Nobel-laureate economist Ronald Coase died on Labor Day at age 102. Coase was blessed with a long, active life—he published what turned out to be his final book last year at age 101 (his wife enjoyed a similarly long life and they had been married for 75 years when she died last year at age 102!).
One of his most inspiring arguments about the importance of limited government arose from a most unlikely example: lighthouses.
You’ve no doubt heard of the example of lighthouses to demonstrate the necessity of government: the argument runs that no one could profit by building and maintaining a lighthouse on his own, yet lighthouses are necessary to shipping and the economy, therefore we must have government-run lighthouses. Coase showed that this was wrong—you don’t need government to have lighthouses, and perhaps you don’t need government to provide other services either.
More on lighthouses in a minute. First, some background on Coase: like many English intellectuals of his generation, he was a socialist as a young man but gradually became convinced that government regulation was frequently more of a hindrance than a help to society.
Coase’s change of views did not come from theoretical or philosophic insight but followed from his close, detailed studies of industries and markets, beginning with studies of the U.S. automotive industry and the British postal service in the early 1930s. As Coase described in an interview:
[My political views] changed gradually. What was most important was the work I did on the economics of public utilities at the London School of Economics. I studied the results of municipal operation of utilities and the effects of nationalization, particularly in the post office. This led to grave doubts about nationalization. It didn’t produce the results people said it did. My views have always been driven by factual investigations. I've never started off—this is perhaps why I’m not a libertarian—with the idea that a human being has certain rights. I ask, “What are the rights which produce certain results?” I’m thinking in terms of production, the lives of people, standard of living, and so on. It has always been a factual business with me. I discovered that municipal operation didn’t work as well as people said it would, and nationalization did not either…I don’t reject any policy without considering what its results are. If someone says there’s going to be regulation, I don’t say that regulation will be bad. Let’s see. What we discover is that most regulation does produce, or has produced in recent times, a worse result.
In being lead to his conclusions by data rather than by theory, Coase was very much like the late political scientist James Q. Wilson, whose “broken windows theory of crime” and conservative public policy recommendations followed from empirical analysis more than from a theoretical commitment to conservative or libertarian premises.
But back to Coase’s lighthouse example. In this charming 1974 essay, Coase begins by noting that many famous economists—ranging from John Stuart Mill to Paul Samuelson—offered lighthouses as an example of a service that only government could provide.
Coase recounts the history of British lighthouses to show that this is simply not the case—indeed, “that only 11 out of the 46 lighthouses in existence in 1820 had been originally build by Trinity House [a private mariners’ association] while 34 had been built by private individuals.” The lighthouses were paid for by tolls, which would be collected by customs agents when ships stopped at various ports and turned over to private lighthouse owners. Although the government had a role in issuing “patents” (licenses) for lighthouses, the government did not maintain lighthouses at all—they were built and maintained by Trinity House as a private association or by private individuals.
Indeed, from the first lighthouses in the early sixteenth century until the mid-nineteenth century, the operation of lighthouses was mostly a private affair—and had a philanthropic result, because Trinity House provided for sailors’ widows and orphans, as well as elderly sailors, out of the profits from its lighthouse operations. In 1853, the government stepped in to set the dues that could be charged for passage by a lighthouse and then again in 1898 to set an annual charge on each ship to support British lighthouses. These government actions ended the ability of Trinity House to make a profit on its lighthouses and so to serve a philanthropic agency.
As Coase points out, in spite of these government interventions, British lighthouse operations still include the non-governmental Trinity House, which ensures that mariners have an active say in day-to-day lighthouse operations; a government owned-and-operated lighthouse system would be less efficient and worse managed.
So, while even famous economists have offered lighthouses as the exemplary case of a service only government can provide, Coase showed that lighthouses do not need to be provided by government—and, in fact, it’s better to leave lighthouses, along with most other services, in the hands of private organizations and individuals. In so doing, he was a key contributor to the case for a free society.
Here’s a nice summary of Coase’s lighthouse essay and four other of his most important contributions from his long career.