These notes are from the lecture The Theory of the Firm, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Klein.
Limits to Neoclassical Approach
- Little insight into what firms are, what they do, why they’re important.
- Little insight into practical managerial and policy issues:
- How firms should be:
- Organized.
- Structured.
- Financed.
- Governed.
- Organized.
- Effect of regulation
- How firms should be:
Aspects of the “Theory of the Firm
- Theory of production:
- Production structure.
- Factor pricing.
- Entrepreneurs’ costs.
- Production structure.
- Theory of firm proper:
- Existence.
- Boundaries.
- Organization
- Existence.
Production and Cost
- Complexity of Production:
- Entrepreneurship.
- Economic calculation.
- Entrepreneurship.
- Austrian Imputation Theory:
- Classical view: costs determine prices.
- Austrian view: prices determine costs.
- Marginalist productivity theory: factor prices tend to be equal to their discounted marginal revenue (value) products.
- Classical view: costs determine prices.
Nature of the Firm
- Neoclassical view: firm as aproduction function (“black box”).
- Nexus-of-contracts view: firm as a legal fiction.
- Knowledge-based (“capabilities”) view: firm as a stock of knowledge.
- Coasian view: firm as ownership of assets.
- Problems:
- Neoclassical — only considers manager, very limited.
- Nexus-of-contracts — sense in which that’s true, and relationship between employers and employees. Response to Marxist constual of the firm as a power relationship. However, the relationship and contracts differ from other contracts:
- Less specific.
- Entering into relationship where, within defined limits, you do at your boss says.
- Contracts qualitatively different from normal contracts.
- Less specific.
- Knowledge-based view — it is true, but tautological; doesn’t say uch about how the firm’s total knowledge is utilized.
- Coasian — firm is entrepreneur plus alienable assets he uses. ther individuals employed by the firm are not really a part of the firm, but imply individually contracting with the firm.
- Neoclassical — only considers manager, very limited.
Coasian Framework
- Firm and market as alternative resource-allocation mechanism.
- External and internal transacion costs.
- Optimal boundary of the firm — determined by cost of market transaction.
- Further development:
- Asset specificity, and the holdup problem.
- Markets, hierarchies, and hybrids.
- Authority and delegation.
- Asset specificity, and the holdup problem.
- Compatable with Austrian Economics?
- Wthin the firm, the price-mechanism is suppressed.
- It is not necessary to have a market within the firm.
- So-long as there is still a market outside of the firm.
- Internalize transactions until marginal cost of internalization equals the marginal cost of externalization.
- Austrian theory is very concerned with property and who owns what.
- Wthin the firm, the price-mechanism is suppressed.
Rothbard on Limits of the Firm
- Conventional explanation.
- Incremental limits: nature of decision-making (ownership).
- [incomplete, help wanted]
Austrian Objections to Coasian Framework
- Ignores competition.
- Says price-mechanism is suppressed (bad phraseology).
- Insufficienty “dynamic”.
- [incomplete, help wanted]
Summary
- Coasian framework: ownership and authority, which is essential to Misean calculation.
- Entrepreneurship & economic calculation:
- Factor-pricing.
- Firm boundaries and internal organization.
- Factor-pricing.
- Policy implications:
- Need for free-market prices.
- “Freedom to fail”.
- Need for free-market prices.
{ 1 comment }
The theory of the firm seems to be similar, even identical, to panarchist theory. Any one familiar with this comparison or with panarchism itself?
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