Real life economics

It is one of the tragedies of men of genius that their great ideas are liable to be distorted and used by opponents to justify ends that the originator never intended. So it was with the British-born, US-based Nobel laureate Ronald Coase, who died recently aged 102, lamenting in the last years of his life that modern economics had lost its way.

Coase was a true genius in the sense that Jacob Bronowski used the word, a man with at least two original ideas. In 1937 he published a seminal work, The Nature of the Firm, written when multinational companies like Ford, General Motors and Union Carbide were coming to prominence. He introduced the concept of market friction or what he called "transaction costs".

Traditional microeconomic theory concentrated on production and transport costs, and had "neglected the costs of entering into and executing contracts and managing organisations", as the citation of Coase's Nobel prize declared. He filled the gap.

In 1959 Coase, who moved to the United States after the war, argued that the US Federal Communications Commission should sell radio frequencies to the highest bidder rather than giving them away free. His policy was adopted in 1994.

Probably his most famous work was The Problem of Social Cost, published in 1960, which is one of the most cited publications in the history of economics. He had been thinking of tricky problems in economics, including what to do about "those actions of business firms which have a harmful effect on others" - such as pollution or gas emissions.

He argued that the traditional method of having the government impose a tax on the polluter was less efficient than having the parties negotiate and reach a solution. Coase's work is part of the climate change debate today, offering the intellectual backing for carbon trading schemes rather than anti-emissions taxes.