Ronald Coase's theory of the firm and the scope of economics

Ronald Coase's work and its reception illustrate the significance – and the difficulty – of identifying problems and proposing solutions, which provides the theme of this paper. His theoretical innovation was not derived from economics, and seemed irrelevant to contemporary issues of economic theory and policy; only his much later perception of an apparently unrelated problem – the incoherent treatment of social cost as market failure – showed how the concept of transaction costs could illuminate two major areas of economics. The inadequate treatment by economists of the transaction costs of markets is linked to the neglect of processes, and especially the processes of organising the growth and use of knowledge – key concerns of Smith and Marshall. The curious relationship between Coase's explanation of firms and Austin Robinson's analysis of competitive industry leads to a reflection on the scarce resource of human cognition and the role (and fallibility) of institutions.