Coase’s FCC Legacy

, Bethany Stotts, Leave a comment

At first blush the Federal Communications Commission (FCC)—which regulates “interstate and international communications” using “radio, television, wire” and “satellite”—doesn’t seem like much of a free-market mecca. But panelists at a recent conference held at George Mason University (GMU) argued that the FCC was significantly affected 50 years ago by Ronald H. Coase’s noted article, “The Federal Communications Commission.”

In this paper Coase argues that, with regard to broadcast radio, “the government and its historians based their regulatory views ‘on a misunderstanding of the nature of the problem’” and “goes on to present the argument for an efficient market based on property rights in radio spectrum,” according to the free market Ludwig von Mises Institute.

Coase “begins the process of unwinding what Adam Thierer and I call in an article we’ve just published in The American, ‘the progressive conceit’ … and as I reread the article as Adam and I were thinking about writing this article, I was frankly surprised to see how much of the seeds of what became the law and economics counterthesis to the progressive movement, how many of the seeds in those ideas were present in this 1959 article…” said Dr. Jeffrey A. Eisenach, an adjunct professor at GMU and Chairman of Empiris, a D.C.-based economics consulting firm. He argues that Coase unwound “a whole series of progressive assumptions at the core of which” were two notions:

a) that “markets often, usually, frequently, commonly fail” and,

b) “that when they do, government can, often, usually, generally, will make it better.”

Dr. Eisenach is the former President of the Progress & Freedom Foundation, which co-sponsored the event with the GMU Mercatus Center.

According to Dr. Eisenach, Coase stripped morality from the question of market externalities, so that incidents which were once viewed as a conflict between a villain and an innocent party could be classified as economic compromises. “Coase had three counterpoints” to the progressive presumption that markets often fail and government will make it better, said Dr. Eisenach. They were:

1)      “…  the existence of market failure externality does not in and of itself justify government intervention, in fact government is often the cause of the problem,”

2)      “ government intervention is seldom either administratively efficient or politically neutral” and often results in the “malallocation” of resources, and

3)      “…the government control of the economy is a threat to not just economic liberty but to political liberty.”

This is especially true in the case of spectrum policy, which was in the past subject to the Fairness Doctrine and now faces further liberty-threatening regulations under a doctrine of “localism, diversity and media ownership.”

Coase is described by UChi’s “Program in Law and Economics” as the creator of “law and economics as a distinct discipline” for his work, “The Problem of Social Cost.”  However, the 1991 Nobel prize winner credits the idea for allocating spectrum through market forces to graduate student Leo Herzel.

“It is sometimes said that I originated the idea of using prices to determine use of the radio frequency spectrum. This is wrong,” said Coase during a 2003 Centennial speech at the University of Chicago Law School, where he is currently an emeritus professor. “The idea was first put forward by Leo Herzel, a student at the University of Chicago Law School in a student note in the law review in 1950. The article dealt with the choice by the FCC of the color television system to be used there.” He was not convinced of the merits of Herzel’s arguments until he encountered a weak counterargument from an FCC, said Coase.

Bethany Stotts is a staff writer at Accuracy in Academia.