What is Coase’s understanding of transaction costs in economic theory and history? Our argument in this paper is twofold, one theoretical and the other empirical. First, Coase regarded positive transaction costs as the beginning, not the end, of any analysis of market processes. From a Coasean perspective, positive transaction costs represent a profit opportunity for entrepreneurs to erode such transaction costs, namely by creating gains from trade through institutional innovation. We demonstrate the practical relevance of entrepreneurship for reducing transaction costs by revisiting the case of the lightship at the Nore, an entrepreneurial venture which had arisen to erode the transaction costs associated with regulation by Trinity House, the main lighthouse authority of England and Wales. By intervening into the entrepreneurial market process, Trinity House would pave the way for the nationalization of the entire English and Welsh lighthouse system. By connecting our theoretical contribution with an empirical application, we wish to illustrate that Coase’s theoretical understanding of transaction costs is inherently linked to an empirical analysis of market processes.
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This does not imply that the transaction costs associated with calculating, or measuring, the valuable attributes of goods and services are unimportant (see Barzel 1982, 2005; North 1992). Rather, the ability to measure and calculate the value of goods and services is a by-product of having established exchangeable and enforceable private property rights (see Candela 2019).
The point that private property is a necessary precondition for pricing a good had been first made by Mises ( 1975) in the context of the socialist calculation debate (see also Lavoie 1985 and Boettke 1998). As Edmund Phelps has argued, “Mises is regarded as the originator of property rights theory” (emphasis original, 2013, 123). Moreover, it suggests, as argued by Baird (2000) and Piano and Rouanet (2018), a neglected link between the Austrian tradition in economics and the transaction-cost tradition in economics.
To illustrate the importance that Trinity House attributed to these acts, it is interesting to note that Joseph Cotton (1818, 50) called the Act for Maritime Pilotage of 1808, the ‘Trinity House Pilot Act’. Cotton became an elder brethren of Trinity House in 1788 and later, in 1803, became the deputy master of the Society. See also Tran (2003) for more on the Act for Maritime Pilotage of 1808 and Hignett (1978) for the Pilotage Act passed in 1732.
There are other examples provided by Trinity House members. One such example is Joseph Cotton in his retelling of a conflict between Trinity House and Liverpool and Irish merchants (1818, 113–114). Lights in Ireland, at the time a British possession, were under a different authority than Trinity House. The Irish agency managed to get a bill introduced in parliament for the construction of a lighthouse on the Isle of Man in the middle of the Irish sea. There appears to have been a conflict over the issue of under whose purview the Isle of Man fell and the rates to be charged. ‘Rather than suffer an encroachment on the authority’ that it had received earlier, Trinity House ‘was disposed to undertake the light at the inferior toll’ (Cotton 1818, 114).
When lobbying for special treatments, pilots who operated lighthouses complained that while they worked on the lighthouses, other pilots were stealing their services (Clancy 1984, 47–48).
In fact, bundling may even occur between seemingly unrelated services. In this case, the aforementioned monopoly of Trinity House over ballastage is crucially important. As the weight added at the bottom of an empty ship was crucial in assuring stability, the service was an essential component of reducing the risks of being shipwrecked. Like pilotage, ballastage is an excludable service (i.e. no payment, no ballastage) and just like pilotage, it could be bundled with lighthouses. A ballast provider could produce a lighthouse and bundle the fee within his excludable service.
Nevertheless, private leasers were inventive in finding ways to circumvent this issue. For example, in 1775, Charles Hawker was trying to obtain subscriptions for a lighthouse at the Ayr (also known as the Chester) near Liverpool. The subscriptions were solicited before the opening of the lighthouse which technically circumvented the prohibition (Chester Chronicle, December 11th, Anonymous 1775). From the work of Joseph Cotton (1818, 114, 146), we know that Trinity House owned the lease for the lighthouse.
This conclusion that ‘‘private’ lighthouses ended in failure and required centralisation’ is put forth by Bertrand (2006, 401).
In discussing another public good in England at the same time, prosecution and policing, Mark Koyama (2012) highlights that private ‘prosecution associations’ were able to produce a highly efficient and productive system notably through the practice of price discrimination which allowed these association to ‘price in’ marginal customers.
In 1731, the rates announced varied between from 0.045 to 0.12 pences per ton regardless of origins (Daily Courant, Sept. 15, Anonymous 1731). The terms of the 61 years patents must have included an increase in rates as they varied from 0.15 to 0.24 pences per ton for domestic ships and twice those for foreign ships (Anonymous 1768, 23).
It is worth noting that the reductions in rates promised and those accomplished since 1822 occur during an era of overall price deflation. The price level fell by 20% from 1815 to 1832 (the year most discussed in the 1834 report to the House of Commons) and fell an additional 6% from 1832 to 1845 (Clark 2005; Measuring Worth 2018). As such, the reductions promised by Trinity House appear to keep the real price steady at 1815 levels and did not constitute real reductions in dues. In any case, the dues did not start to fall immediately after nationalization in 1836—merchants had to wait to 1849 for this to occur (Taylor 2001, 769). The stability in nominal rates after from 1836 to 1849 suggest that, as the general price level kept falling, real light dues actually increased by 10%.
The reference for 1732 placed their expenditures at 450£ per month on pensions and almshouses which implies an annual total of 5400£ per year. In real monetary terms (£ of 1832), this amounted to 9976£ per year. The House of Commons report of 1834 placed the figure at 32,861£ in 1832 (1834, XII).
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We wish to thank the editor, Alain Marciano, and four anonymous referees, whose comments greatly improved an earlier draft of this paper. We also benefited greatly from the comments and feedback provided by Peter Boettke, as well as from the assistance of Marcus Shera. Any remaining errors are entirely our own.
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Candela, R.A., Geloso, V. Coase and transaction costs reconsidered: the case of the English lighthouse system. Eur J Law Econ 48, 331–349 (2019). https://doi.org/10.1007/s10657-019-09635-4
- Ronald Coase
- Transaction costs