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The Coase theorem is associated with Stigler because Stigler coined the term. The object of this paper is to show that Stigler’s Coase theorem is Stiglerian for deeper – namely, methodological – reasons. We argue that, convinced as he was by the importance of Coase’s message, Stigler also believed that this message – such as presented in “The Federal Communications Commission” (1959) or “The Problem of Social Cost” (1962) – was not scientific. Hence, he had to transform it into a theorem to give it a scientific dimension. This is what we try to show by presenting Stigler’s methodology and by confronting it to the methodology used in Coase’s articles.

The first issue that requires examination is the question of how we got to this point to begin with. The answer to this question, of course, is a function of who “we” happens to be. The lawyers can blame Oliver Wendell Holmes (1897, p. 469), who made “the man of the future … the man of statistics and the master of economics.” The future, it would seem, is now. Legal Realist/Institutionalist lawyer-economists such as Walton Hamilton and Robert Lee Hale, who were economists on law school faculties before that tradition got started at Chicago, had something to do with this too, although neither they nor law-minded economists such as John R. Commons can be given credit or blame for the economic analysis of law – at least not directly.³ The birth of the economic analysis of law is very much a Chicago story – Coase, Becker, and Posner – although we must allow that Guido Calabresi also had more than a bit to do with these things.⁴

We argue that the future of Austrian political economy rests on the study of how institutional entrepreneurs discover and implement alternative institutional arrangements conducive to economic growth. This requires a dual level of analysis in spontaneous order studies. How such institutional arrangements manifest themselves is ultimately an empirical question. As a progressive research program, Austrian political economy will entail cross-fertilization with other empirical branches of political economy that illustrate its own central theoretical contributions to political economy, namely economic calculation, entrepreneurship, and spontaneous order. Accordingly, we argue that such cross-fertilization with the work of Ronald Coase and Elinor Ostrom will further expound the institutional counterpart of “rivalry” in the market process, namely polycentricism and its empirical manifestation. Understanding the distinct relationship between rivalry and polycentricism will provide the central theoretical underpinning of institutional evolution.

Ronald Coase's landmark 1937 article, “The Nature of the Firm,” framed the study of organizational economics for decades. Coase asked three fundamental questions: Why do firms exist? What determines their boundaries? How should firms be organized internally? To answer the first question, Coase famously appealed to “the costs of using the price mechanism,” what we now call transaction costs or contracting costs, a concept that blossomed in the 1970s and 1980s into an elaborate theory of why firms exist (Alchian & Demsetz, 1972; Williamson, 1975, 1979, 1985; Klein, Crawford, & Alchian, 1978; Grossman & Hart, 1986). The second question has generated a huge literature in industrial economics, strategy, corporate finance, and organization theory. “Why,” as Coase (1937, pp. 393–394) put it, “does the entrepreneur not organize one less transaction or one more?” In Williamson's (1996, p. 150) words, “Why can't a large firm do everything that a collection of small firms can do and more?” As Coase recognized in 1937, the transaction-cost advantages of internal organization are not unlimited, and firms have a finite “optimum” size and shape. Describing these limits in detail has proved challenging, however.¹

During recent years, financial economists have made a significant contribution to the rapid development of a vibrant and growing literature on organization structure and corporate governance. In reviewing the development of this literature, it becomes easy to see how the seminal contributions of Ronald Coase (awarded the Nobel Prize in Economics in 1991) have become the cornerstone of a new institutional economics. In particular, researchers following in Coase’s footsteps have clarified the conditions under which voluntary contracts between private agents can resolve a wide variety of so-called “agency problems.” More than just representing an important discovery of the significance of transaction costs and property rights for the institutional structure and functioning of the economy, Coase’s work has become an important foundation for the theory of contracts and for the whole field of “organization economics.”

Williamson's systematic treatment of transaction costs in explaining governance structures has rarely been applied to the field of environmental economics. The aim of this chapter is to address this oversight by analysing how transaction cost economics can help choose among environmental policy tools.

We apply the analytical framework of discrete structural alternatives – market, hybrid forms and hierarchy – to the choice of environmental policy instruments. Environmental-related transactions, which differ in their attributes, are aligned with categories of policy instruments, which differ in their cost and competence, so as to effect a discriminating – mainly transaction costs economizing – result.

First, we suggest defining the transaction as the trading of property rights to the use of natural resources. Second, the characteristics of the transaction are described as mainly measurement costs. Third, we determine the conditions under which a particular ‘governance structure’ that is a policy instrument is chosen.

A major contribution of our analysis is to question the relevance of many economists’ prescription in favour of incentive-based instruments. Indeed, in some plausible circumstances a command-and-control instrument may be more efficient by economizing on transaction costs.

Environmental economics has employed the seminal contribution of Ronald H. Coase (1960) intensively but has remained relatively unaffected by the contributions of perhaps his most influential follower, Oliver E. Williamson. Our chapter is a first step towards an operationalization à la Williamson of Coase's (1992, p. 778) ‘fundamental insights’ in the environmental realm.

The Hesitant Hand is a book about the struggle between market and state control of human behavior. Medema tells a convincing story of the evolution of the management of self-interest, which has fluctuated over time from more government control to less and back again. Adam Smith's lack of confidence in government and his explanation that the invisible hand of the market could harness self-interest led to the rejection of reliance on state regulation. The book's cover illustration is a human hand. I grant the obvious connection with the title of the book, but I would offer Fig. 1 as a picture that conveys the essence of the argument.

X = multiple interpretations