A Conversation with Harold Demsetz By Amy Willis

A professor at the Graduate School of Business at the University of Chicago in the 1960s and a primary figure in Chicago School Economics and in the field of Law and Economics, Harold Demsetz has contributed original research on the theory of the firm, regulation in markets, industrial organization, antitrust policy, transaction costs, externalities, and property rights. A member of the American Academy of Arts and Sciences and a Director of the Mont Pelerin Society, Demsetz was Arthur Andersen UCLA Alumni Emeritus Professor of Business Economics at the time of this interview.

Mark Grady, Professor of Law and Director of the UCLA Law School’s Center for Law and Economics, interviews his former teacher at UCLA about the main issues and problems at the core of Demsetz’s lifetime investigation into the nature of economics. Ken Lehn, Sam Peltzman, and Ben Klein provide critical and insightful commentary on the influence and impact of Harold Demsetz’s work.

“I don’t think you can have liberty without private property.”

Below are some prompts for further conversation:

1- How did Demsetz first encounter economics, and how did it change the trajectory of his life?

Industrial Organization

2- Demsetz describes the early days of this field as too “lawyer-like.” What did he mean, and how does his work attempt to rectify this?

3- Demsetz notes that many free-market economists, most notably George Stigler, supported antitrust legislation initially. Why, and what made him change his mind?

4- How do individual firms achieve market concentration if not for monopoly-seeking, according to Demsetz? Why is Demsetz opposed to breaking up such firms, as in the case of many antitrust decisions?

Property Rights and Regulation

5- Why is air pollution such a difficult problem for markets and individual actors to solve? What approaches did command-and-control legislation take to try to mitigate air pollution, and why weren’t they successful?

6- How does Demsetz’s work suggest alternatives to the approaches above, and why are they generally more effective?

Nature of the Firm

7- What’s wrong with the way Adam Smith and David Ricardo defined the firm, according to Demsetz?

8- Why does Demsetz suggest the Chinese were so interested in the theory of the firm during the Tienanmen Square era?

9- Demsetz says China, “When you create capitalism, you create an avenue for people to create wealth,” and they become “effective competitors with the state.” He also predicted that China would face a “juncture” when either democracy will prevail or the private economy will be killed. How prescient do you think this prediction remains today? Explain.

Law and Economics

10- Why does Demsetz believe these two discipines to be such a fruitful marriage?

11- Why did Demsetz characterize Pigou‘s theory of welfare economics as a “Nirvana solution”? What’s wrong with the way Pigou characterized externalities, according to Demsetz?

Ronald Coase and Transactions Costs

12- How does Demsetz describe the Coase theorem? How does this approach solve Pigou’s problems with externalities?

13- How did Demsetz attempt to quantify transaction costs? What did he and his colleagues learn about the separation of ownership and control in corporations in the process?

14- Why does Demsetz suggest that insider trading has “a socially useful function?” Do you think insider trading should be illegal? Explain.

Competition and Monopolies

15- How do monopolies become monopolies, according to Demsetz? Why does he insist that “bigness” does not necessarily equal “badness?”

16- Why doesn’t the establishment of a natural monopoly, such as a utility company, necessarily result in a monopoly price? What role ought “the community” play with regard to such companies, according to Demsetz?

Exploring the Origin of Property Rights

17- How did the emergence of property rights in North America correlate with the Native Americans’ fur trade?

18- What does Demsetz mean when he says that the private ownership of resources lies behind the price mechanism?

Market Coordination and Efficiency

19- How did the San Fernando Valley get so congested with traffic, according to Demsetz? How does he suggest the situation might be improved?

20- The conversation closes with Demsetz allowing that there are many problems that are not so easily solved by markets and independent actors. What are some of these problems? What does he mean when he says we don’t know how to auction off the world 300 to 500 years from now?

Related References:

Harold Demsetz, Toward a Theory of Property Rights, American Economic Review

Demsetz and Property Rights, at the Online Library of Liberty

Harold Demsetz and Belen Villalonga, Ownership structure and corporate performance, Journal of Corporate Finance

Entries from the Concise Encyclopedia of Economics

Econlib Resources: