Coase’s Methodology in Reforming Economic Theory: With Special Focus on “the Nature of the Firm” and “the Problem of Social Cost”

 
Ronald Coase introduced the concept of “transaction cost” into the economic literature. This contribution is evaluated as important as other path-breaking contributions, like the introduction of “Marginalism” and “substitution”. One may ask how and according to which methodology Coase has been able to make such a vital contribution to and reform the economic theory. This study indicates the following statements as the cornerstones of Coase’s methodology: 1. Economists must apply their box of tools to study economic systems and explain the reality; 2. Instead of appealing to completely abstract models, economists must study the actual way of resource allocation by rational actors; 3. Therefore, the best way of empirical study is gathering relevant documents and observations to understand the private solutions agents invent to solve the problem of scarcity; 4. Reunion of documents and observations is guided by the problem of the study; 5. This problem itself discloses via the recognized inconsistency between the state of the art of theory and observed reality; 6. In this course of action, theory is used as the benchmark to study new situations and 7. The last step of this theory construction process is generalization of theory by employing empirical findings. More reality-consistent theories are expected from this approach.