modern economics (John Hicks, another British Nobel laureate in economics, was another such example). He has consistently criticized economists for practicing ‘‘blackboard economics,’’ which has turned economics into a theory-driven subject, detached from the ordinary business of life (e.g., Coase and Wang 2012b). While Coase is widely appreciated as one of the most original and independent minds in modern economics, his scholarly writings mainly consist of empirical work, the majority of which being case studies, a method rarely practiced in today’s empirical economics. Although Coase was one of the first economists to use statistical methods, he has repeatedly warned economists about the dangers of doing empirical work based exclusively on aggregated statistical data. As Coase put it wittingly, ‘‘if you torture data enough, nature will always confess.’’ Today, with easy access to computing power, statistical packages, and data collected by government bureaus and other agents, the practice of torturing data has become an essential training in virtually all graduate programs in economics and management. As existing literature provides insights into Coase’s contributions, especially to economics, see e.g., Coase (1994, 2004), Medema (1994), and earlier published interviews,1 we explore Coase’s perspective on 1 See, for example: Coase (2002) on why economics will change—an address to the University of Missouri; Nye (1997) interview with Coase on the emergence of New Institutional Economics; Coase (1999) on the mission and features of the International Society of New Institutional Economics; Hazlett (1997) on the Coase Theorem and other topics; and Wang (2010a, b) on the aims of the Coase China Society.
123
S. Terjesen, N. Wang
entrepreneurship, and his thoughts on the future of economics and scholarship. We begin with a biographical overview of Coase’s life, where possible citing Coase’s prior writings to capture his voice. The interview consists of two parts. The first part records Coase’s life history and his thoughts on scholarship, it was conducted in Chicago on October 21 and 22, 2012. The second component of the interview covers Coase’s perspective on entrepreneurship and his most recent work with his collaborator, Ning Wang, who has been working with Coase since 1998, and is answered by Coase and Wang.
2 Biography Ronald Harry Coase was born in Willesden, London, on December 29, 1910. Coase’s father worked as a post office telegraphist, where his mother had also worked until they were married. The Coase family name originally comes from the west of England. His father was born in Devonshire to a carpenter, and his mother was born in the northeast of England. They moved to London when they were young. Both started to work at 12, they had little formal education, but were able to read and write. As the only child of his parents, Coase remembers entertaining himself, for example, playing chess himself with his left hand against his right hand. Coase was always interested in academic learning, and was largely left alone in pursuing his own avid curiosity about the world, with little guidance or pressure from his parents. Coase (2004, pp. 190–191) describes his first school experience: ‘‘When I was young I had a weakness in my legs which led to my wearing irons. I went to the local school for physical defectives. It was run by the same department of the council that ran the school for mental defectives, and I suspect that there may have been a overlap in the curriculum. I have no clear recollection of what I was taught there. All I can now remember is having been taught, at one stage, basket-weaving, a useful skill that I am afraid I failed to master. I missed taking the entrance examination for the local secondary school at the usual age of 11 (perhaps because I was at the school for physical defectives). But, through the efforts of my
Coase on entrepreneurship
parents, I was allowed to take the examination at the age of 12, as a result of which I was awarded a scholarship to go to the local secondary school, the Kilburn Grammar School. The teaching there was good, and I received a solid education in the usual subjects. I passed the matriculation examination in 1927, with distinction in history and chemistry. It was then possible to spend the next two years at Kilburn Grammar School studying for the intermediate examination of the University of London.’’ At age 18 in 1929, Coase matriculated to the London School of Economics (LSE) to pursue studies towards a Bachelors in Commerce. In his Nobel autobiography, Coase (1991a) describes the role of his early mentor Plant and the Cassel Traveling Scholarship. ‘‘I took a hodgepodge of courses for Part I of the final examination, which I passed in 1930. For Part II, I specialised in the Industry Group. I then had an extraordinary stroke of luck, another accidental factor which would affect everything I was to do subsequently. Arnold Plant, who had previously held a chair at the University of Cape Town, South Africa, was appointed Professor of Commerce (with special reference to Business Administration) at the London School of Economics in 1930. I attended his lectures on business administration but it was what he said in his seminar, which I started to attend only five months before the final examinations, that was to change my view of the working of the economic system, or perhaps more accurately was to give me one. What Plant did was to introduce me to Adam Smith’s ‘invisible hand’. He made me aware of how a competitive economic system could be coordinated by the pricing system. But he did not merely influence my ideas. My encountering him changed my life. I passed the B. Com, Part II final examination in 1931, but having taken the first year of University work while still at school and three years residence at the London School of Economics being required before a degree could be awarded, I had to decide what to do in this third year. Among the subjects studied for Part II, the one I had found most interesting was Industrial Law and what I had decided to do was to study in this third year
175
for the degree of B.Sc. (Econ), with Industrial Law as my special subject. Had I done so I would undoubtedly have gone on to become a lawyer. But that was not to be. No doubt as a result of Plant’s influence, the University of London awarded me a Sir Ernest Cassel Travelling Scholarship and although I did not know it, I was on the road to becoming an economist. I spent the academic year 1931–32 on my Cassel Travelling Scholarship in the United States studying the structure of American industries, with the aim of discovering why industries were organized in different ways. I carried out this project mainly by visiting factories and businesses. What came out of my enquiries was not a complete theory answering the questions with which I started but the introduction of a new concept into economic analysis, transaction costs, and an explanation of why there are firms. All this was achieved by the Summer of 1932, as the contents of a lecture delivered in Dundee in October 1932, make clear. These ideas became the basis for my article ‘The Nature of the Firm’, published in (1937), cited by the Royal Swedish Academy of Sciences in awarding me the 1991 Alfred Nobel Memorial Prize in Economic Sciences. The delay in publishing my ideas was partly due to a reluctance to rush into print and partly to the fact that I was heavily engaged in teaching and research on other projects. I held a teaching position at the Dundee School of Economics and Commerce from 1932 to 1934, at the University of Liverpool from 1934 to 1935 and at the London School of Economics from 1935 on. At the London School of Economics I was assigned a course on the economics of public utilities in Britain. In 1939, the Second World War broke out and in 1940 I entered government service doing statistical work, first at the Forestry Commission and then at the Central Statistical Office, Offices of the War Cabinet. I returned to the London School of Economics in 1946. I then became responsible for the main economics course, ‘The Principles of Economics’, and also continued with my research on public utilities, particularly the Post Office and broadcasting. I spent nine months in 1948 in the United States on a Rockefeller Fellowship studying the American broadcasting
123
176
industry. My book, British Broadcasting: A Study in Monopoly, was published in 1950. In 1951, I migrated to the United States. I went first to the University of Buffalo and in 1959, after a year at the Center for Advanced Study in the Behavioral Sciences, I joined the economics department of the University of Virginia. I maintained my interest in public utilities and particularly in broadcasting and during my year at the Center for Advanced Study in the Behavioral Sciences, I made a study of the Federal Communications Commission which regulated the broadcasting industry in the United States, including the allocation of the radio frequency spectrum. I wrote an article, published in 1959, which discussed the procedures followed by the Commission and suggested that it would be better if use of the spectrum was determined by the pricing system and was awarded to the highest bidder. This raised the question of what rights would be acquired by the successful bidder and I went on to discuss the rationale of a property rights system. Part of my argument was considered to be erroneous by a number of economists at the University of Chicago and it was arranged that I should meet with them one evening at Aaron Director’s home. What ensued has been described by Stigler and others. I persuaded these economists that I was right and I was asked to write up my argument for publication in the Journal of Law and Economics. Although the main points were already to be found in The Federal Communications Commission, I wrote another article, The Problem of Social Cost, in which I expounded my views at greater length, more precisely and without reference to my previous article. This article, which appeared early in 1961, unlike my earlier article on ‘The Nature of the Firm’, was an instant success. It was, and continues to be, much discussed. Indeed it is probably the most widely cited article in the whole of the modern economic literature. It, and The Nature of the Firm were the two articles cited by the Royal Swedish Academy of Sciences as justification for awarding me the Alfred Nobel Memorial Prize. Had it not been for the fact that these economists at the University of Chicago thought that I had made an error in my article on The
123
S. Terjesen, N. Wang
Federal Communications Commission, it is probable that The Problem of Social Cost would never have been written. In 1964, I moved to the University of Chicago and became editor of the Journal of Law and Economics. I continued as editor until 1982. Editorship of the journal was a source of great satisfaction. I encouraged economists and lawyers to write about the way in which actual markets operated and about how governments actually perform in regulating or undertaking economic activities. The journal was a major factor in creating the new subject, ‘law and economics’. My life has been interesting, concerned with academic affairs and on the whole successful. But, on almost all occasions, what I have done has been determined by factors which were no part of my choosing. I have had ‘greatness thrust upon me’.’’ In introducing Coase to receive the Nobel Prize in 1991, Lars Werin of the Nobel committee shared: ‘‘The economic system has an institutional structure, which we often regard as self-evident because we observe it around us every day. But it is actually peculiar and intricate. For instance, people make agreements among themselves in many different ways, ranging from simple purchases to complex contracts; what determines the pattern? Economic activity takes place within a framework of legal rules: contract law, tort law, etc.; why are these laws formulated as they are? And why do we have firms at all? These and other components of the institutional structure must certainly be essential elements in the functioning of the economic system. Nevertheless, economic theory could not answer these questions. This state of affairs annoyed a young economist who had just received his first degree in London in the 1930s. He wrote an essay with the perhaps untactically pretentious title The Nature of the Firm. He provided a strong and productive answer to the last question, why firms exist, although hardly anyone bothered to listen. He gradually added building blocks to his theoretical construction, and had eventually— in the early 1960s—set forth the principles for answering all of the questions. It was not until the 1970s and 1980s that the breakthrough for his
Coase on entrepreneurship
ideas occurred. Astonishingly, basic economics had to be revised, managerial economics received a new foundation and research in economic history new impulses, a new discipline, law and economics, was established on the borderline between economics and legal science, and traditional jurisprudence itself became unsettled. It is for this achievement that the originator, Ronald Coase, is rewarded…’’ Coase is the Founding President of the International Society for New Institutional Economics (ISNIE) and Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. His two main articles, ‘‘Nature of the Firm’’ (Economica 1937) and ‘‘The Problem of Social Cost’’ (Journal of Law and Economics 1960) have each been cited over 22,000 times. In 1937, Coase married Marion Ruth Hartung of Chicago at London whom he met in 1932 during his Cassell Travelling Scholarship to the United States. Marion, a musician by training, was a delightful companion for 80 years. Marion is known for her kindness, artistic acumen, and excellent sense of humor. Her sudden death on October 17, 2012, just a few days before this interview, dealt a severe blow to Professor Coase.
3 Life history and thoughts on scholarship Q: What motivated you to become a scholar? A (Coase): I don’t know. I was always interested in understanding things. It was accidental that I ended up as an economist. I always wanted to be a historian. But to take a degree in history, I was told that I had to know Latin. But I didn’t. Then I chose chemistry; but a degree in science required mathematics. After I took a course in mathematics, I found myself not liking it. I was left no choice but to take a commerce degree which didn’t teach one anything. It was a lot of subjects thrown together to be a degree. But I was exposed to a wide variety of subjects, including accounting, industrial law, organizational psychology, and so on. They all dealt with practical problems. When I later traveled on a scholarship in the United States, I felt I was well prepared. At LSE, I did not take any course in economics, but I sometimes sat in some economic classes just to get a feeling what was going on in the field.
177
Q: What was your first impression of America? A (Coase): There were no planes to America then. I went by boat. I learned a lot because I went around asking questions and visiting factories. The one advantage of the Great Depression was that people had a lot of time to answer my questions. You would go into a factory and they would have six blocks of machinery and five weren’t operating. People didn’t have a lot to do. On Michigan Avenue [Chicago], you had to mind where you walked because there were men without jobs sleeping on the street. I don’t know what the real unemployment rate was— probably 50 %. It was agriculture that saved things. People from farm families went back to the farm. The people you saw were only a fraction of the actual working population. It was extraordinary that America came through. During this time I asked people about their work, their jobs, their decisions, and how they made those decisions. And when I went back to Britain, I wrote ‘The Nature of the Firm’ about this. I gave the whole argument in 1932–1933 and described it in a letter to [Ronald] Fowler. Q: What was the subject of your PhD dissertation? A (Coase): I never wrote a dissertation. I received the PhD on the basis of works submitted, which included ‘Nature of the Firm.’ I only got the degree because in America when I was visiting during the war, it was embarrassing to say that I did not have a doctorate. [Note: Coase received his PhD in 1951.] Q: What was your first academic position? A (Coase): [Coase’s professor and mentor] Arnold Plant recommended me to Dundee. The school was set up by the local council and wasn’t a proper university. We were given topics that we had to deliver. During this time I also took my students on tours of jute factories. At that time, Dundee was built on the jute industry. Jute was used to make carpets and bags. Q: Where were you during World War II? A (Coase): I worked in the Statistics office. I gathered data on the artillery supplies. I analyzed where the artillery was going to the fronts in Germany and how much was coming back. I could show where more artillery was needed and where too much was sent. This showed problems in the organization and organizations don’t like it when you show them where the problems are. After 3 months, they stopped me from doing it.
123
178
Also during the war, there were people sleeping in tube stations. You had to be careful to step over them. I remember another time during the war—I was in Westminister and the bombs went right over us. Q: What was life like at LSE? A (Coase): My department chair Lionel Robbins would assign my lectures. He would give me a title and then I would have to come up with it. This was unlike in America where you would be given a textbook. I could teach what I wished. I lectured in the Old Theatre. I didn’t know what to do with [the] room because there was also a balcony. There were about 200 students total on the floor and in the balcony. I would deliver one sentence to the floor and the next to the balcony. I didn’t feel very supported at LSE. My type of research was not appreciated by Lionel Robbins. When I was considering leaving LSE for America, he never talked to me. If he had, perhaps I would have stayed. Q: What did your parents think of your path? A (Coase): They didn’t know what to think. They had no idea of my academic pursuit. My parents went to work at 12. They could read, write, and do arithmetic but they had no interest in any academic subject. I was always interested in academic work. My mother loved me and supported me in whatever I wanted to do. If I failed, it wouldn’t have bothered her at all. She just would have said ‘‘Ronnie isn’t good at that.’’ My father sometimes had an attitude that I didn’t like. He liked to pretend that he was things that he wasn’t. I have a photograph of him during the war (WWI) where he was a sergeant. And the photograph has the stripes of a sergeant which he was holding to be mistaken for an officer. Years later, I gave my father a copy of ‘‘The Problem of Social Cost’’ and his comment was ‘‘It was heavy’’ and that is all that he said. He didn’t understand a word of it. My mother didn’t have any interest at all. She never had any ambition except unconditional love. She played tennis and was fairly good. They were disappointed in me going to America [in 1951 to take a position at the University of Buffalo]. My mother would have liked to have seen more of me. My father thought I went to America for the basest of reasons—for the salary—which was not correct… I certainly missed the cricket in England. Q: What virtues are essential for an academic scholar?
123
S. Terjesen, N. Wang
A (Coase): Honesty. We are not just playing a game. We have purposes. I think that for most economists their work is not a serious subject. It is something you do when it’s a serious subject. Whether we can do something with this [new] journal [Man and the Economy] we don’t know, but we are trying to get people to think seriously. I also think kindness is a most important character. There are a lot of people in the world who are not so kind, so it is important to be kind. Q: How has technology changed transaction costs? A (Coase): I don’t know. It must be very great. Computers didn’t exist until recently. Office machines are relatively new. All of that must have changed and altered immensely the way things are carried out. Q: What about trust? A (Coase): I think it’s more difficult to trust people now because in the society that used to exist, people used to talk to one another. If you didn’t do something, you would let people down and you would be found out. Q: How has technology changed scholarship? A (Coase): It doesn’t seem so different. You can do a lot with a pencil. Q: What should we teach students? A (Coase): I don’t think we should impose ideas onto them. I think the best way to teach students is to teach them how to educate themselves. Q: What did it feel like when the Nobel Prize Committee contacted you? A (Coase): Actually they [Nobel Prize committee] couldn’t find me. I was in Tunisia. They [committee] never did find me. I never heard from them directly. It was the new agency Reuters that found me. I was surprised and I walked into tell my wife. I walked in not with elation but some sort of severity. The news agency Reuters came to our apartment and brought photographers and so on. They took charge and said stand in front of the statue and they took pictures of me. That was how it happened. They said stand over here, stand over there. From that point, my life was not my own. I just accepted it. I never saw it coming. I had gone to Tunisia to see some camels and things in the desert. I never saw them. One of the first occasions was a Tunisian dinner. They played Tunisian music on a large string instrument for me.
Coase on entrepreneurship
At one point, they put this Tunisian musical instrument on my lap and took a picture of me. Curiously enough there was an article about me in Forbes magazine and the picture was me playing this instrument. There were many other dinners [during that stay], with the British Ambassador, the American Ambassador, even the Tunisian President. Q: You must have met many world leaders? A: I met [Ronald] Reagan. We had a reception with lots of people lining up. People grumbled that I held up the line. But it was Reagan that wanted to talk. He heard my accent and was very quick to know that I wasn’t an American. He started talking to me about Margaret Thatcher and held the whole line up. He was a great admirer of Margaret Thatcher and I think rightly so. I got an invitation to meet the Queen, and I thought ‘Oh, so troublesome.’ Only recently have I wondered if that wasn’t a mistake. She didn’t invite me to anything after that. I thought we would be lined up and she would shake my hand. It was probably a mistake. It was probably the start of something that she wanted me to do. I should have gone. It would have been an occasion. When we were staying in the Riviera [Coase and his wife Marion spent 30 summers at their home in the French Riviera], Princess Grace was in Monaco and she gave a lot of atmosphere to the place. I only saw her once. We had gone to a concert held in a church. Outside there was a very lovely Italian staircase which I walked down. I heard someone speaking French behind me. It was very good French. It was Princess Grace. She got in a car and left. We lived in an apartment [in Chicago] that was across the street from the big house of the Catholic Church. The Pope stayed there during his visits. We were told not to go out on our balcony because they were afraid he would be shot. Q: Do you have any hobbies? A (Coase): I took oil painting classes [when working at the University of Buffalo] in Buffalo. I gave it up when it was too time consuming. That was probably a mistake. I also love music and performance. London is the best city if you like theater and performance. Q: What research are you working on? A (Coase): I remain a historian. Many years ago I began investigating the multiple companies that
179
provided water to London in the 1700s and 1800s. [Today there is one water supply infrastructure firm: Thames Water.] These companies provided very different quality water around London. Once someone opened a tap and a fish came out. Another company gathered water just a few feet from where sewage was expelled. I would like to write up a paper on London’s water supply. My main concern now is to start a new journal, Man and the Economy. Economics has been static and theory-driven for too long. We have to change it. The best way, as I see it, starts with studying man as he is and the economic system as actually exists in the real world. Q: What important research questions should scholars focus on? A: You disqualify yourself by asking that question. First you must find a problem and study it. Only later will you find out if it is important or not. Q: What is your opinion of today’s economy? A (Coase): I haven’t studied it, but I am not worried. The economic problems we face today are minor compared to the ones I have seen. During the Great Depression, if you walked into a factory, you would see nothing was going on. The Great Depression was truly great.
4 On entrepreneurship Q: What is entrepreneurship to you? A (Coase and Wang): Entrepreneurship involves undertaking new business initiatives, such as setting up a new firm, creating a new market, inventing a new product, experimenting a new way of marketing, retailing, or organizing the production line, and bearing the related risks. These are all novel business endeavors, their outcomes cannot possibly be known in advance. Most of these attempts may fail, but the few successful ones help to introduce fundamental changes to the economy, keeping it innovative. Actions fully dictated by the logic of choice—the so-called equimarginal principle—does not, in our view, qualify as entrepreneurial. The Danish physicist Niels Bohr made a subtle but critical distinction between thinking and merely being logic in reasoning. A parallel distinction can be made in the
123
180
business world between entrepreneurial undertaking and merely following the logic of choice. Q: Why is entrepreneurship important? A (Coase and Wang): Entrepreneurship is the fountainhead of endogenous changes in the economy, bringing about technological, institutional, and organizational innovation and creating new knowledge. Entrepreneurship drives economic evolution, determining its speed and direction. Q: How has entrepreneurship changed? A (Coase and Wang): For one thing, with economic globalization and the market economy springing in China, India, Africa, and elsewhere, entrepreneurship has become a global phenomenon, as it should be. This global blossoming of entrepreneurship provides a great opportunity for scholars to study how the market economy functions in countries with different histories, cultures, and political systems. In addition, entrepreneurship seems to have received more and more attention in school curriculum, at least in the United States. Outside business schools where entrepreneurship has been a traditional subject of teaching and research, entrepreneurship has become an integral part of a liberal arts education. This probably has something to do with the fact that economic globalization and competition from abroad have increased the public awareness of entrepreneurship. At the same time, we also see a lot of continuities. One thing that has not changed is the persisting importance of family in entrepreneurship. The growth of big corporations once led people to fear that family would be no longer relevant for the economy. But that fear has turned out to be quite unnecessary. Entrepreneurship probably is as old as family. Among all human institutions, no one performs better than family in providing a sense of security and a safety net. It is probably no coincidence that family still plays a critical role in entrepreneurship. Another continuity, which is unfortunate, is that economics remains detached from the ordinary business of life. As is currently taught in classroom and presented in textbooks, economics does not have much to say about entrepreneurship. Q: What important entrepreneurship research and policy questions should be addressed in today’s world?
123
S. Terjesen, N. Wang
A (Coase and Wang): Different scholars will answer this question in their own ways. This is healthy for the development of the field. For a subject like entrepreneurship our ignorance is so vast and in many cases we even do not know what are the right questions to ask, pluralism is inevitable and desirable. We believe that the study of the structure of production provides a framework to understand entrepreneurship. As economists, we are interested in entrepreneurship not for the heroic personalities of entrepreneurs, their moving personal stories, or even their business acumen, but their lasting impact on the economy, such as novel products, news ways of organizing production, including new firms and new markets, and so on. In other words, any trace entrepreneurship leaves on the economy can be found in the structure of production. This has direct implications for entrepreneurship research and related policy questions. In a recent piece we did together, ‘‘The Industrial Structure of Production’’ (Coase and Wang 2011), we proposed the structure of production as a subject matter for economics. Today, economics identifies itself as a theoretical approach of economization and does not have a subject matter. As detached from the ordinary business of life, economics does not have much to do with management or entrepreneurship. But once economics takes the structure of production as its subject matter, entrepreneurship will assume a critical importance in economic research, ending the unfortunate separation of economics and entrepreneurship research. For its policy implications, we believe entrepreneurship offers a much better and viable goal for the state to pursue than full employment or economic growth. Today, the government and the private sector hire a large number of economists to forecast macro economic performance. But there is no evidence that anyone or any economic theory can predict growth, inflation, or unemployment. We simply do not have enough grasp of how the interrelated parts of the modern economy work together that enables us to predict such macro matters. Government policies intended to stimulate growth and create jobs are more often than not beset with unintended consequences of missed economic opportunities, oppressed entrepreneurship, and unexpected inflation.
Coase on entrepreneurship
Given the poor record the governments everywhere have in managing the macro economy, we are hopeful that they can do a better job if they embrace the promotion of entrepreneurship as their policy objective. It is certainly true that there is still much we don’t know about entrepreneurship. But the study of the structure of production will offer a lot of insights. Q: Your recent work [book How China Became Capitalist, Palgrave Macmillan: Coase and Wang 2012c] explores the evolution of the Chinese economy. What is the future of entrepreneurship in China? A (Coase and Wang): We are quite optimistic about the future of entrepreneurship in China for a number of reasons. First and foremost, entrepreneurship has had a long history in China before its recent revival. From the Travels of Marco Polo, we know that China had a commercial society long before the West. In its recent past under the rule of communism, China attacked entrepreneurship and banned private business. Fortunately, that radical ideology did not last long in China. Once it was weakened, entrepreneurship came back all over China. As we showed in How China Became Capitalist, it was mainly entrepreneurship that transformed China from a poor, socialist economy to a vibrant market economy. Second, among the largest global economies, China has the most open economy in the whole world. Over the past two decades, China has been a favorite destination for foreign investment. In the past decade or so, China has emerged as a great investor in Africa, Southeast Asia, Latin America and elsewhere. Trade in goods and ideas not only creates enormous economic gains, but also keeps people open-minded. As China becomes more integrated in the global market economy, we expect entrepreneurship will keep flourishing in China. We are also aware that the further development of entrepreneurship in China still faces many challenges. The first hurdle is that the rule of law is still not fully respected in China. The Chinese government still has too much discretionary power that can be readily abused to encroach upon entrepreneurship. In addition, the remaining state monopolies also pose a direct threat to entrepreneurship. We think the most damaging flaw that China suffers now is the lack of an open market for ideas. It has a
181
broad and insidious impact on entrepreneurship in China. But we are cautiously optimistic that a free market for ideas may well arise in China in the coming decades. Q: You have written that ‘‘It’s time for China to embrace not just the market, but the marketplace of ideas. This will help not just China reach its full potential, but the world as well’’ (WSJ 2012). What research and other activities are needed to reach this potential? A (Coase and Wang): We have to realize that the market for ideas, just like many other markets, does not arise automatically. In our modern society, a farmer’s market probably can readily arise without much institutional backup. But most markets in today’s economy, such as a commodity exchange or a futures market, often require an intricate system of rules and regulations—this is quite apart from any government regulation that there may be. This is made crystal clear in Richard Sandor’s recent book, Good Derivatives: A Story of Financial and Environmental Innovation (Wiley 2012), in which Sandor details his personal odyssey of creating various markets. The market for ideas is a particular kind of factor market. No market economy can function without a labor or capital market because labor and capital are vital inputs of production. As our modern economy has become more and more knowledge-intensive, no factor of production is more important than ideas. Human capital has gained importance as a concept in the past few decades exactly because ideas or knowledge has become a vital factor of production. The concept of the market for ideas is not our invention. It has been widely used in legal scholarship to refer to such political freedom as free speech, free press, and free exercise of religion. But we give it a new meaning. In an early article, ‘‘The Market for Goods and the Market for Ideas’’ (Coase 1974, included in Essays on Economics and Economists; Coase 1994), the market for ideas was viewed as ‘‘the market in which the intellectuals conducts his trade’’ (Coase 1994, p. 67). If we take a further step to expand the concept, the market for ideas can be fruitfully seen as a factor market. In this way, it is no longer a concept in law or political science, but a fundamental concept in economics. This has great implications for economic research
123
182
and economic policy. For example, what makes the market for ideas different from other factor markets? What determines the working of the market for ideas? Does patent facilitate or block innovation? Our sense is that the market for ideas will enrich our understanding of the market in general and challenge some of our conventional wisdom. We need a lot of work, both conceptual and empirical, to understand better the market for ideas and its far-reaching impact on the working of our knowledge-driven modern economy. Q: Your research and teaching career has spanned over eight decades. What are some of the major changes you have witnessed? What changes are necessary for the future? What advice would you give to today’s scholars? A (Coase): When I started my career, economics was a small profession, at least in Britain. Almost all of us knew each other. One result of this close and small academic community is that scholars’ contribution to the field was not mainly judged by their publications. The push for publications did not come close to what it is now. There were not many academic journals at the time so that everyone could be well informed of what was going on in the whole field by reading the few journals available. Today, there are hundreds of academic journals and no one can possibly read all the articles even if he confines himself to the few leading journals. The field is expanded, and the professional community is much enlarged. But I doubt whether that enormous quantitative growth has translated into a better understanding of how the economy works. Another significant change is that research has become almost exclusively quantitative. If you look at any journal in economics today, it is hard to find a single empirical article without some statistical analysis. With increasing access to computing power and aggregated statistical data, economists can easily mine data to find statistical results that fit in their theory. As I said many years ago, nature will always confess if you torture data enough. Things have become worse since then. Today, empirical research is not driven by interesting problems, but by the availability of data. Articles are judged first and foremost by technical sophistication. I have always encouraged scholars to conduct empirical work, the kind of work that will give us insights into the working of the economy. Francis
123
S. Terjesen, N. Wang
Crick, probably the greatest biologist in our time, said the following in What Mad Pursuit, ‘‘It is all too easy to make some plausible simplifying assumptions, do some elaborate mathematics that appear to give a rough fit with at least some experimental data, and think one has achieved something. The chance of such an approach doing anything useful, apart from soothing the theorist’s ego, is rather small.’’ It applies equally well in economics. If economics is ever going to make any progress, it first has to become an empirical subject. As it is taught today, economics is a theory-driven subject; empirical work is generally looked down in the profession. At the same time, many of the empirical work is to fit number-crunching to theory. But empirical work would have little significance if it fails to challenge our theory, or deepen our understanding of the theory. We have to break this vicious cycle to change economics. Empirical research has to be driven by problems, not data, and guided by a theory. Once we decide what problems to work on, we should collect whatever data that bear on the problem. Only in this way can empirical research offer some insight into the working of the economy. Q: Another hallmark of your career has been your record of service—as editor of the Journal of Law and Economics (1964–1982) and most recently in establishing the Coase China Society to promote the study of the real world economy. Could you comment on your commitments to service? A (Coase): Today, at the time of promotion, scholars are judged by their teaching, research and service. Editing a journal or a book, reviewing articles, book manuscripts or grant proposals, organizing seminars or conferences are all regarded as public services. This is not what came to my mind when I took up the editorship of the Journal of Law and Economics. Editing a journal is not merely providing a public service to the profession, or doing some kind of academic philanthropy. Editorship surely requires an enormous amount of time and a strong sense of commitment, but it goes far beyond donating time and efforts for a public service. When I decided to come to the University of Chicago and take on the editorship of the Journal of Law and Economics, I viewed it as a great opportunity to advance a subject and promote a
Coase on entrepreneurship
certain viewpoint. The Journal has certainly played some role in advancing law and economics as an independent field of inquiry. Some of my colleagues thought that editing the Journal diverted time from my own research. That is certainly true. But I don’t think there is a better way to advance a subject. This is a decision I have never regretted. Actually, I am now planning to start a new journal, Man and the Economy. This proposed new journal aims to do to economics what the Journal of Law and Economics has done to law and economics. Since the 1930s, economics has become a study of human choices. It has become an approach detached from the real world economy. Many questions that are vital to understanding how the economy works but cannot be put into the logic of choice are inevitably ignored, including production and entrepreneurship. The introduction of new goods and services and the establishment of new firms and markets are all left out in economic research. We believe economics is a study of man creating wealth in society. Knowledge in economics cannot come by unless we study man as he is and the economic system as it actually exists.
5 Epilogue As a centenarian, Coase remains an avid reader. He subscribes to Nature, Science, the Economist, and Scientific America, and frequently finds articles of great interest to him. He also keeps up with the major journals in economics. He is also a fan of National Public Radio (NPR), PBS’s Nova program, and Dr. (Mehmet) Oz. As the most senior living Nobel laureate in economics, Coase is still preoccupied with economic research. With the help of Ning Wang, Coase organized the 2008 Chicago Conference on China’s Economic Transformation and the 2010 Chicago Workshop on the Industrial Structure of Production. Over the past few years, he has been busy co-writing with Ning Wang How China Became Capitalist (Coase and Wang 2012a, b, c), which was published in spring 2012. He now sets his eyes on a new journal, Man and the Economy. As the author of ‘‘The Nature of the Firm’’ (1937) and ‘‘The Problem of Social Cost’’ (1960), Coase is known as a theorist. In his heart, Coase is always an empiricist. When Coase was selected as Distinguished
183
Fellow in 1980, the American Economics Association issued the following statement: ‘‘In a generation that will be remembered for its introduction of logical rigor into economics and for its refinement of quantitative empirical tools, a few economists have steadfastly practiced economics as a social science, a study of relationships between men medicated by the social institutions through which they deal with one another. Ronald Coase stands in the forefront of these economists. … Antaeus lost his strength when his feet left the ground. We honor Ronald Coase for keeping his feet always grounded in the realities of economic-social life, and for reminding us, by demonstrating the strength so gained, that that is where our feet belong also.’’ In his 1991 speech given at the Nobel banquet, Coase, then 80 years old, had the following message to his fellow economists (Coase 1991b): ‘‘It is my expectation that their researches will greatly increase our understanding of the institutional structure and, by so doing, will aid businessmen in their choice of business practices, will improve government economic policy and in consequence will lead to a more productive economy. It is fashionable in some circles to denigrate greater production but as Arthur Lewis, a Nobel Laureate who, to our great loss, died earlier this year, once reminded us, it is only recently and only in some countries that as a result of the greater productivity of the economy, that women have ceased to be little more than beasts of burden. The task of economists is a humble one but nonetheless essential. Maynard Keynes once said that economists are the trustees not of civilisation but of the possibility of civilisation. If we economists succeed in our task, let us hope that the rest of society will take advantage of the opportunities thus afforded and that a civilised life will be achieved in all countries of the world.’’ Today, Coase still implores economists and other social scientists to study real world problems. Whatever progress economics has made since Adam Smith pales in comparison with the enormity of our ignorance about the working of the modern economy,
123
184
as painfully attested by the recent financial crisis and economic recession. Economic globalization has helped to spur global entrepreneurship, allowing many of the seven billion residents on the planet to benefit from specialization and trade. At the same time, it has also rendered the interconnected world economy even more complicated and widely open to global sources of disturbances. The mounting challenges that we face today, from poverty to climate change, from water shortage to green energy, require bold entrepreneurship in all human endeavors. We hope that scholars will follow the model of Ronald Coase—a true gentleman scholar possessing tremendous intellect, but equally great humility and kindness. Acknowledgments The authors thank Professor Ronald Coase for granting this interview to commemorate his 102nd birthday. Coase also generously provided us with the permission to reprint excerpts from his autobiography (Coase 1991a) and speech (Coase 1991b). As Swedish law allows individuals to quote works without formal permission as long as the author and copyright are clearly stated, excerpts from the Nobel Foundation are marked as copyright (The Nobel Foundation).
References Alvarez, S. A., & Busenitz, L. W. (2001). The entrepreneurship of resource-based theory. Journal of Management, 27, 755–775. Coase, R. H. (1937). The nature of the firm. Economica, 4, 386–405. Coase, R. H. (1974). The market for goods and the market for ideas. American Economic Review, 64(2), 384–391. Coase, R. H. 1991a. An autobiography. Nobelprize.org. The Nobel Foundation. Coase, R. H. (1991b). Speech at the Nobel Banquet. Nobelprize.org. The Nobel Foundation. Coase, R. H. (1994). Essays on economics and economists. Chicago: University of Chicago Press. Coase, R. H. (1999). International Society of New Institutional Economics. Interview. Coase, R. H. (2002). Why economics will change. Address to U Missouri: Columbia. Coase, R. H. (2004). In W. Breit & B.T. Hirsch (Eds.) Lives of the Laureates: Eighteen Nobel economists (4th edn), (pp. 189–207). MIT Press: Cambridge. Coase, R. H., & Wang, N. (2011). The industrial structure of production: A research agenda for innovation in an
123
S. Terjesen, N. Wang entrepreneurial economy. Entrepreneurship Research Journal, 1(2), 1–11. Coase, R. H., & Wang, N. (2012a). How China made its great leap forward. Wall Street Journal. Available at: http:// online.wsj.com/article/SB1000142405270230330250457 7326132059836456.html?mod=googlenews_wsj. Accessed 06 December 2012. Coase, R. H., & Wang, N. (2012b). Saving economics from economists. Harvard Business Review, 36. Coase, R. H., & Wang, N. (2012c). How China became capitalist. New York: Palgrave Macmillan. Hazlett, T. W. (1997). Looking for results: Nobel laureate Ronald Coase on rights, resources, and regulation. Available at: http://reason.com/archives/1997/01/01/lookingfor-results. Accessed 06 December 2012. Madhok, A. (2002). Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and resource-based theories of the firm and the institutional structure of production. Strategic Management Journal, 23, 535–550. Medema, S. (1994). Ronald H. Coase. St. Martin’s Press: New York. Minniti, M., & Levesque, M. (2008). Recent developments in the economics of entrepreneurship. Journal of Business Venturing, 23, 603–612. Nye, J. (1997). Interview. Inaugural Conference, International Society for New Institutional Economics. Available at: http://www.coase.org/coaseinterview.htm. Accessed 06 December 2012. Sandor, R. (2012). Good derivatives: A story of financial and environmental innovation. Hoboken: Wiley. Terjesen, S., Hessels, J., & Li, D. (2011). Comparative International Entrepreneurship Research: A Review and Research Agenda. Working paper presented at Academy of Management. The Royal Swedish Academy of Sciences. (1991). The prize in economics 1991—Press Release. Nobelprize.org. http:// www.nobelprize.org/. Accessed 06 December 2012. Wang, N. (2003). Coase on the nature of economics. Cambridge Journal of Economics, 27, 807–829. Wang, N. (2010a). Measuring transaction costs: Diverging approaches, contending practices. Division of Labour and Transaction Costs, 2(2), 111–146. Wang, N. (2010b). Interview. Coase China Society. http:// english.unirule.org.cn/Html/Unirule-News/201101011309 56819.html. Accessed 06 December 2012. Werin, L. (1991). Presentation speech for the Sveriges Riksbank Prize in economic sciences in memory of Alfred Nobel. The Nobel Foundation. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press.
