Yesterday, the world lost one of its great thinkers. Ronald Coase, a legendary Nobel laureate in economics, passed away at the age of 102. I was lucky to interact with him briefly last year. He was kind enough to review my book and give constructive feedback. However, Professor Coase influenced me far more than with a simple book review. Perhaps more than anyone, his work made my own career possible.
I consider Coase one of the world’s great innovation thinkers. That’s not a conventional view, so I should explain. I went to law school at the University of Chicago, where Coase taught for most of his career. His ideas infected the entire school, and they still do. Coase argued that you cannot understand economics without understanding the relationships between people. And the relationships between people are governed by rules, whether existing ones (laws/norms) or new ones (contracts). The costs of forming such relationships – what he called transaction costs – are significant enough to shape whole economies.
The notion of transaction costs explains a lot. When most people look at innovation ecosystems like Silicon Valley, for instance, they tend to think of the obvious raw inputs. They see universities, entrepreneurs, companies, capital funds, incubators, and other tangible assets. However, what really makes innovation ecosystems tick are the relationships between people. That’s why a legal scholar might see Silicon Valley through a different lens than a neoclassical economist.
Let me go out on a limb. Most of the gracious eulogies in the news today overlook something important: Coase’s ideas are still considered renegade in the ivory tower. While the economics profession has borrowed a few select ideas from Coase, his core insights have been largely ignored.
The proof of this? For starters, economics is still mostly a theoretical, quantitative profession (what he called “blackboard economics”), the financial crash of 2009 surprised even leading economists like Alan Greenspan, and America (indeed, most of the world) is struggling to find new levers to increase economic growth in the modern age. These are all symptoms of Coase being ignored.
Coase’s insights have not finished bearing fruit. His legacy is often embraced by conservatives as justification for the government to keep its hands off, to let the free market do its things. But Coase’s ideas are more nuanced. His basic point was that economies function better when people are able to communicate and work things out between themselves. Yet he also understood that people, left to their own devices, often do not work things out so well on their own.
Coase realized that managing organizations should focus on removing barriers between people, a notion that transcends the simple divide of government good or bad. In fact, what Coase observed were the raw building blocks of innovation itself. One might call him a “particle physicist” of innovation.
I think of Ronald Coase and a handful of others as the “tip of the spear” of a new economic framework for the modern era. This roster includes other bright lights such as Elinor Ostrom, W. Edwards Deming, E.O. Wilson, AnnaLee Saxenian, and Ade Mabogunje. All have spent their careers fighting the conventional wisdom. They focus on the connective tissue of human society, rather than its raw assets.
They make us ask the big questions: What causes two people to collaborate? Why do entrepreneurial teams form? How does innovation thrive sustainably across entire ecosystems?
We, humanity, are just getting started on the journey that Ronald Coase mapped out. As theologian Reinhold Niebuhr wrote, “Nothing that is worth doing can be achieved in our lifetime.” In that sense, the greatest impact of Coase’s work is probably yet to come.
Thank you, Professor Coase.
Victor W. Hwang is an entrepreneur, venture capitalist, and ecosystem designer in Silicon Valley. He is primary co-author of The Rainforest: The Secret to Building the Next Silicon Valley. His firm, T2 Venture Creation, grows startups and designs innovative ecosystems for companies, communities, and countries. He is an organizer of the Global Innovation Summit and Global Innovation Week, a celebration of the world’s rising innovation ecosystems on February 17-21, 2014, with participants from nearly 50 countries.
