Coase Rules

One concept that believers of centralized economies detest is the theory of Ronald Coase.  Coase Theorem is one of the most important economic theorems out there.  In fact, it’s what I would call a bedrock theory.  A lot of classical or Chicago School economics is built on top of it.

Even Professor Ron Burt’s theories and research on human networks have roots in Coase Theorem.  It permeates everything.  Coase is one reason that assigning property rights is so important.  Capitalistic free market systems cannot operate without clearly defined property rights and the rights of individuals to hold and decide what to do with private property over the rights of the State.

My friend Professor Michael Gibbs turned me on to this article out of the Annenberg Innovation Lab at USC.  It’s on cryptocurrency and blockchains.  Not surprisingly, Coase Theory looms large for effective blockchain economics.  Here is one salient point in a post full of them.  I suggest you read the whole thing.

An important TCE concept is that “if every possible contingency for use of a building, machine, or patent were spelled out in contracts, then labeling one party the owner of the asset would confer no additional rights.  However, when contracts are incomplete, owners have the residual rights of control, meaning they can do whatever they want with the asset except for what’s in the contract.”

If one could write a complete contract, embed it in software as a smart contract, and store it in a blockchain-based distributed ledger, transactions could be handled with no need to worry who owns what assets because all future decision are being adjudicated by a comprehensive, tamper-proof smart contract.  In such a case, all decisions can be made in a purely decentralized market with no need for firms, bankers, lawyers or other intermediaries.  However, when a decision about an asset has to be made that’s not specified in the contract, only the firm that owns the asset, – that is, that holds the residual control rights to the asset in TCE terms, – can make such decisions.

This can go so many ways.  One tenet of Coase Theory is companies will build stuff in-house and do things in-house as long as its cheaper to do it in-house than contract it.  Blockchain, in theory, could blow up a company by making transaction costs so low that building in-house is economically inefficient.  Smart contracts ensure that everyone executes.

We have witnessed break up of vertical silos. For example, is a drug company really a “drug company” anymore?  They outsource the research to university labs.  They outsource the manufacturing.  They only are marketing engines.  What’s a world utilizing blockchain look like when it intersects with drug development and sale?

I think this is why blockchain is so compelling.


3 thoughts on “Coase Rules

  1. “Blockchain, in theory, could blow up a company by making transaction costs so low that building in-house is economically inefficient.” ???? How so ? the cost of labor, paid for in dollars or Blockchain is the same (no worker will take a LESS valuable currency) … and there are many other factors that help decide if building in-house is better than outsourcing … I don’t see how it makes transaction costs go down …

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