Economics Dictionary of ArgumentsHome
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| Firms: Firms in economics are organizations that produce goods or services to sell for profit. They combine inputs like labor, capital, and raw materials to create outputs. Firms make decisions about production, pricing, and investment, and they play a central role in allocating resources within a market economy. See also Entrepreneurship, Production, Production theory, Markets, Economy._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Ronald Coase on Firms - Dictionary of Arguments
Kiesling I 9 Firms/Coase/Kiesling: (…) why do firms exist? Coase observed the contrast between markets, where individual actions and decisions are coordinated by the decentralized price system, and firms, where actions and decisions are coordinated by internal hierarchy and central planning. If spot markets using the price system to coordinate production can maximize economic welfare, why is not all production done through spot market transactions? Kiesling I 10 These two options present alternative institutional structures for the organization of production. >Firms/Neoclassical economics. Firms/Coase: (…) [Firms] exist in order to address - specifically, to keep to a minimum - transaction costs. Coase’s answer unleashed a stream of influential research that is still generating new ideas today (although he did not use that phrase in his 1937 article, calling them “marketing costs” instead). Coase defined transaction costs as “the cost of using the price system” (1937(1): 390). A more general definition is the cost of establishing and maintaining property rights (Allen 1999(2): 898). As examples of transaction costs, Coase included the task of discovering what market prices are and the cost of negotiating a separate contract for each transaction. Institutions emerge to reduce those costs, but they can never be eliminated entirely. Firms still use contracts, but they are of longer duration and of a different nature: Kiesling I 11 „It is true that contracts are not eliminated when there is a firm but they are greatly reduced. A factor of production (or the owner thereof) does not have to make a series of contracts with the factors with whom he is co-operating within the firm, as would be necessary, of course, if this co-operation were as a direct result of the working of the price mechanism. For this series of contracts is substituted one.“ (1937(1): 391) Organizing and using managerial hierarchy within the firm has costs, so the decision of what transactions to perform internally involves weighing the tradeoff between transaction costs and organization costs. That was Coase’s fundamental insight. >Transaction costs/Coase. Contracts/employment/time: Consider how costly it would be to have to settle on a new contract each day for each worker who comes to the shop, and for that contract to specify the tasks to be performed. Longer-term employment contracts that make the employee part of the firm typically economize on transaction costs, enabling the shop owners to schedule and plan production and the workers to schedule tasks based on more stable expectations and routines. Longer-term employment contracts also encourage firms to invest in worker training, making them more productive. But shop owners may decide not to bring all of the relevant transactions into the firm. Kiesling I 12 The firm, simply responding to profit incentives, tends to discover and implement the lowest transaction costs solution, (…). The firms contract with others for functions that are cheaper to accomplish through markets than by organizing internally. This paradigm may seem basic, but it has sparked a wide range of research and created new fields of inquiry in economics, management, and political science. If a firm is successful and faces sufficient demand to expand, it can expand by increasing the amount of its production, by expanding into related product lines (product differentiation), or by merging with a competitor (horizontal integration). It can also integrate backward by producing its own inputs, or forward into more finished goods and marketing (vertical integration). Coase argued that the comparison between transaction costs and organization costs determine the size and boundaries of the firm as well as the extent of vertical integration. „[A] firm will tend to expand until the costs of organising an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange on the open market or the costs of organising in another firm.“ (1937(1): 395) >Specialization/Adam Smith. 1. Coase, Ronald H. (1937). The Nature of the Firm. Economica 4, 16. 386-405. 2. Allen, Douglas W. (1999). Transaction Costs. Encyclopedia of Law and Economics._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Coase, Ronald Kiesling I L. Lynne Kiesling The Essential Ronald Coase Vancouver: Fraser Institute. 2021 |
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