22 November 2005

The Coase Theorem

This gem comes from the middle of a libertarian (i.e. "liberal" for non-Americans) rant which I happen to agree with but may be unpleasant for others called Separation of Family and State (http://www.techcentralstation.com/111005A.html).

His general thesis is that a good society is one that is prepared to live with imperfect rules. When you think about it this makes sense: what matters is not so much that the rules are perfect (although approximating perfection should be the aim and there should be a mechanism for change to that end), but that they are clear and enforced so that people can get on with whatever they're doing. In practice, this is what happens. Our courts are imperfect, individual court cases are subject to a large element of luck, but in Australia people tend to have faith in their courts and rightly so. They are imperfect but fairly so. (Vietnamese courts are also imperfect but no one has faith in those.) It is when the law is constantly changing, see for example the contortions of torts law in the 20th century, that one loses confidence.

Justice, on the other hand, is a different issue altogether.

The Coase Theorem and Imperfect Rules

I believe that a key element of practical libertarianism has to be a willingness to live with imperfect rules. I view the famous theorem of Nobel Laureate
Ronald Coase as an illustration of this.

Suppose that there are two users and a common resource. An example would be a ball field that could be used by soccer players and baseball players. Another example would be a stream that could be used either to water livestock or irrigate crops.

Roughly speaking, the Coase theorem says that it does not matter who owns the common resource, as long as someone owns it. If the farmer owns the stream, then the herder can buy water from the farmer. If the herder owns the stream, then the farmer can buy some water. Either way, water will be allocated efficiently. Furthermore, the owner will have an incentive to maintain the stream in such a way as to maximize the value for both uses. On the other hand, if no one owns the water, then each user will attempt to consume too much. Perhaps the stream will go dry.

A willingness to live with imperfect rules is a little-noticed requirement for libertarianism. If instead you say, "I believe in a government that only enforces rules, but the rules must satisfy the larger needs of justice," you have created a hole in libertarianism through which one can drive a proverbial truck of big government. As Thomas Sowell has pointed out, the
Quest for Cosmic Justice is never-ending and self-defeating.


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