Ronald Coase, Lighthouses and Elon Musk
Many entrepreneurs may never have heard of Ronald Coase, but his work made it easier for the free markets to triumph over areas traditionally managed by the government, rather than the public sector.
Coase, a Nobel laureate and University of Chicago economist, died Sunday at the age of 102. For economics students, he is one of the most cited researchers, namely for two works: The Nature of the Firm, which looked at organizational structure and growth, and The Problem of Social Cost, which took a transactional-cost look at ways to remedy perceived harm done by businesses in areas such as pollution.
To the legal profession, he was best known for the Coase Theorem, which looked at how peoples' actions (which he called externalities) could create a cost on others, and how those externalities could be fixed – without groups like the government getting involved.
But, for entrepreneurs, Coase's work with lighthouses is especially important. Most of his work led him to the conclusion that all forms of government regulation are bad. He was not, however, one to simply condemn any effort by the government to set rules. Rather, his argument was more nuanced.
“If someone says there's going to be regulation, I don't say that regulation will be bad,” Coase told Reason magazine in 1997. “Let's see. What we discover is that most regulation does produce, or has produced in recent times, a worse result. But I wouldn't like to say that all regulation would have this effect because one can think of circumstances in which it doesn't.”
But he was clear that the private sector could always produce a better result because market forces were their own regulator. He rejected the idea that the government could even operate for the “public good” better than private business.
And that's where lighthouses come in. For decades, economists cited lighthouses as the area where government knew – and operated – best. Lighthouses needed to be built and managed by the state, since too many people benefited from their guidance and few could afford, or even had the inclination, to pay.
Hogwash, argued Coase, citing history. (Interestingly, for economics students, Coase was accessible because he didn't burden his research with formulae or very much math at all.) In The Lighthouse in Economics, Coase showed that private lighthouses in Great Britain, owned by individuals and corporations and funded by shipping fees, existed and thrived. The British government indeed became a monopoly for lighthouse operation – but only after it seized the private ones. The government didn't like the competition. It never does.
What do British lighthouses have to do with entrepreneurs and innovators? Look at what is happening in cities like Los Angeles, where new ride-sharing companies are taking on the government-backed and regulated taxicab industry. Look at the increase and new dynamic pricing models for private toll roads.
And look at Elon Musk. His SpaceX is a private company that has essentially taken on the private good that was once the monopoly of the National Aeronautics and Space Administration. And his idea for the Hyperloop directly competes with the government's control of rail transport in the state of California (though the Hyperloop almost certainly won't be built in that state).
The private sector faces competition and roadblocks from the state every day. In fact, governments can make the argument that everything they do is a social good. In socialism and communism, states do just that: industry is designed to create jobs and equality, and such goals needs to be imposed on the people. Governments don't run businesses for the financial benefit, but rather for the social good – workers' rights, power to the people, and all that. But, with respect to those who want more government involvement in worker pay or business conduct, these kinds of systems rely on the totalitarian nature of their governments to meet their goals. With economic equality, there is a distinct lack of personal freedom.
Coase recognized this...and preached it. Economic freedom came from allowing private enterprise to correct solutions and fix problems. The government is too inefficient to do so, and it relies on taxation, rather than a drive for profits, to meet its goals.
Instead, the world's problems can be solved by private people sketching ideas on the back of a cocktail napkin and finding private capital to transform their thoughts into enterprises. That's the essence of entrepreneurship, and Coase's ideas fostered that drive and philosophy.