Toward a Clarification of the Block-Demsetz Debate on Psychic Income and Externalities

For over a quarter of a century, one small corner of the voluminous literature on the Coase theorem has been the scene of an animated and, at times, heated debate between Walter Block and Harold Demsetz. Over the entire course of the debate, Block (1977, 1995, 2000) has argued that when individuals have only psychic income with which to maintain their property rights, the Coase theorem fails. And Block (1977, 1995) holds the position that his psychic income case represents a conceptually distinct qualification to the Coasian position. Demsetz (1979, 1997) maintains that Block's case against the Coase theorem, at least in its weak form, involves nothing more than a demonstration of the potential importance of income effects and as such does not constitute a conceptually distinct qualification. Despite the many thousands of words spent over the issue by the two opponents, it is hard to be satisfied with the current state of the debate. Few points of agreement have been made. In his last paper on the issue Demsetz commenting on Block's then latest foray states: "I learn nothing from reading his part of this debate, and apparently he learns nothing from reading my part, so I write this reluctantly and refuse to join in any future similar exercise in futility" (1997, p. 101). For his part, Block (2000) continues to argue that the Coase theorem can fail even if transactions are zero and is exasperated by Demsetz's failure to appreciate his putatively fundamentally different slant on the Coase theorem. In this note I seek to clarify some aspects of the debate between Block and Demsetz. In doing so, I show that the debate has been more than one full of sound and fury signifying nothing: their debate over technical aspects of the Coase theorem once properly interpreted yields important insights for public policy.