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R. H. Coase and the Neoclassical Model of the Economic System

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  • Harold Demsetz

Abstract

R. H. Coase makes two claims in his most important articles: (1) a positive cost of using the price system is needed to explain the existence and importance of firms, and, therefore, neoclassical theory, which treats the price system as free to all, offers no explanation for the existence of firms, and (2) neoclassical theory's important deduction--that a private ownership, competitive economy allocates resources efficiently--is valid only if there is no cost to the provision and use of a price system. I reject both claims in this article and go on to argue that the assumptions that underlie neoclassical theory's perfect competition model are appropriate to the purpose for which it is intended; namely, to understand resource allocation in a private, decentralized economic system. The assumptions that underlie Coase's reasoning serve a different purpose--to understand organization within firms.

Suggested Citation

  • Harold Demsetz, 2011. "R. H. Coase and the Neoclassical Model of the Economic System," Journal of Law and Economics, University of Chicago Press, vol. 54(S4), pages 7-13.
  • Handle: RePEc:ucp:jlawec:doi:10.1086/664179
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    1. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, Oxford University Press, vol. 82(1), pages 33-53.
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