In the thread on "Why do Marxist economists avoid using math, and what kind of conclusions do they reach without it?", we got into some discussion concerning Ronald Coase. It is often forgotten that the young Ronald Coase was a socialist and that as a young economist he had been very much interested in the socialist calculation debates, along with his friend Abba Lerner, who back then was very much a socialist too. That was still the case when Coase wrote his first famous paper The Nature of the Firm ( https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0335.1937.tb00002.x ) where he first introduced his notion of transaction costs, which for him constituted the main reason why firms exist in market economies in the first place. As he put it:
> > The main reason why it is profitable to establish a firm would seem to be > that there is a cost of using the price mechanism. The most obvious cost > of “organising” production through the price mechanism is that of > discovering what the relevant prices are. This cost may be reduced but it > will not be eliminated by the emergence of specialists who will sell this > information. The costs of negotiating and concluding a separate contract > for each exchange transaction which takes place on a market must also be > taken into account. Again, in certain markets, e.g., produce exchanges, a > technique is devised for minimising these contract costs; but they are not > eliminated. It is true that contracts are not eliminated when there is a > firm but they are greatly reduced. > > Many years later when Coase was awarded the Nobel Prize in economics, he alluded to this in his Nobel Lecture. ( *The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1991* ( https://www.nobelprize.org/prizes/economic-sciences/1991/coase/lecture/ ) ). There he said: > > > > I decided to study vertical and lateral integration of industry in the > United States. Plant had described in his lectures the different ways in > which various industries were organised, but we seemed to lack any theory > which would explain these differences. I set out to find it. There was > also another puzzle which, in my mind, needed to be solved and which > seemed to be related to my main project. The view of the pricing system as > a co-ordinating mechanism was clearly right but there were aspects of the > argument which troubled me. Plant was opposed to all schemes, then very > fashionable during the Great Depression, for the co-ordination of > industrial production by some form of planning. Competition, according to > Plant, acting through a system of prices, would do all the co-ordination > necessary. And yet we had a factor of production, management, whose > function was to co-ordinate. Why was it needed if the pricing system > provided all the co-ordination necessary? The same problem presented > itself to me at that time in another guise. The Russian Revolution had > taken place only fourteen years earlier. We knew then very little about > how planning would actually be carried out in a communist system. Lenin > had said that the economic system in Russia would be run as one big > factory. However, many economists in the West maintained that this was an > impossibility. And yet there were factories in the West and some of them > were extremely large. How did one reconcile the views expressed by > economists on the role of the pricing system and the impossibility of > successful central economic planning with the existence of management and > of these apparently planned societies, firms, operating within our own > economy? > > Coase realized that once transaction costs are admitted, *market coordination loses its privileged status*. It becomes just one governance mechanism among others. Thus, the very same logic that explained the existence of firms within a market economy could be scaled up to justify the extension of planning across whole industries and even across entire economies. In that way, the young Coase undercut the claims of Ludwig von Mises and Friedrich Hayek that markets are always superior. Hayek famously viewed markets and the price system as information processing system. To my mind, that was indeed an important contribution to economic theory but Coase, in effect, saw that there was more to it than that. He saw that the prices are just one information system but they are costly and noisy, while hierarchical planning uses different information flows (rules, routines, accounting, commands). So for Coase, the choice between planning versus markets became an empirical one of sterming which information system was the least costly and most reliable. As we know, Coase would later on shift from being a socialist to become a Chicago School conservative. A part of his rationale for this shift were the claims that the administrative costs of planning rise rapidly with scale, that planners face incentive problems and that legal and political instiutions matter. But those were contingent conclusions, not refutations of the young Coase's logic. Once markets were seen as costly institutions rather than natural mechanisms, planning becomes a legitimate alternative wherever it lowers coordination costs. The firm itself is empirical proof that planning works; socialism extends this principle from private to collective control. In recent years, there has been a revival of interest among many socialists in the development of new modes of socialist economic planning. The collapse of the Soviet Union back in 1991, had convinced many people, including many leftists, that socialist economic planning does not really work. But since that time, improvements in computer technology have persuaded many people that rational socialist economic planning really is now feasible. Digital planning proposals associated with thinkers like ** Paul Cockshott implicitly rely on *Coasean logic* by treating markets and planning as alternative coordination mechanisms whose relative efficiency depends on their costs. Cockshott’s central claim is not that markets are conceptually unnecessary, but that modern computing, real-time data, and automated logistics drastically reduce the administrative and informational costs that historically made large-scale planning inefficient. This mirrors Coase’s insight that the price mechanism itself is costly to use, and that non-market coordination expands whenever those costs can be lowered relative to market exchange. In Coase’s terms, digital technologies shift the boundary between market coordination and planned coordination outward. More specifically, Cockshott’s reliance on input–output tables, algorithmic allocation, and feedback-driven adjustment replaces the costly processes of search, bargaining, contracting, and enforcement with standardized computational rules. This is structurally identical to Coase’s explanation of why firms substitute managerial direction for contracts: authority (or, in this case, algorithmic governance) economizes on transaction costs. Digital planning thus generalizes the Coasean theory of the firm to the economy as a whole, arguing that when information processing and coordination costs fall sufficiently, planning can outperform markets over wide domains without invoking any claim of theoretical market “impossibility.” -=-=-=-=-=-=-=-=-=-=-=- Groups.io Links: You receive all messages sent to this group. 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