The Enlightenment in Economic Science

For the 100th Birthday of Ronald Coase

December 29, 2010

Chenggang Xu

University of Hong Kong

Among the few on the topLet me start by borrowing some words of Einstein to celebrate the

100th Birthday of Coase and I’ll explain why I borrow these words

“In the temple of science are many mansions, and various indeed are they that dwell therein and the motives that have led them thither. Many take to science out of a joyful sense of superior intellectual power; …; many others are to be found in the temple who have offered the products of their brains on this altar for purely utilitarian purposes. Were an angel of the Lord to come and drive all the people belonging to these two categories out of the temple, the assemblage would be seriously depleted, but there would still be some men, of both present and past times, left inside. Our [Ronald Coase] is one of them, and that is why we love him.”

-- borrowed from Albert Eistein (1918), Principles of Research: for Planck’s 60th Birthday [Planck is a mentor of Einstein]

Coase as an Economic Scientist“There is no logical path to these laws [of physics]; only

intuition, resting on sympathetic understanding of experience, can reach them.” (Einstein, 1918)

• For more than 100 years economists have tried to be “scientific” by imitating rigorousness of physics– But interpreting physics as a “box of analytical tools” is wrong

• The enlightenment that Ronals Coase has given to us corrects that wrong and harmful but popular view

• The essence of science is to understand puzzling facts: it starts from observations and ends with observations– In contrast, mathematics starts from axioms and ends with QEDs

of proofs; but science can never be proved by logical consistency alone

– e.g. Calculus is analytical tools invented by physicists: it is math, but is NOT science and is not physics!

Intuitive Coase: Science beyond Logic• The type of empirical and theoretical work emphasized by

Coase is fundamentally different from today’s fashions in our profession, which is centered on deductive/inductive reasoning

• Deductive reasoning (e.g., proving theorems) and inductive reasoning (e.g., running regressions) alone would not lead to breakthroughs in deep understandings of real world problems– This old fundamental issue (Hume, 1748) has been ignored in our

profession – The most important discoveries in economics and in physics are all

beyond deductive/inductive reasoning: “There is no logical path to these laws” (Einstein, 1918)

– e.g. “The invisible hands”, “the Coase Theorem”, and “the boundary of the firm”

– e.g. “The universal gravitation” and “the general relativity”

Ronald Coase vs. Isaac Newton:Boundary of the Firm vs. Universal Gravitation

• The importance of the issue of the boundary of the firm to economics is comparable to that of the universal gravitation to physics– It is a central issue in understanding the nature of markets, firms,

government, economics systems, and institutions in general– Just like universal gravitation is a central issue in understanding

the nature of the universe

• Generations of economists have followed and the influence will continue – Similar to the influence of Newton’s universal gravitation on

Einstein’s general relativity, on today’s unified field theory, etc. – Analytical tools may be changed but the spirit of the essential

question is the same

Coase: an Immortal Curios Scientist• With his immortal curiosity Coase has devoted most of his

energy to explore what happened in China in recent years• His way of research is like what Einstein said about

physics: he rests on intuition, “on sympathetic understanding of experience,” because “[t]here is no logical path to these laws”– Although this is not the fashion in our profession!

• The scientific attitude that we learn from Coase: to be an independent intellectual – Driven by pure curiosity of the real world– Never been dictated by outside forces, such as the power, the

rich, or other extrinsic incentives– Do not follow the fashion of the profession– Enjoy of being a lonely explorer of the truth

Happy Birthday Ronald Coase!