Another Head-Scratcher

I apologize in advance if this is a case of reading too much into something. But, upon reviewing an intermediate micro textbook, I found the following perplexing,

…[S]top for a minute and ask yourself whether we really need firms to produce the goods and services that we consume regularly. This was the question raised by Ronald Coase in a famous 1937 article: If markets work so well in allocating resources, why do we need firms?

— Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics (Upper Saddle River: Pearson, 2013), p. 203.

Actually, it may be an issue of not reading enough into it (especially considering it within the context of the paper it cites). But, doesn’t that question, by itself, seem odd? Firms are part of the market, and therefore part of that process of allocation. Statements like that are similar to the one made by Stiglitz in an excerpt I quoted yesterday. The process of resource allocation doesn’t exist independent of the institutions that give rise to it.

Of course, if you continue down the page of the textbook I’m excerpting, the authors explain the basic advantage of the firm very well: coordination.


  • g

    Not so perplexing… its a necessary question, the answer to which explains the existence of institutions themselves. Its asking why don’t individual workers and consumers contract arrangements on an individual basis viz a viz the rest of the market process rather than forming supra-individual entities that are centrally coordinated by an entrepreneur. Coase’s answer is transaction costs of course.. or more fundamentally, uncertainty, that makes very short term contracts unsatisfactory.

    • JCatalan

      Right, I get that. My point that it’s a bit absurd to act as if firms are independent of the market, and ask “if markets are so great, why do we need firms.” Firms are part of the market, and therefore contribute towards the efficiency of resource allocation; i.e. allocation as we know it isn’t the same without the firm. In other words, it’s not that we couldn’t ask what purpose firms have; it’s to assume that we can talk about market allocation in the same way with or without the firm.

      • g

        Well the point is firms don’t have to be part of the market process.. so why are they? ..its perfectly possible to have a market between two people that produces the same theoretical outcomes as when a firm is involved… firms aren’t a neccesary part of ‘the market process’.. Its a neoclassical, methodologically individualist, question that abstacts away from an institutional view of the market.. the basic neoclassical theory has no place for the firm.. people will just use very short term contracts. Coase just reconciled the theory with the real world.

        • JCatalan

          When Austrians talk about the market process, they’re talking about the real world. We can abstract from various conditions and argue that we can achieve the same allocation of resources through a barter economy between individuals, but this isn’t the market process of resource allocation that Austrians usually talk about. Maybe that explains part of the “confusion.” What Coase’s theory of the firm really tells me is that you do need certain institutions to allocate resources in a certain way, because without them you wouldn’t be able to overcome the difficulties that exist in the real world.

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