Where Chicago meets London: James M. Buchanan, Virginia Political Economy, and cost theory

This episode also is recounted by Coase (1993).

“The Coase Theorem,” as defined by Stigler (1966, p. 113), “asserts that under perfect competition private and social costs will be equal”. The passage in “The Federal Communication Commission” that was the precursor to the Coase Theorem, which had been regarded as an error to Stigler et al., goes as follows: “It might be argued that this is by no means an unusual situation, since the rights acquired when one buys, say, a piece of land, are determined not by the forces of supply and demand but by the law of property in land. But this is by no means the whole truth. Whether a newly discovered cave belongs to the man who discovered it, the man on whose land the entrance to the cave is located, or the man who owns the surface under which the cave is situated is no doubt dependent on the law of property. But the law merely determines the person with whom it is necessary to make a contract to obtain the use of the cave. Whether the cave is used for storing bank records, as a natural gas reservoir, or for growing mushrooms depends, not on the law of property, but on whether the bank, the natural gas corporation, or the mushroom concern will pay the most in order to be able to use the cave. One of the purposes of the legal system is to establish that clear delimitation of rights on the basis of which the transfer and recombination of rights can take place through the market” (Coase 1959, p. 25).

Stigler had been the co-editor (with Kenneth Boulding) of the sixth volume of Readings in Price Theory: Selected by a Committee of the American Economic Association (1952), in which Knight (1924) had been selected for reprinting.

Maricano (2013, p. 227) reinforces the point as well by illustrating that Buchanan’s displayed a consistent interest in addressing the issue of externalities, which can be traced back to the early 1950s and rooted in his work on public finance. As he states, “Individuals’ readiness to pay when they receive subjective benefits from the goods they consume and services they use is an idea that Buchanan got from Wicksell, and he used it in all his works on externalities. It started with a study in which he applied Wicksell’s voluntary exchange theory to a problem involving spillover effects, namely, the use of highways” (see Buchanan 1952). What is more important for our purposes here, Marciano also states that the “remarkable consistency and constancy of Buchanan’s views means” that Buchanan’s analyses of externalities paralleled, though developed independently, of Coase (Maricano 2013, p. 251).

Pigou refers to perfect (or pure) competition as “simple competition”.

Robbins (1971, p. 129) himself has written that “Hayek must be credited with bringing Austrian and Wicksellian thought to the [LSE].” Both Hayek and Robbins together forged a joint teaching and research program that paralleled the ambitions of Buchanan and Nutter (see Boettke and Candela 2020).

Interestingly enough, Stigler also had also reprinted Wicksteed (1914) in the AEA’s Readings in Price Theory.

Kirzner (1973, pp. 227–228) makes the same subtle, yet important point in Competition and Entrepreneurship.

Candela and Geloso (2018a, b, 2019) explicate the point empirically, building from and extending Coase’s (1974) original analysis of the English lighthouse system.