Coasean Causal Inference: Using Models as Foils

Abstract

Ronald Coase reasoned with economic models, and made inferences more generally, in an unorthodox manner. In 'The Problem of Social Cost', Coase draws a conclusion concerning the impact of transaction costs in the real world by looking to a model world in which transaction costs are conspicuously absent. Yet how Coase draws such an inference—from the model world to the actual world—remains opaque. The central goal of this paper is to make this method of inference crystal clear. We achieve this by offering a formal characterization of Coase's method of inference; we call this form of reasoning models as foils. We then show that other important thinkers from the history of economic thought also used models as foils, and we end by arguing that this method of inference can be used to fruitful ends by contemporary economists.