The Russian Revolution had taken place only fourteen years earlier.
We knew then very little
about how planning would actually be carried out in a communist system.
Lenin had said that
the economic system in Russia would be run as one big factory.
However, many economists in
the West maintained that this was an impossibility.
And yet there were factories in the West
and some of them were extremely large.
How did one reconcile the views expressed by
economists on the role of htep ricing system and the impossibility of successful central
economic planning with the existence of management and of these apparently planned
societies, firms, operating within our own economy?
I found the answer by the summer of 1932.
It was to realize that there were costs of using the
What the prices are has to be discovered.
There are negotiations to be
undertaken, contracts have to be written up, inspections have to be made, arrangements have
to be made to settle disputes, and so on.
These costs have come to be known as transaction
Their existence implies that methods of co-ordination, alternative to the market, which
are themselves costly and in various ways imperfect, may nonetheless be preferable to relying
on the pricing mechanism, the only method of co-ordination normally analysed by economists.
It was the avoidance of the costs of carrying out transactions through the market that could
explain the existence of them firm in which the allocation of factors came about as a result of
Coase himself (in his Nobel prize