Review of Austrian Economics, 13: 175–192 (2000)
2000 Kluwer Academic Publishers
Roy Cordato’s “Austrian” Critique of Coase
on Social Cost
J. PATRICK GUNNING email@example.com
College of Commerce and Economics, Sultan Qaboos University, P.O. Box 20, SQU 123, Sultanate of Oman
Abstract. In his book on Austrian welfare economics, Roy Cordato presents a scathing criticism of the Coasean
approach to making judgments in tort cases. His criticism claims that the Coasean approach is both unrealistic and
normative. Moreover, it would introduce uncertainty, thereby reducing individuals’ freedominpursuingtheirgoals
through the exchange process. To avoid all of these problems or at least to better deal with them, the economist
who is interested in giving advice to judges ought to advocate a rule of strict liability regarding invasions of real
(i.e., material) property. He claims that this rule is derived from Austrian economics.
This paper, which takes a “different” Austrian perspective, makes several arguments against Cordato. First, it
arguesthathis recommendedrulewould not achievethe goalthathe setsforit. Itwouldincrease the freedomof some
people while reducing the freedom of others in pursuing their goals. Second, it argues that his criticism of Coase
is misplaced. Contrary to Cordato’s claim, Coase has not advocated day-to-day interventions in the market system
based on beneﬁt-cost calculations that assume general competitive equilibrium. On the contrary, like the Austrians,
he has emphasized the difﬁcult knowledge and calculation problems associated with this. Also, he has pointed
out the preponderance of empirical evidence against such interventions. Moreover, Coase’s recommendations do
not concern day-to-day interventions at all. Rather, he has been concerned with the institutional structure, most
especially with the initial delimitation of rights. This concern, which implicitly takes account of uncertainty,
immunizes Coase’s analysis from Cordato’s uncertainty critique.
JEL classiﬁcation: A13, D23, D62, H23, K11, P16, B31.
In a book that claims to present a modern Austrian perspective on welfare economics and
externalities, Roy Cordato introduces a welfare criterion that is “divorced from perfect
competition or any notion of general equilibrium.” He believes that such a criterion will
provide a “sound theoretical basis for further empirical and public policy analysis in the area
of externalities” (Cordato 1992:1). Other neo-Austrian economists have proposed welfare
The distinguishing feature of Cordato’s proposal is his scathing criticism of Ronald
Coase’s paper on social cost (Coase 1988a ). He claims that the Coase approach
to public policy advocates, or at least requires, micro-management of economic affairs.
This requirement disregards the established Austrian view that no one could possess the
knowledge needed to make such decisions. Since micro-management is impossible, he
writes, anyone who tries to apply the criterion must make an ethical judgment. Of course,
Cordato’s welfare criterion also entails an ethical judgment. However, it does not require
This paper makes two arguments. The ﬁrst is that Cordato’s own analysis is inconsistent.
The ultimate goal of his welfare criterion is to enable individuals to more efﬁciently pursue
their goals through the exchange process (Cordato 1992:64). Yet the particular judgments
he recommends in tort cases are unlikely to achieve this goal. Although they would facilitate