Wednesday, December 10, 2014
The Coase theorem meets global federalism
I just explained to my MAREB students the Coase theorem yesterday, and today I read this post by Branko Milanovic. I told my students that the theorem (if property rights are complete and transaction costs are zero, the parties to collective problems reach efficient solutions) had been used to justify massive privatization, and other policies such as trading in pollution permits. Of course, the theorem is a theorem and not a description of reality. Like the two welfare theorems, the Coase theorem gives the false impression that efficiency and distribution can be easily separated, but they are not. Plutocracies create inefficiencies. The particular distribution of property rights in Russia is linked to the failure of democracy, and the failure of democracy makes it difficult to develop a modern well functioning economy. The expectation, as Milanovic argues, was that the oligarchs would demand the protection of property rights through the rule of law, as the rich did in the US in the past, but the oligarchs moved their resources to other countries (where no one asks them about the origin of their wealth), because that is easy to do with globalization, so they do not need to demand the protection of property rights in Russia. It is utopian to think about a democratic global government that regulates global capitalism and redistributes at a global scale, but it was also utopian to think about a Europe without borders in 1945. Markets need rules and redistribution, and today markets are global, so rules and redistribution should increasingly work at the global level. In 1945 rules to constrain capitalism were mostly a national work in progress, Europe was a dream and global federalism was not even a proposition. Today nation states have done most of their work and are increasingly obsolete, Europe is a work in progress and global federalism has moved from nothing to a dream. That's some progress.