Coase’s Chinese Legacy

HONG KONG – The recent death of Ronald H. Coase, the founding father of new institutional economics, is a great loss to Chinese economists who are seeking an effective framework for understanding China’s ongoing economic transformation. His legacy – insights into the role of firms, financial institutions, and the state in shaping the market and driving economic development – will prove crucial as China works to achieve high-income status.

With two seminal papers, Coase changed the way economists view institutions’ impact on an economy. His 1937 paper “The Nature of the Firm” introduced the concept of transaction costs into discussions of a firm’s structure, function, and limitations. And his 1960 paper “The Problem of Social Cost” proposed that the state could manage the negative externalities, such as pollution or traffic, of economic activities through well-defined property rights.

In his final years, Coase shifted his focus to the emergence of capitalism and the creation of markets in China. According to Coase, since the period of reform and opening up began in 1979, China has been a living experiment in institutional evolution, shaped simultaneously by the central government and by local governments and enterprises.

This evolution is at the center of a case study of Foshan – a city of seven million people located near Guangzhou, at the heart of the Pearl River Delta – launched last year by a team of Chinese researchers (of which we were a part). As it turns out, Foshan may well be the ideal example to test Coase’s views.