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Looks Can Be Deceiving: Ronald Coase and his uneasy relations with Chicago School

Summary:
Steven Medema on Promarket blog writes on how Ronald Coase despite spending many decades at Chicago school of economics had an uneasy relationship   with the school: Ronald Coase is typically thought of as one of the Chicago School’s brightest lights. But Coase’s relationship with Chicago was always an uneasy one, even during his decades-long tenure at the University of Chicago Law School. The root of the disagreement between Coase and other prominent members of the Chicago School was methodological in nature and revolved around how economists go about doing economics. …… For Coase, the ultimate purpose of theory is not prediction, but instead “to give you an insight into what is going on—to give you understanding—to give you a base for thought.” A theory that is applicable to the

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Steven Medema on Promarket blog writes on how Ronald Coase despite spending many decades at Chicago school of economics had an uneasy relationship   with the school:

Ronald Coase is typically thought of as one of the Chicago School’s brightest lights. But Coase’s relationship with Chicago was always an uneasy one, even during his decades-long tenure at the University of Chicago Law School. The root of the disagreement between Coase and other prominent members of the Chicago School was methodological in nature and revolved around how economists go about doing economics.

……

For Coase, the ultimate purpose of theory is not prediction, but instead “to give you an insight into what is going on—to give you understanding—to give you a base for thought.” A theory that is applicable to the real world, then, must have reasonably realistic underlying assumptions to facilitate analysis, to elaborate the causal chains that explain economic activity, and allow one to properly evaluate the potential effects of policy proposals. Absent this, Coase argued, we are left with “blackboard economics,” Coase’s disparaging term for analysis that exists only on the economist’s blackboard and has little actual bearing on the world in which we live. To assume that the competitive markets model provided a reasonable approximation of actual markets was, for Coase, simply the Chicago variant of what he regarded as the profession’s misguided approach to economic reasoning.

But Coase also had relatively little faith in the type of empirical work fancied by his Chicago colleagues and, thus, in claims regarding predictive power. Though certainly not opposed to empirical analysis, broadly defined, Coase’s preferred brand of such work was of the qualitative kind—pouring through government documents, legal cases, and the like. He was clearly averse to modern statistical techniques and the conclusions that economists drew from them, noting in a 2010 interview that “A regression with aggregated statistical data will not tell you much about the way the economy works.” Equally troublesome, for Coase, was the propensity of economists to end up with empirical results that fit their priors, an attitude reflected in his now well-known quip, in How Should Economists Choose? that “If you torture the data enough, nature will always confess.”1 To say that Friedman was displeased with Coase’s position would be an understatement, and that displeasure spilled out across a four-page, single-spaced letter addressed to “Ronald” rather than Friedman’s usual “Ronnie” once Friedman had the chance to read the text of Coase’s AEI lecture.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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