November 21, 2017

Ronald H. Coase, ‘Accidental’ Economist Who Won a Nobel Prize, Dies at 102

Ronald H. Coase, whose insights about why companies work and when government regulation is unnecessary earned him a Nobel Memorial Prize in Economic Science in 1991, died on Monday in Chicago. He was 102.

His death was announced by the University of Chicago.

By his own description, Professor Coase (rhymes with doze) was an “accidental” economist who spent most of his career teaching at the University of Chicago Law School and not its economics department. Yet he is best known for two papers that are counted among the most influential in the modern history of the science.

In one, “The Nature of the Firm,” which was largely developed while he was still an undergraduate and published in 1937, Professor Coase revolutionized economists’ understanding of why people create companies and what determines their size and scope.

He introduced the concept of transaction costs — the costs each party incurs in the course of buying or selling things — and showed that companies made economic sense when they were able to reduce or eliminate those costs by performing some functions in-house rather than dealing in the marketplace.

The ideas laid out in the paper explain why, in the first half of the 20th century, companies tended to become more vertically integrated (for example, Ford Motor building its own steel mills and buying its own rubber plantations rather than relying on suppliers), and why, more recently, companies have tended to do the opposite, aggressively outsourcing even basic functions like paying their employees.

In the second of his groundbreaking papers, “The Problem of Social Cost,” published in 1960, Professor Coase challenged the idea that the only way to restrain people and companies from behaving in ways that harmed others was through government intervention. He argued that if there were no transaction costs, the affected parties could negotiate and settle conflicts privately to their mutual benefit, and that fostering such settlements might make more economic sense than pre-empting them with regulations.

The paper made the idea of property rights fundamental to understanding the role of regulation in the economy. It grew out of a study by Professor Coase on how the Federal Communications Commission licensed broadcasters.

The practice of issuing the licenses more or less permanently for small fees to whoever applied first and met legal requirements made little economic sense, he argued; better to treat them as property, auction them off and allow them to be freely transferred. Decades later, his ideas were used to raise billions of dollars for the Treasury when radio frequencies were assigned for cellular phone services.

Ronald Harry Coase was born on Dec. 29, 1910, in Willesden, England, the only child of two postal workers. Though he spent more than 50 years living and working in the United States, he retained his English accent and habits all his life.

His father was an amateur athlete of some renown, but Ronald’s interests were more academic, not least because of weakness in his legs that obliged him to wear iron braces for a time.

In his autobiographical essay written for the Nobel committee after being awarded the prize, he recalled being taken by his father at age 11 to a phrenologist to hear what could be discovered from the shape of his head. The phrenologist detected “considerable mental vigor,” Professor Coase wrote, and recommended that he work in banking or accounting and raise poultry as a hobby.

Because of his leg braces, Professor Coase wrote, he attended a special primary school and enrolled in secondary school a year late, missing the chance to pursue a concentration in history or Latin. Science was his third choice, but he found he had little patience for the mathematics involved, so he studied the only other subject available: commerce.

At the University of London, he was on his way to becoming an industrial lawyer when a seminar with Sir Arnold Plant, a well-known economist of the time, changed his focus again, this time for good. After graduating from the London School of Economics, he taught there and at other British universities, and married Marion Ruth Hartung in 1937. The couple immigrated to the United States in 1951, when he joined the faculty of the University of Buffalo. He left for the University of Virginia in 1958.

While teaching at Virginia, Professor Coase submitted his essay about the F.C.C. to The Journal of Law and Economics, a new periodical at the University of Chicago. The astonished faculty there wondered, according to one of their number, George J. Stigler, “how so fine an economist could make such an obvious mistake.” They invited Professor Coase to dine at the home of Aaron Director, the founder of the journal, and explain his views to a group that included Milton Friedman and several other Nobel laureates-to-be.

“In the course of two hours of argument, the vote went from 20 against and one for Coase, to 21 for Coase,” Professor Stigler later wrote. “What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.” Professor Coase was asked to expand on the ideas in that essay for the journal. The result was “The Problem of Social Cost.”

Professor Coase was soon invited to become editor of the journal, and to join the Chicago faculty, where he stayed the rest of his life, disdaining the equation-heavy approach of what he called “blackboard economics” in favor of insights grounded in real markets and human behavior.

By identifying transaction costs and explaining their effects, the Royal Swedish Academy of Sciences wrote in announcing his prize in 1991, “Coase may be said to have identified a new set of ‘elementary particles’ in the economic system.”

Professor Coase’s wife, Marion, died in 2012. No immediate family members survive.

This article has been revised to reflect the following correction:

Correction: September 3, 2013

An earlier version of this obituary misidentified the essay that earned Professor Coase an invitation to meet with the economics faculty of the University of Chicago. It was his essay about the Federal Communications Commission, not “The Problem of Social Cost.” (As a result of that meeting, Professor Coase was asked to write the essay that was subsequently published as “The Problem of Social Cost.”)

This article has been revised to reflect the following correction:

Correction: September 5, 2013

Because of an editing error, an obituary on Wednesday about the economist Ronald H. Coase misidentified the university where he taught from 1951 to 1958. It was the University of Buffalo, not the State University of New York at Buffalo. (It did not become part of the State University system until the early 1960s.)

Article source: http://www.nytimes.com/2013/09/04/business/economy/ronald-h-coase-nobel-winning-economist-dies-at-102.html?partner=rss&emc=rss

You’re the Boss Blog: What You Need to Know About Credit Card Processing

Staying Alive

The struggles of a business trying to survive.

Starting on Tuesday morning, I am going to publish a series of posts about my search for an honest and affordable processor of credit card transactions. It was not an easy search, but I learned a lot — much of which I never wanted to know but some of which I think may be helpful to other business owners.

As a warm-up to the series, I offer this primer on card-processing basics. I think this background information will be helpful if you read the series or, more important, if you, too, have struggled to arrange credit card processing. My own search began when I was tipped off that I was paying more than necessary for my transactions. Many years ago, I agreed to let my bank handle them, and since then, I had given the topic little thought.

I wrote about my issues with my bank in a previous post, including my feeling that my credit card processing — also known as merchant services — was costing me too much. That feeling was set off by a cold call last spring from a processor that was interested in seeing whether it could lower my transaction costs. That prompted me to do some research.

I soon learned that there are four parties involved with every credit card transaction: the merchant receiving the payment (“merchant”), the bank that the merchant uses to provide processing services (“acquiring bank”), the bank that issued the card to the customer (“issuing bank”) and the customer (“customer”).

The money in the transaction is lent by the issuing bank to the customer, who will either pay off  the debt within 30 days or add it to a balance and pay interest on it. Technically, as I will explain in a moment, the acquiring bank is also making a loan to the merchant. Fees are deducted by both the issuing bank and the acquiring bank, so that the amount of money that ends up in the merchant’s account is less than the amount charged the customer.

The issuing bank’s fee is called the interchange fee. The acquiring bank’s fee is called the discount rate, and it might be supplemented with other fees. Both the interchange fees and the discount fees are expressed as percentages of the transaction, although a small fixed amount may be associated with each transaction.

Many banks issue credit cards to customers and act as issuing banks. These banks hand out cards of a certain brand, with Visa, MasterCard and Discover the most common. American Express is a little different — it acts as both the issuing and the acquiring bank and charges a single fee directly to the merchant but will administer the transaction through the acquiring bank so that a merchant can process American Express transactions through the same terminal as the other cards.

Those interchange rates are published information — you can see Visa’s fee structure here and MasterCard’s here. The exact interchange fee charged to the acquiring bank (and the merchant) is determined by several factors: whether the card is present at the transaction, what type of card is used (a rewards card? a card used by the government for purchasing?) and what type of merchant accepts the card.

Yes, the type of business you are in can affect the interchange rates. This is because the issuing bank wants to be compensated for the risk of the dreaded chargeback, which happens when a customer disputes a charge successfully. When a customer complains about the product or services you have provided, chances are good that the money you were paid by the acquiring bank, plus additional fees, will be taken out of your account. You can appeal this, but it will take a while and you will probably lose.

Some businesses are more likely than others to provoke chargebacks. The safest transactions, from the point of view of both issuing banks and acquiring banks, occur when the cardholder is physically present to swipe the card and sign the receipt and when the goods are inexpensive and unlikely to provoke complaints. Merchandise and services that are standard and used quickly are the safest, which is why gas stations, restaurants and car rental agencies get favorable rates.

The riskiest transactions are those that are done over the phone and Internet, especially if the transaction is large and the business is of a kind that tends to generate complaints. That’s why an important part of applying for merchant services is revealing what kind of business you are. To make sure everyone is speaking the same language, the processors employ MCC Codes, four-digit numbers issued for a wide variety of businesses as defined by the federal government. If you wade through the MasterCard interchange document I linked to above, you will see special interchange rates associated with different MCC codes. Visa works the same way.

If you need to accept credit cards for your business, you have to deal with the acquiring bank. It is common for the responsibilities of the acquiring bank to be split between two entities. The first, commonly called the merchant service provider, is in constant contact with the merchant. When a sales representative shows up at your door to try to sign you up for credit card processing, or when you interact with a Web site (such as Square) to investigate a deal, you are dealing with the merchant service provider, which can be an arm of a bank or a smaller independent company.

In every deal I looked at, standing behind the merchant service provider was another company. I’m not sure if this is the correct term, but I’ll call it the processing company. This entity actually executes the mechanics of the transaction: transmitting information among the merchant, the issuing bank and the acquiring bank. In my dealings with four merchant service providers, I found it difficult to tell exactly how the duties of the acquiring bank were divided between the merchant service provider and the processing company. The sales representatives clearly worked for the merchant service provider. The monthly statement could come from either the merchant service provider or the processing company. The card readers were provided by the processing company. And somewhere in the middle were the underwriters.

Underwriters? Is someone evaluating risk? Yup. It is important to understand that when you sign up to accept credit card payments, you are actually borrowing money. When the acquiring bank transfers cash to the merchant, it is assuming the risk that there will be a chargeback. That risk will remain until the transaction (which may, for instance, include shipping time) is completed and the warranty on the goods (which may last a long time after delivery) has expired.

Despite that risk, the acquiring bank will put the transacted funds in the merchant’s account a couple of days after the transaction is reported. The acquiring bank sees this as a loan and that’s why when you apply for merchant services, your fitness to borrow the amounts that your business generates in credit card transactions will be evaluated. Every merchant services application I have seen has required a Social Security number and demanded that all card transactions be backstopped by my own assets. My house, my car and my savings are all up for grabs if things go wrong.

And as with any personal guarantee, this one is likely to affect your credit score and your ability to borrow money outside the business. At the very least, if you shop around for merchant services, as I did, your personal credit report will show multiple inquiries — with whatever effects that might have.

Tuesday: My search for an honest credit card processor begins.

Paul Downs founded Paul Downs Cabinetmakers in 1986. It is based outside Philadelphia.

Article source: http://boss.blogs.nytimes.com/2013/03/25/what-you-need-to-know-about-credit-card-processing/?partner=rss&emc=rss