Introduction
Law in the Economy—the Coasean Law and Economics

Ning Wang[2]

The modern market economy, from which most of us derive our livelihood and much else, is full of dynamism, creativity, and uncertainty. New and better products and services, from the latest models of cellphones and electric cars to life-saving drugs to online shopping and payment services, are continuously becoming available to consumers everywhere. As new markets, technologies, organizations, industries and economies arise, existing ones are forced to compete, adapt or falter. With its constant flux, unpredictable dynamism, and unrivaled creativity, the market economy constantly raises a host of perplexing puzzles and daunting challenges（e.g.，Schumpeter，1934；Coase and Wang，2011）. Amidst them, stand out two fundamental questions；they drive and shape our imagination and our understanding of the economy, including our own place in it. How does the market economy work? What can be done to make it work better?

The two questions capture our insatiable curiosity concerning the world we reside in, including our desire to see beyond the veil of social reality glued and fused together by our own thinking, speaking, and acting, and our continuous ambition to enrich our lives. On them rest the possibility and progress of human civilization. The articles collected in this volume trace one individual's bold and creative efforts to tackle the two questions in his own characteristic Coasean way.

The articles span almost half a century, the earliest one being a lecture Coase delivered in 1958 to celebrate the opening of the Thomas Jefferson Center for Studies in Political Economy at the University of Virginia, and the last one being another lecture Coase presented in 2002，at the University of Chicago Law School as part of its centennial celebration, both published posthumously in Man and the Economy, a new journal Coase launched shortly before his death. In between those years, the modern approach to law and economics was born and steadily established itself as a profoundly influential school of thought in American jurisprudence and one of the most exciting developments in economics in the 20th century and beyond.

All the articles have been published before, but they are collected here in a single volume for the first time. Many of them are familiar to most readers, and some have been treasured by generations of students—Steven Cheung once told me that as a Ph. D.student at UCLA in the late 1960s, for a couple of years he always carried a copy of“The Federal Communications Commission”in his pocket and eventually memorized most parts of the 40-page long article. This collection brings to light forcefully, in a way that no single article possibly can, how Coase worked throughout his long career as a“solitary philosopher，”with little regard to the changing trends and fashions in the profession, conceiving the subject, approaching problems, and searching for solutions. The two fundamental questions on which Coase focused-how the market economy works and what can be done to improve it-are still with us today. Neither is likely to lose its significance in the foreseeable future. Thanks to Coase's wisdom and humor, we can view both questions in different lights and explore solutions in more fruitful directions. The simple but powerful ideas, which run throughthe articles, enlarge our toolbox and broaden our horizon. We are thus better equipped, with finer maps in hand and more humility in the heart, to embark on our own intellectual journeys. For those who seek to follow Coase’s path, this volume serves well as a signpost and a steppingstone.

1

Coase on Law and Economics contains thirteen articles that Coase wrote on the subject of law and economics. In terms of content, the articles fall into four series.

The first and by far the largest series centers on the problem of social cost, which is Coase's most influential article；The second series of papers focuses on the market for ideas, including“The Market for Goods and the Market for Ideas”and“Advertising and Free Speech”；The third series consists of two empirical papers，“Payola in Radio and Television Broadcasting”and“Blackmail”；The fourth and last series of papers deals with the history of law and economics.

2

Ronald Coase has been widely acclaimed as a founding father of modern law and economics. His paper，“The Problem of Social Cost，”the most cited paper in modern legal and economics scholarship, together with Guido Calabresi's（1961）influential article on torts, is largely responsible for the birth of the new discipline（Posner，2003[1973]）.[1]In addition, Coase served for 18 years, from 1964 to 1982，as editor of the Journal of Law and Economics, founded at the University of Chicago Law School in 1958 by Aaron Director. Coase used his editorship to inspire, induce, and instruct scholars, particularly junior ones, to study the impact of the law on the economy.

This honor, however, often made the honoree uneasy. Law and economics, as seen by Coase, contains two different and complementary lines of scholarship, each withdistinct subject matter and research program. The first and dominant one, as currently taught and practiced, is generally identified as the“economic analysis of law，”a term coined and made popular by Richard Posner’s（2003[1973]）Economic Analysis of Law, the very first textbook in the new subject and now a classic. It applies the basic concepts and principles of modern price theory to analyze the law and make sense of legal rules, institutions, and practices. Thanks to Posner’s erudition and exceptional productivity, the economic analysis of law has grown into a well-developed and firmly institutionalized research program in American law schools, with its standard curriculum and regular outlets for scholarship. Law and economics in this regard is an innovation in legal education and in jurisprudence, matters to which Coase did not have much interest or qualification to contribute. Coase, an old-style economist, always felt somewhat uneasy by a sense of exile while teaching in a law school.

Another factor, which probably played a more important part, further distanced Coase's approach from economic analysis of law. In terms of its intellectual origin, economic analysis of law is an enterprise of the“economic imperialism”that has gradually moved modern economics away from a study of man, of wealth, and of social organization in the tradition of Adam Smith（1976[1776]），Alfred Marshall（1920[1890]），and Frank Knight（1951[1933]）and made it a formal science of choice precipitated by scarce means and given ends à la Lionel Robbins（1932）and Gary Becker（1976）. A striking and far-reaching consequence of the transformation, which deeply disturbed Coase, is that modern economics has severed（or liberated, depending on the perspective taken）itself from the real-world economy. Having abandoned its traditional subject matter, contemporary economics risks losing its empirical root and measure of relevance. A longtime junior colleague of Robbins at the London School of Economics in his early career and later a colleague of Becker at the University of Chicago, Coase enjoyed a congenial relationship with both. As a scholar, however, Coase stuck to the old-style vision of economics and never joined their path. Coase practiced economics in the spirit of Smith, Marshall, and Knight, holding economics as a study of man creating wealth in society through specialization, organization, andexchange. Coase’s unwavering commitment to this intellectual tradition explains his lack of interest in economic imperialism and his insouciance toward economic analysis of law.

Holding such a high hope for economics and embracing such a demanding measure of progress, Coase often felt that too little had been accomplished since the time of Adam Smith and that much had to be done to keep economics relevant and alive. With a sense of urgency, Coase approached law and economics with a different purpose. Instead of analyzing law from an economic perspective, Coase examined law's impact on the working of the economy. What roles does the law play in the origins and development of the market economy? How does it affect the structure of the economy, its performance and evolution over time? How can it be altered to make the economy work better?

Compared with economic imperialism spearheaded by Gary Becker（1976），which extends to the whole terrain of social sciences and beyond, the pre-Becker view of economics as found in Smith, Marshall, and Knight, with its focus on the working of the economy, appears rather narrow. For those who take pride in economics practiced as a universal analytical parlance for social sciences, Coase's vision of economics may well appear anachronistic and unnecessarily self-restricted in focus. At the core of modern economics stands the theory of pricing（e.g.，Friedman，1976；McCloskey，1985；Stigler，1987；Cheung，2017）. Economic imperialists apply it to understand human behavior beyond the traditional boundaries of economics, such as the family, the school, the court, and government offices. Travelling in a reverse direction, Coase employed basic economic reasoning to understand the working of the firm and of the market as well as the economic impact of government policy and regulation. Thanks to Coase’s persistence, we now have a richer economics that goes beyond resource allocation and price determination and a better understanding of how the economy works. Still, our growth of knowledge in economics, like explorations in the fundamentals elsewhere, only leads us to see farther and clearer what we don’t know. Law and economics, Coase believed, could help economists to tackle some of themost intricate and elusive questions about the economy. Unless economics achieves a resounding success in understanding the working of the economy, economic imperialism will face legitimate resistance and even popular revolt in its recently colonized fields.

At this point, it is of interest to compare Coase's approach to law and economics with that of Guido Calabresi, another founder of modern law and economics. In his recent book, The Future of Law and Economics（Calabresi，2016），Calabresi also emphatically separates law and economics from the economic analysis of law. A fellow, Calabresi shares Coase's view that law and economics is not equal to, and has to be more than, economic analysis of law. What bothers Calabresi（2016）is not so much that economic analysis of law examines the legal world from the standpoint of economic theory, but rather“as a result of that examination，[it]con firms, casts doubt upon, and often seeks reform of legal reality，”taking existing economic theory—whether it is market or Marxist economics—as the unproblematic Archimedean reference point.

Law and economics, Calabresi explains，“begins with an agnostic acceptance of the world as it is, as the lawyer describes it to be. It then looks to whether economic theory can explain that world”（p.2）. Furthermore, when existing economic theory cannot explain it, rather than dismissing the legal world as irrational, Calabresi（2016）recommends two further questions. First, are we looking at the legal world as it really is? Second, can economic theory be revised and refined so as to explain why the legal world is as it is?

In contrast to the economic analysis of law, which applies existing economic theory to analyze law, both Coase and Calabresi begin with the real world and look for theory to explain what the real world is and why it is what it is. As a legal scholar, Calabresi is understandably more interested in what economics can do for law；as an economist, Coase is more interested in what law does to the economy. Only when Posner and Calabresi meet Coase, can law and economics build a strong reciprocal bilateral relation between law and economics, each informing, inspiring and enriching the other.[2]

3

In the introductory essay to the first collection of his papers, The Firm, the Market, and the Law, which shares the same title with the volume, Coase（1988a）emphatically recognized the law as an integral part of the economic system. It is straightforward for economists to recognize the firm and the market as basic components making up the institutional structure of the economy. The law is no less a constituent part of the economy, Coase emphasized, interacting with the firm and market in complex ways that we still poorly understand.

In the first place, law provides the foundation for economic activity. Economics starts with and centers around exchange. But what is exchanged are rights rather than physical entities, rights primarily, though not exclusively, defined and enforced by law. From another perspective, economics is essentially concerned with competition, not the kind of competition conceived in theory of perfect competition, but the act of competing and process of rivalry as commonly understood. But the rules of competition are primarily defined by property rights. Both approaches take us to the same conclusion, a point brought out forcefully in“The Federal Communications Commission”and“The Problem of Social Cost，”that the delineation of rights establishes a precondition for the working of the market—this insight is what Steven Cheung（1992）calls the Coase Theorem. Armen Alchian reached the same point when he stated that“in essence, economics is the study of property rights”（1967）. When rights are not clearly delineated, as in the case of collective ownership under socialism in China（Coase and Wang，2012），or rescinded, as in the case of“Payola in Radio and Television Broadcasting，”potential acquirers of rights, who believe that they can employ the resources more pro fitably, are deprived of the opportunities to resolve their conflict through competitive bidding. The market, as a result, becomes incapacitated, giving rise to resource misallocation and rent dissipation. When such oppression of the market becomes widespread throughout the economy and extends over time, its grim consequences go far beyond economic inefficiency；affected economic actorsbecome discouraged and even feel helpless. No economy and society peopled by such demoralized people have a chance to succeed in the long run.

Economists are inclined to imagine the economy as the flow of goods and services that link the households and firms together through markets, joined and facilitated by the flow of money. Think about Frank Knight’s（1933）famous“wheel of wealth”（Patinkin，1973），which is widely popularized by Paul Samuelson’s（1948）influential textbook.[3]This, however, is not how legal scholars have been trained to approach the subject. They have long emphasized that what is exchanged in the market are rights rather than physical materials, a viewpoint shared by contemporary sociologists（e.g.，Coleman，1990）. The famed 19th century German jurist, Rudolph von Jhering, brought the point home.“The commerce of exchanges, looked at from the legal point of view, is not a circulation of objects；it is a transfer of rights. Isolated from the law which relates to it, the object is deprived of all value. Neither utility nor economic use determines the value of things；that is the result essentially of the circumstances that the use of the object is legally assured and depends on the manner in which it is protected by law. The law is an essential factor in the notion of value；in a revolution all values suffer；they recover when confidence in the certainty of law returns. Legally the transfer of an object signifies the transfer of the right over that object；legally commerce in objects is no other than the establishment of rights, their transfer, their extinction”（quoted from Charles Reinold Noyes，1936）.

That the foundation of economics is anchored to law can be seen from another perspective. Economics, in the tradition of Adam Smith and Alfred Marshall, is essentially a social science of wealth-creation. In a commercial society built on specialization, organization, and exchange, wealth essentially hinges on direct or indirect exchangeability. For example, because voluntary slavery is outlawed today, a person cannot sell himself directly, but he can bring whatever he can produce to the market or sell his service of productivity, making himself for sale indirectly. Without exchange, there would be neither room nor incentive for specialization. Without specialization, there would be little growth in productivity. Since the object ofexchange is rights, wealth-creation thus critically depends on rights, their delineation, enforcement, and protection. Wealth can be efficiently employed in a market economy, generating the highest returns to its owner and enriching the society at the same time, only when the laws of contract, property, and tort reduce transaction costs and facilitate the transfer of rights.

Moreover, wealth or the stream of services it generates, unless secured by law and norms, is bound to be squandered, if ever created in the first place. The law of property, which institutes private property rights and induces private entrepreneurship, is the bedrock of civil society. This traditional view of private property, whose rich roots go back to Locke, Hume, and Smith, is further reinforced in the 20th century when radical schemes of nationalization that trample private property have all ended up impoverishing the economy and undermining the dignity of human life, despite noble intentions.

Secondly, law plays a critical role in creating and shaping what Coase（1991）called the“institutional structure of production.”The firm—the social organization that transforms input into output—comes into being because of the cost of using the market mechanism. The market is an institution that exists to reduce the cost of carrying out exchange transactions. Because law is intimately involved in exchange, it clearly plays a pervasive role in the setting up of the firm and the market. Moreover, law is a critical component in the institutional environment in which the firm and the market operate. The working of modern markets, particularly, the labor and financial markets, is heavily influenced by a whole range of statute laws and rules of regulation. Business firms also operate in the shadow of the law, including various laws of corporation and of competition. Because law occupies a central and continuously growing role in the modern market economy, unless it is taken fully into account, Coase believed, economics would be severely ill prepared for understanding, let alone to prescribe policies to improve, the working of the market economy. It was this conviction that brought Coase to law.

Thirdly, by changing the rights and duties of personal and corporate actors, andredrawing the line between what is lawful and what is not in business dealings, law can directly and profoundly change how economic actors behave and through them, how the economy operates. In this way, law becomes a valuable policy instrument to be employed to improve the working of the economy. Compared with conventional instruments, like monetary and fiscal policies, law is more direct and focused. It has the potential to be a powerful tool to shape the working of the economic system to our liking.

That this did not happen was a constant source of Coase's critique of modern economics. Two policy choices, strongly favored by economists and commonly adopted by policy-makers, are taxation（e.g.，imposing a Pigovian tax to deal with externalities）and direct government regulation（e.g.，establishing certain ad hoc regulatory agents, such as the Federal Communication Commission entrusted to manage broadcasting, telephone and telegraph industries）. Both are meticulously scrutinized and systematically criticized by Coase（1959，1960）. The reason that Coase favors the use of law to modify the rights and duties of economic actors over taxation and government regulation is not so much that private bargaining always ends up in allocative efficiency, making Pigovian taxation and government regulation unnecessary, a proposition has become known as the popular Coase Theorem（e.g.，Farrell，2016），but that well-defined property rights empower economic actors and induce enterprising initiatives from those who are motivated to discover the most profitable employment for whatever assets or rights they possess. Without such continuous enterprising undertaking from economic actors, the market economy will quickly lose its dynamism and wither away.

For Coase, the study of law in the working of the economy also has a substantial methodological payoff：It ties economics to the real world. In economics, many examples are ingeniously invented to illustrate economic theory；they are meant to provide a convenient empirical footing to otherwise abstract theory. The lighthouse in economics has long been such a canonical example（Coase，1974）；the story of Fisher Body and General Motors is a recent example that Coase（2006）turned his criticaleyes to. The“fable of the bees”as investigated by Steve Cheung（1973）is a favorite of Coase, who solicited Cheung to write the paper.[4]

In contrast, legal scholars are trained to rely on real life examples in their reasoning and writings. The basic pattern of common-law reasoning is reasoning by example, that is, reasoning from case to case. The doctrine of precedent in common law is built on close perusal and careful comparison of legal cases. For law school students in the United States, an important part of their training is to memorize classic cases and to learn to think like a lawyer, that is, reason by analogy. Strikingly different from economics, the examples used in law are true and real, not something concocted or fabricated just to make a case. This is an important and apparently unique feature of legal reasoning.[5]Marrying law and economics in the Coasean way helps to bring realism back to economics.

4

A discussion of law in the economy would leave a big lacuna in our understanding of Coasean law and economics unless ethics is taken into account because ethics plays a fundamental role in adjudicating positive law, in regulating right and wrong, and in motivating and judging human behavior.

Ethics and economics have had long and intimate relations since the time of Adam Smith, who started his career as professor of moral philosophy, authored The Theory of Moral Sentiments before the Wealth of Nations, and revised the former significantly to note down his last thoughts a few months before his death. For Smith, ethics and economics are integral part of what he called the“science of human nature”（1982）. Man's natural sociality, his curiosity for order, desire for plenty and esteem, mediated and augmented by his power of imagination, joy of sympathy, and longing for propriety and virtue, mold human instincts into social life. Cultivated, refined, and elevated human nature, made possible by growing wealth extended to all members of the commercial society, promises new venues to develop social institutions. In thepursuit of science of man, the abstract theory of human nature is applied to understand the evolution of morality and law and the progress of politics and commerce. A better understanding of social institutions sheds further light on human nature and provides a firm empirical foundation on which a mature“science of human nature”can be built. The science of man so cumulatively built may well be positioned to inform and even instruct the development of social institutions, in the critical and negative sense of pointing out what is wrong and proscribing what not to do. In this sense, economics, for Smith and Coase alike, is necessarily an applied empirical moral science.

Frank Knight took the same approach to ethics and economics, who had a formative and lasting impact on Coase. Knight（1935）reminded us that“life is not fundamentally a striving for ends, for satisfactions, but rather for bases for further striving … the true achievement is the refinement and elevation of the plane of desires, the cultivation of taste.”Man is not a utility-maximizer, not due to the limitation of bounded rationality as emphasized by Herbert Simon（1955），or the lack of information as noted by George Stigler（1961），but rather because man is always explorative and constantly creative, if he remains active at all. Being“the discontented animal, the romantic, argumentative, aspiring animal，”man is“interested in changing himself, even to changing the ultimate core of his being”（Knight，1947）. Thus, he can never pre-commit himself to a set of fixed goals；such a strict life would be frustrating if he fails, and boring if he succeeds. Instead of striving for a given end，“the end is always more or less redefined in the course of the action itself, and an interest in this process of redefinition is inherent in the interest in action. The end or ideal which functions in advance of action is rather a sense of direction than an end in the concrete sense”（Knight，1947）. In redefining his end, man may fall prey to the vice of“conspicuous consumption”and other traps, he never totally aborts his striving for a better self. The striving, as Adam Smith（1976）noted, is not driven by“the love of our neighbor”or“the love of mankind，”but by a“stronger love, a more powerful affection，”that is，“the love of what is honorable and noble, of the grandeur, and dignity, and superiority of our own character.”

Unlike Smith and Knight, Coase rarely took on ethics explicitly in his writing. Nonetheless, he approached economics similarly as a moral science. At the end of“The Problem of Social Cost，”Coase（1960）pointed out the limitation of his analysis.“The analysis has been confined, as is usual in this part of economics, to comparisons of the value of production, as measured by the market. But it is, of course, desirable that the choice among different social arrangements for the solution of economic problems should be carried out in broader terms than this and that the total effect of these arrangements in all spheres of life should be taken into account.”To close the paragraph, Coase referred to a point stressed by Knight that the problems of economics“must ultimately dissolve into a study of aesthetics and morals”（1960）.

Commenting on the wide readership The Theory of Moral Sentiments has commanded in present-day China, Coase and Wang（2012）write：“After thirty years of market transformation, China has not only endorsed capitalism as an economic system which facilitates the creation of wealth, but also its moral character and ethical foundation, without which capitalism itself cannot be sustained.”To explain the moral character and ethical foundation of capitalism in the Chinese context, they continue，“A traditional Chinese moral precept，‘do not give up a good dead because it is trivial；do not commit a misconduct because it is trivial，'ostensibly contradicts the basic tenet of modern economics.… This Chinese teaching focuses on an aspect of human nature that is largely ignored in modern economics；that our character is formed gradually and almost imperceptibly by what we do.… Frank Knight made a valuable point in stressing that a society should be judged more by‘the new wants it generates, the type of character it forms in its people, than by its efficiency in satisfying wants as they exist at the time.’Modern economics takes as given the wants that the choice of resource allocation intends to satisfy and disregard the long-time cumulative impact that choice inevitably has on shaping the wants—it takes a snapshot view of a continuous process. But the economy both satisfies wants and simultaneously sows the seeds of new wants, which in turn drives the next round of economic production and consumption. Any action that promises short-term gains but has a corrupting effect on the moral character of the people dims the long-term future of the market economy.”[6]

The ethical feature of Coase's economics is demonstrated most characteristically in his study of the market for ideas and a lifetime commitment to seeking truth in the market for economics ideas. His courage to go his own way and his conviction in the final triumph of truth revealed the courage of his conviction and show us the best way to defend a free market for ideas. Coase's（1991）Nobel lecture ends with the following：“A scholar must be content with the knowledge that what is false in what he says will soon be exposed and as for what is true, he can count on ultimately seeing it accepted, if only he lives long enough.”The will to believe in truth, as Frank Knight（1947）told us, is“the foundation of all morality.”A free market economy rests on ethical principles of personal autonomy and individual responsibility. The right of everyone to choose and pursue his ends and the duty of everyone to respect the same right in others have long and widely been appreciated as the moral foundation of a market economy. Equally important but far less recognized is the intellectual commitment to seeking truth as a crucial pillar in the moral foundation of a free society（Popper，1946；Polanyi，1951），the courage of everyone to express his ideas and pursue what he believes is truth, particularly when he is against the majority view, the obligation of everyone to encourage the same courage in others, and the humility to admit and the grace to come to terms with his ignorance and missteps.

5

Both law and the economy are human institutions；they are products and by-products, intended or not, of human mind and action, subject to human will and error. Their plasticity renders them a fertile field for us to exercise imagination and practice creativity, so long as we are wise enough to attend to the boundaries of what we know and what we can do. Good laws facilitate the working of the economy, the evolution of which induces legal change. The co-evolution of law and the economy makes them a joint human enterprise.

Law figures prominently in a market economy that rests on an extensive divisionand complex organization of labor and exchange. An open market economy, with a peaceful and bursting communal life, implies law and government of the highest order. Law as general rules, as opposed to customs and commands, and government ruled by law rather than by discretion are essential in establishing order among diversity, including economic order among competing interests. The fundamental role that law plays in the working of the market economy and the complex ways law, ethics, and the economy interact and counteract in co-evolution were appreciated by none other than Adam Smith, the founder of modern economics.[7]

Adam Smith meant the subject he helped to found to be a branch of what he called“the science of a legislator”（1976；see also Haakonssen，1981），to be joined by ethics（Smith，1978）and jurisprudence. Though his long-projected treatise on natural jurisprudence was left unfulfilled, Smith's lectures on the subject have survived in the form of student notes（Smith，1982）. In the lectures, Smith endeavored“to trace the gradual progress of jurisprudence, both public and private, from the rudest to the most refined ages, and to point out the effects of those arts which contribute to subsistence, and to the accumulation of property, in producing correspondent improvements or alterations in law and government”（John Stewart, quoted in“Introduction，”Smith，1982）. Jurisprudence, which provides“the theory of the rules by which civil government ought to be directed”and shows“the foundation of the different systems of government in different countries”（Smith，1982），instructs the legislator to govern in accord with natural liberty to allow the invisible hand to work its magic. Natural liberty works, as Smith（1976）emphasized, only in a“well-governed society”which justice is regularly and tolerably administered so that universal opulence“extends itself to the lowest ranks of the people.”Natural liberty lasts only when the majority of the population actively participate in and bene fit from the wealth it helps to create because“no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable”（Smith，1976）.

Most of his contemporaries read the Wealth of Nations, if read it at all, as a crude, unsophisticated, and imprecise formulation of price theory；their focus is placedsquarely, if not exclusively, on what Smith called the“invisible hand.”Coase saw in Smith's masterpiece an overwhelming emphasis the author consistently and systematically placed on“the appropriate institutional[and ethical]framework for the working of a pricing system”（Coase，1977b）. Such a framework is neither a derivation from timeless metaphysical foundations nor a deduction of universal abstract theories. Rather, it has to evolve out of historical experiences, full of uncertainty and contingency. The framework is inevitably imperfect, always leaves room for continuous innovation and improvement. Modern institutional economics, which, as envisioned by Coase（1984），“should study man as he is, acting within the constraints imposed by real institutions，”and was hoped to be“economics as it ought to be，”continues the classical line of economics started by Smith. For Smith and Coase alike, the market economy is not, and cannot be, populated by atomized economic man, an imaginary species created by economists to work out their theoretical models. Were the atomistic picture true of the market economy, there would be nothing to talk about the institutional structure of production, let alone the legal system or ethics. Law and ethics are critical in fashioning and preserving economic order, exactly because a market economy is not a mechanical system of logic and calculation, but has to rely upon unruly human passion and unbounded human imagination.[8]

6

Coase（1960）is widely regarded as the beginning of economics of property rights and property law（e. g.，Demsetz，1967；Cheung，1978；Barzel，1997；Lueck and Miceli，2007；see also Allen，1998）. For Coase, law is less an authoritarian program of delimiting or fixing rights once and for all than a common framework of reference based on which market order can emerge to coordinate competing interests. Coase did not take right as absolute or inviolable. At the end of“The Problem of Social Cost，”he stressed that“a system in which the rights of individuals were unlimited would be one in which there were no rights to acquire.”Nor did Coase believe that governmentinfringement of rights must be denounced on an a priori basis. In a modern pluralistic society, rights are always subject to government intervention. Indeed, even if it is possible to keep government out, rights are inevitably constrained by each other. In a market economy，“balancing”or tradeoffof rights is not a choice, but an essential feature of social reality.

For this reason, Coase（1960）has often been criticized for sidestepping in rem rights（Merrill and Smith，2001），for overlooking property as the law of things（Smith，2012），for ignoring property as sequential exchange（Arrunada，2017）and even charged for undermining private property institutions（Block，2003）. It would take us too afar to address such criticisms. A short defense is that Coase was an economist and he followed a conventional approach which he found helpful and adequate to expose Pigou's fallacy. For an institution as evolved as property and a concept as complex as right, it is unreasonable to expect any single piece of scholarship from an economist to provide a comprehensive treatment. It is certainly not fair to ask Coase to“bear the costs of the limitations in the development of the literature on property rights he spawned”（Lueck，2017）. In rem and in personam rights, while distinct analytically, can hardly be disjointed in practice. In rem property rights secure possession；in personam contractual rights maximizes its market value. For in personam rights to be of any value, in rem rights have to be respected to a sufficient degree. Without the“right to exclude，”the“right to use”would be defenseless against any encroachment. Without the“right to use，”the“right to exclude”would be less valuable.

The problem of sequential exchanges is common in any market economy where economic resources are valued differentially over time and among a plurality of economic actors and they change hands continually. Writing on the rise of market economy in China, Coase and Wang（2012）notes，“China did not first delineate property rights, specific other relevant institutional rules and then allow market forces to allocate rights to the highest bidder. Instead, what rights economic actors were allocated to have … and what institutional constraints they faced in exercising their rights were delineated when the state released the rights of control to privateeconomic actors.”This unconventional practice greatly speeded up the introduction of market competition into China to avoid the cost of delineating rights, which would be prohibitive at the time. In this way, as one reviewer points out，“The state followed the promptings of private business and did not have‘to get the rights right before their economic values were revealed in competition'”（Schwartz，2014）. Moreover, as Coase and Wang（2012）observed, when economic conditions change over time, the value of rights also alters, some rights gain and others lose relevance. In this process, the state“was thus frequently called in to revise and redefine the structure of rights.”As a result, while China did not formally sanction in rem rights during the first two decades of market reform, in personam rights worked through free contracting and subcontracting to activate and take advantage of market competition.

As demonstrated in the Chinese case, Coase's law of the market has worked its magic. The Coasean emphasis on contractual or in personam rights, without challenging collective ownership head on at the outset, has proved surprisingly effective in introducing property rights and market forces into the Chinese economy in the early 1980s（e.g.，Coase and Wang，2012；Cheung，2014）. Only after a quarter century of market transformation, during which in personam rights had become widely appreciated, did formal in rem rights become ratified, with the passing of the Property Law of China in 2007，in which rights to private property are formally recognized for the first time in the history of the People’s Republic of China.

7

Coasean law and economics, with its focus on the law's impact, direct or indirect, intended or not, on the working of the economy, sets us on a long-overdue search for appropriate institutional frameworks and ethical underpinnings that make a free market economy not just possible, but viable and resilient. The task has gained more urgency and become even more challenging in our rapidly globalizing economy. With the recent spread of market economies in Asia, Africa, Eastern Europe and Latin Americaover the past few decades, an unprecedented size of the world's population depends on the division and organization of labor and global trade for their prosperity. Market economies are taking root in societies with different cultures, histories, religions, and political systems. The common fate of humanity has never been so crucially dependent on our understanding of the market, both its unbounded transformative creativity and its inescapable limitations. The development of law and economics in these fledging markets and its continuous evolution in developed economies along the Coasean line require scholars to stand firm on the ground and away from“blackboard economics，”engaging real-world problems, discovering and inventing theories that help them understand whatever questions they choose to tackle. For travelers on this long and challenging intellectual journey, Coase on Law and Economics will be cherished as a source of inspiration, ideas, and courage.

Notes

[1]At the first annual meeting of the American Law and Economics Association in 1991，Guido Calabresi, Ronald Coase, Henry Manne and Richard Posner were honored as the founders of the new discipline. In 2010，the board of the Association established the Ronald H. Coase Medal to recognize bi-annually major contributions to the field. Richard Posner was its first recipient, followed by Guido Calabresi in 2012.

[2]For his recent coming to terms with Coasean economics, see Posner（2011）. After realizing that“Keynes's informal, unrigorous, largely unmathematized analysis of the macroeconomy has provided greater insight into our current economic situation than 75 years of increasingly formal, rigorous, mathematized analysis，”Posner is able to appreciate Coase's“stubborn adherence to the illustrious tradition of what might be called commonsense economics.”

[3]Knight later dropped this rather mechanic view. In the 1948 preface to Risk, Uncertainty, and Profit, Knight wrote that，“the correct picture of production is not that of a‘circular flow'but that of an inclusive organic complex of agents, human and non-human, which continuously maintains itself and yields in addition a return available for consumption or further investment”（Knight，1964）.

[4]These and several other fables of economics can be conveniently found in a collection put together by Daniel Spulber（2001）.

[5]Moral reasoning, for example, otherwise quite similar and often deeply related to legal reasoning, does not shun away from made-up moral dilemmas to capture the complexity and intricacy involved in moral decision-making. Actually, the best-known moral dilemmas are all conceived imaginary examples, such as the prisoner's dilemma, the trolley problem and Sophie's choice.

[6]The lack of personal and institutional trust has seriously inflicted the economy and society and has of late become a public outcry in China（e.g.，Li，1995；He，2015）.

[7]Adam Smith's legacy to the development of law and economics has attracted a fair amount of attention（see for example, MacCormick，1981；Malloy and Evensky，1994；Simon，2013；Mahoney，2017）. Unfortunately, the discussions often take the economic analysis of law as the only way to practice law and economics and fail to notice the distinction between the Coasean law and economics and economic analysis of law（for few exceptions, see McCloskey，1998；Medema，2016）.

[8]Otherwise，“the science of a legislator”as conceived by Smith would not make any sense. As stressed by Smith，“laws of justice”make a“well-governed state”possible；together they are conducive to and protective of a commercial society. Among contemporary economists, Hayek（1973，1976，1979）probably represents the most ambitious effort to restate the“principles of justice and political economy”and revive Smith’s“science of a legislator.”Efforts of the same spirit should include the Freiburg school of law and economics associated with Walter Eucken（e.g.，Vanberg，2001）and the research program of constitutional political economy（e.g.，Brennan and Buchanan，1985）.

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