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1. “When an economist is comparing alternative social arrangements, the proper procedure is to compare the total social product yielded by these different arrangements. The comparison of private and social products is neither here nor there.” (p.34)

   These two sentences are charged with a number of points. First, can we measure total social product? Second, is it true that comparing private and social products is “neither here nor there”?

   Coase’s injunction that economists must compare total social product resulting from different arrangements of property rights presumes that economists can in fact do this. Unlike his zero-transaction cost assumption, I think he actually means this to happen in the real world – this is in fact the real work of economists in his mind. The problem is that arriving at net social product is so laden with transaction costs that it is impossible to do, just like Hayek’s argument about social calculation of prices. One can make gross calculations and assumptions about the real social costs of particular property rights arrangements to individual actors at a given time, but these will never arrive at the true social costs because discovering all the ramifications of even seemingly innocuous assignments of rights can have far-reaching, unseen consequences in a connected economy.

   Coase argues in this paper: “It is always possible to modify by transactions on the market the initial legal delimitation of rights” and those transactions would always take place if they were costless and “lead to an increase in the value of production” (p. 15). Since transaction costs are not in fact costless, we know that their existence eliminates many transactions. Negotiating with many rights holders for access to a water source for example may prove too high due to transaction costs, even if the actual cost of purchasing the rights might not be that high.

   Furthermore, it is not always possible to engage in market transactions after an initial delimitation of rights because part of the delimitation of rights may include non-transferability (inalienability). For example, I have the right to vote, but my right to vote is non-transferable – I cannot use the market to arrive at a higher social product. I may be better off if I could sell my vote, since at the margin it is relatively worthless.

   The argument that private product does not matter, and only social product matters is a strict utilitarian argument and does not proceed from any lasting or predictable principle. This provides little or no guidance to government actors on how to make allocations of rights. Some violations of private product may appear to result in an increase in social product (which is, again, virtually impossible to measure), but are repugnant to our values as individuals.

   This is a very interesting article that has a lot to teach us, but I think its flaws hinge on the assumption that we can rebuild a philosophical framework from the point of zero-transaction costs, even if we acknowledge that this assumption is strictly a means of getting at the underlying issues.

   posted 22 Apr 2010, 6:49 AM by Mark Bonica