20 Pages Posted: 1 Oct 2014 Last revised: 5 Nov 2015

Date Written: September 30, 2014

Abstract

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 the logic of choice in discovering alternative institutional arrangements. That is, individuals will engage in exchange not only within a given institutional arrangement, but will also 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 a bridge between the "Old" Chicago School and the "New" Chicago School, but 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 transactions costs, Coase more than any other economist of the 20th century brought institutional analysis to the foreground by stressing the role they play in ameliorating or exacerbating conflicts in a world of positive transactions costs.