Alchian, Buchanan, and Coase: A Neglected Branch of Chicago Price Theory

This paper suggests that there exists a neglected third branch of Chicago price theory, which includes Armen Alchian (1914-2013), James Buchanan (1919-2013), and Ronald Coase (1910-2013). While this branch shares characteristics that are common to the other branches of Chicago price theory, there are two fundamental contributions of this branch that distinguishes it from the others in the Chicago price theory tradition. The first contribution is the application of logic of choice in discovering alternative institutional arrangements. That is, individuals will engage in exchange behavior to foster more preferable institutional arrangements that further the particular goals of the exchanging parties. The second contribution is the notion that the provision of markets is an entrepreneurial activity. We argue that this Alchian, Buchanan, Coase approach to price theory provides not only a bridge between the "Old" Chicago School and the "New" Chicago School but also an alternative development of the Chicago School. Our paper, while building on the joint insights of Alchian, Buchanan, and Coase, is focused on Coase's development of this approach, and clarifying his contribution. By drawing the economist's attention to transaction costs, Coase more than any other economist of the twentieth century brought institutional analysis to the foreground by stressing the role they play in ameliorating or exacerbating conflicts in a world of positive transaction costs.