Ronald
Coase, a Nobel Prize winner in 1991 for his major contributions in the
field of "law and economics," died on Labor Day at age 102. Indeed, Coase,
one of the two or three most important economists of the twentieth century, was
the father of the Chicago-school "law and economics" movement.
And, as you will see below, Coase's ideas have direct
relevance to the way the FCC conducts its activities today, including with
respect to two very topical issues – net neutrality regulation and the
incentive spectrum auction.
With the University of Chicago Law School as his long-time home,
Professor Coase labored away at his teaching and writing well into his 90s. So
perhaps it is fitting that he passed away on Labor Day. I bet Coase would have
thought so.
Thankfully, Coase lived long enough to see his most
important ideas widely, if not universally, accepted – although the acceptance often
came decades after his fellow academics initially expressed much skepticism, if
not downright ridicule. Coase frequently joked – well, at least half-joked –
that he had some of his best ideas in his 20s, but it took another half century
for them to be accepted.
Coase's ideas, including the so-called Coase Theorem, are applicable
to the FCC's regulatory activities. I don't think Coase would mind at all for
his passing to be used as a "teachable moment;" in fact, I rather
suspect he would regret if it were not. So, I want to suggest the FCC should pay
more attention to adopting a Coasian course.
But first, by way of brief introduction to Coase's ideas,
here are two pieces published in the Wall Street Journal on the day after
Coase's death, "The
Wisdom of Ronald Coase," and "The
Man Who Resisted 'Blackboard Economics.'" And here is the Wikipedia entry for Coase
with links to his major works.
The Coase Theorem – which was not called such by Coase
himself but by his University of Chicago colleague George Stigler – is derived
from the insights in his seminal work, "The
Problem of Social Costs", published in 1960. One formulation might be
that posited by Donald L. Regan: "That in a world of perfect competition,
perfect information, and zero transaction costs, the allocation of resources in
the economy will be efficient and will be unaffected by legal rules regarding
the initial impact of costs resulting from externalities." An even simpler
statement might be: "If there are zero transaction costs, the efficient
outcome will occur regardless of the choice of legal rule."
But Coase recognized in "The Problem of Social Costs"
that the proposition that there are no costs in carrying out market
transactions "is, of course, a very unrealistic assumption." Thus, in
considering its practical application, it is useful to restate the Coase
Theorem, as A. Mitchell Polinsky has, this way: "If there are positive transaction
costs, the efficient outcome may not
occur under every legal rule. In these circumstances, the preferred legal rule is the rule that minimizes the effects of transaction costs. These effects include
actually incurring transaction costs as well as the inefficient choices induced
by a desire to avoid transaction costs."
Here's my own further reductionist simplification deduced
from the Coase Theorem: The choice of legal rules, including the assignment of
property rights, matters as to whether transaction costs are minimized, and
whether transaction costs are minimized matters as to whether economic
efficiency is maximized.
Let's now briefly apply Coasian thinking to two current
communications policy issues.
First, the FCC's order adopting net neutrality regulations –
the oral argument challenging the lawfulness of the FCC's action in the D.C.
Circuit just happens to be on Monday, September 9. The FCC's net neutrality regulations are
highly problematical from a Coasian perspective if for no other reason than that
the vagueness of the rules adopted almost certainly increases the transaction
costs incurred in offering Internet access services. The ambiguity inherent in
the prohibition against "discrimination," as malleable as such a
vague prohibition is, necessarily creates legal uncertainties that translate into
increased transaction costs.
For example, suppose an Internet services provider wishes to
consider a new offering or business model. The ISP must consider the direct costs
incurred for the lawyers (and possibly the lobbyists too) that must be engaged
in order to assess the feasibility of moving forward in the face of the
uncertain application of the rule's scope. And the effects of the ill-defined
legal rule include not only the actual direct transaction costs incurred, but also
indirect costs that lead to inefficient business choices. These inefficient
choices prevent, or inhibit, what otherwise would be the emergence of more
efficient voluntary negotiated agreements among participants in the Internet
marketplace. In other words, a new offering or business model that may benefit
consumers and increase overall consumer welfare may not be implemented at all
in order to avoid the transaction costs induced by the net neutrality rule
adopted by the FCC.
The second topical issue that would benefit from Coasian
thinking is the FCC's incentive auction proceeding. In 1959, Coase published
his famous article simply titled "The Federal
Communications Commission," in which he proposed that spectrum rights
should be auctioned to the highest bidder rather than assigned by the FCC in
its discretion under the public interest standard. Coase argued that spectrum
is not unique as a "scarce" good, and "there is no reason there
should not be private property in frequencies." At the time, the idea was
widely ridiculed by his fellow economists, not to mention by those at the FCC
doling out spectrum licenses.
Coase's auction idea eventually won acceptance some quarter
century after publication of his FCC article, and with the exception of
broadcast frequencies – on which his article primarily focused – for the most
part spectrum rights now are auctioned. But the FCC, with its ingrained
pro-regulatory, interventionist proclivities, is often tempted to encumber
spectrum auctions with various use or eligibility restrictions in ways that
necessarily impact bidding outcomes and prevent the maximization of revenues
realized from the auction. For example, imposing a net neutrality restriction
in the 700 MHz auction, by
most accounts, diminished the revenues realized.
So, today, the FCC apparently is considering encumbering the
proposed incentive spectrum auction by imposing some form of eligibility restriction
that would prevent Verizon and AT&T, in one way or another, from bidding on
the offered spectrum. Consistent with the Coase Theorem, this is certainly a case
in which the legal rules adopted will determine whether the most economically
efficient outcome occurs. I'm pretty sure that Ronald Coase, who, after all,
proposed spectrum auctions, would frown on imposition of conditions that
derogate from conducting a clean auction. In the face of what, in any event,
necessarily will be a complex undertaking in auction design, a prime Commission
goal should be to reduce, to the extent possible, the transaction costs
associated with the auction.
A final note: As I pointed out, many of Coase's ideas were
not accepted until decades after he first propounded them, but, in the end,
they did achieve widespread acceptance. In the Free State Foundation's tag
line, we say, "Because Ideas Matter." They do. It's just that in the
think tank world in which FSF operates, sometimes it takes a while before the
ideas win out. Remembering Coase helps provide us with steadfastness.
So, we remember Ronald Coase for many reasons. To promote overall
consumer welfare and benefit the nation's economic productivity, the FCC would
do well to be attentive to Coase's teachings, and to much more frequently adopt
a Coasian course.
Ronald Coase, R.I.P.