The Coase Theorem and the Theory of the State

Read this original piece of literature written by James M. Buchanan, who explains the Coase Theory.

3. Wicksellian Unanimity

For my purposes in this paper, the specification that parties to an interaction are defined by property rather than liability rules facilitates relating the Coase theorem on allocational neutrality to the underlying conception or theory of government or of the State. In the simplest possible model, we may conceive of a polity that is limited in membership to the parties directly involved in the potential interaction. The interacting group can be made coincident in membership with the political unit. On this basis, we can interpret the "trades" among the parties as being analogous to collective or governmental decisions reached under the operation of a Wicksellianrule of unanimity. Consider either the earlier factory-housewife example, or Coase's familiar rancher-farmer one. In either illustration, we can think of the two-party group as comprising the all-inclusive membership in the political community, in which case agreement between the two parties on any matter is equivalent to unanimous accord. Resort to third-party adjudication is impossible for the simple reason that no third party exists.

From this context, it becomes easier to conceive "the State" merely as the instrumental means or device through which individuals attempt to carry out activities aimed at securing jointly-desired objectives. This is, of course, the traditional framework for all theories of social-contract origins of government. In this setting, all activities of the public sector are explained in exchange terms, even if it is recognized that the exchange process is significantly more complex than that which makes up the central subject matter of orthodox economic theory. There is at least no conceptual or logical necessity to think of "the State" as an entity that exists separate from and apart from citizens.

If we remain within the strict contractarian conception of collective action, where all decisions require unanimous consent by all members of the political community, and if we retain the assumption that transactions costs are absent, the Coase theorem on allocational neutrality may be applied beyond those limits within which it has normally been discussed. In this model, collective or governmental decision-making remains equivalent to freely-negotiated voluntary exchange. Hence, there is little or no cause for concern about"governmental intervention" as such, because any action that might properly be classified as "governmental" would not emerge unless all parties agree on the contractual terms.

Differences in the assignment of rights might, as in the standard simple exchange cases, generate differences in distributional out-comes, but the contractual process would lead to allocational results that are both efficient and invariant. Consider a classic example, that introduces what we may appropriately call collective or public goods, David Hume's villagers whose utility would be increased by drainage of a meadow. The neutrality theorem, applied to this example, demonstrates that an efficient and unchanged allocational result will emerge from freely-negotiated contract whether the postulated initial position should be one in which individuals own separate plots of land through which the swampy stream flows or whether the whole meadow is defined as communal property, accessible to all parties. With an effective unanimity rule, and with zero transactions costs, the complex exchange that is required for efficiency would be worked out under any initial structure of individual rights. The sharing of the gross gains-from-trade among separate persons would, of course, be influenced by the particular property assignment in being. If the sharing of such gains modifies individual demands for the common good, at the margin, that is, if income effects are present, differing assignments can produce slight differences in allocational results, but, under the assumptions here, those results produced will continue to be efficient.