Hard Coase, Soft Coase

Over the course of this semester, I have been working on two research projects which parallel each other very closely.  Both look at water market exchanges (ie, people who buy and sell water), one from a Coasian perspective (ie, how changes in legislation affect markets), and the other from an Ostrom/Ellickson perspective (ie, how social norms and mores affect markets).  Both these papers are being finished up and I will post links to them here, but there is an interesting connection between the two: both forms of bargaining are “bargaining under the shadow of the law.”

“Bargaining under the shadow of the law” typically refers to working within a framework established by a court (eg, how a court determines property rights).  This is the “hard Coase” theorem.  However, “law” need not apply to just courts; indeed, it does not.  There are general rules, or laws, that develop “[From] our continual observations upon the conduct of others,” to help us “form to ourselves certain general rules concerning what is fit and proper either to be done or to be avoided,” (Adam Smith, The Theory of Moral Sentiments, Section III, Chapter IV, Paragraph 9).  These rules are the social norms and customs, what the Romans called mos, or “a guiding rule of life” (see On Duty by Cicero, translated by Benjamin Newton, specifically Newton’s glossary at the end of the book).  These rules, customs, laws govern our behavior and our interactions just as much as legislation does (perhaps even more so) since we face not jail or prison if we violate these rules, but censure, disapprobation, and demerit from our fellow man; extreme cases could result in isolation from the community, a terrible punishment, indeed, given that man is a social creature.  It is these rules, this law, that I refer to as “soft Coase.”

In both the hard Coase and the soft Coase situations, Coase’s arguments about bargaining hold generally true: changes in the law affect how we behave and interact with one another.  This, in turn, affects how we address externalities and other economic behavior.

The Coase/Ostrom/Ellickson look at collective behavior, sprinkled liberally with Alchian/Demsetz insight and Tulluck/Buchanan public choice theory, is an important way of exploring the market process.

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