The question always is, will it pay to bring an extra exchange transaction under the organising authority?
A one page long summary of the main arguments of Ronald H. Coase's 1937 article "The Nature of the Firm" (Economica, …
Management proper merely reacts to price changes, rearranging the factors of production under its control.
The growth of this economic differentiation creates the need for some integrating force without which differentiation would collapse into chaos; and it is as the integrating force in a differentiated economy that industrial forms are chiefly significant.”The most interesting reasons (and probably the most widely accepted) which have been given to explain this fact are those to be found in Professor Knight's Professor Knight starts with a system in which there is no uncertainty:“acting as individuals under absolute freedom but without collusion men are supposed to have organised economic life with the primary and secondary division of labour, the use of capital, etc., developed to the point familiar in present‐day America. publisher has elected to have a "zero" moving wall, so their current
Now, owing to the difficulty of forecasting, the longer the period of the contract is for the supply of the commodity or service, the less possible, and indeed, the less desirable it is for the person purchasing to specify what the other contracting party is expected to do.
A firm, therefore, consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur.The approach which has just been sketched would appear to offer an advantage in that it is possible to give a scientific meaning to what is meant by saying that a firm gets larger or smaller.
When the direction of resources (within the limits of the contract) becomes dependent on the buyer in this way, that relationship which I term a “firm” may be obtained.We may sum up this section of the argument by saying that the operation of a market costs something and by forming an organisation and allowing some authority (an “entrepreneur”) to direct the resources, certain marketing costs are saved.
It is this right of control or interference, of being entitled to tell the servant when to work (within the hours of service) and when not to work, and what work to do and how to do it (within the terms of such service) which is the dominant characteristic in this relation and marks off the servant from an independent contractor, or from one employed merely to give to his employer the fruits of his labour.
the less likely the entrepreneur is to make mistakes and the smaller the increase in mistakes with an increase in the transactions organised. Why does the entrepreneur not organise one less transaction or one more? It is, of course, as Professor Robbins points out, “related to an outside network of relative prices and costs,”In view of the fact that while economists treat the price mechanism as a co‐ordinating instrument, they also admit the co‐ordinating function of the “entrepreneur,” it is surely important to enquire why co‐ordination is the work of the price mechanism in one case and of the entrepreneur in another. At the margin, the costs of organising within the firm will be equal either to the costs of organising in another firm or to the costs involved in leaving the transaction to be “organised” by the price mechanism.
It is interesting to note that Professor Knight considers that:“the relation between efficiency and size is one of the most serious problems of theory, being, in contrast with the relation for a plant, largely a matter of personality and historical accident rather than of intelligible general principles.
The price mechanism (considered purely from the side of the direction of resources) might be superseded if the relationship which replaced it was desired for its own sake. With human nature as we know it it would be impracticable or very unusual for one man to guarantee to another a definite result of the latter's actions without being given power to direct his work.
Centralisation of this deciding and controlling function is imperative, a process of ‘cephalisation’ is inevitable.”“the system under which the confident and venturesome assume the risk or insure the doubtful and timid by guaranteeing to the latter a specified income in return for an assignment of the actual results….
Ronald Coase wrote only a handful of academic journal articles—nearly every one is a blockbuster. The Nature of the Firm By R. H. COASE ECONOMIC theory has suffered in the past from a failure to state clearly its assumptions. It may well be a matter of indifference to the person supplying the service or commodity which of several courses of action is taken, but not to the purchaser of that service or commodity. Its existence in the world is the direct result of the fact of uncertainty.”These quotations give the essence of Professor Knight's theory. The "moving wall" represents the time period between the last issue
This would be the case, for example, if some people preferred to work under the direction of some other person.
With uncertainty entirely absent, every individual being in possession of perfect knowledge of the situation, there would be no occasion for anything of the nature of responsible management or control of productive activity.
The flow of raw materials and productive services to the consumer would be entirely automatic.”Professor Knight says that we can imagine this adjustment as being “the result of a long process of experimentation worked out by trial‐and‐error methods alone,” while it is not necessary “to imagine every worker doing exactly the right thing at the right time in a sort of ‘pre‐established harmony’ with the work of others.
When we are considering how large a firm will be the principle of marginalism works smoothly.
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