Ronald Coase (1937), the Nature of the Firm, Economica 4

Topic: Ronald Coase (1937), The Nature of the Firm, Economica 4

What is the objective of the author?

The purpose of Coase's article "The Nature of the Firm" was concieved to provide explanation based on economic theory that answered two fundemental questions: Why do firms exist, and why is each firm a certain size?

Good: better though is "The purpose of this paper is to bridge what appears to be a gap in economic theory between the assumption (made for some purposes) that resources are allocated by means of the price mechanism and the assumption (made for other purposes) that this allocation is dependent on the entrepreneur co-ordinator."

He is looking for a bridge in theory

How does he propose to achieve his objective?

Coase essentially undertook an emprical study off the back of an awarded 'Cassel' scholarship for the academic year 1931 - 1932. He travelled to the US to study vertical and horizontal integration in industry, held discussions with lecturers, colleagues and those in business and industry. On the basis of informed collaboration, Coase proposes to bridge the gap in economic theory between the assumptions made that resources are allocated by means of price mechanism, and that the allocation is dependent on the entrepreneur; whilst identifing why a firm emerges in a specialised exchange economy.

This bit of the log is all about method, and his method is by question of possible theory, and rejection: thus, his alternative "bridges": the price mechanism might be superseded if factors wanted to work under the direction of some other person: or if people so wanted to direct others, as to pay them more than they would get under the price mechanism: or if consumers preferred for some reason commodities not produced under the price mechanism: these, he proposes as distortions on the supply or the demand side and finds them unsatisfactory explanations

What did he actually do?

As part of his unconscious and unrealised empirical study, he visited the US on scholarship as a UK-based, Socialist, undergrad who met with the presidential candidate of Socialist Party, Norman Thomas, Ford , General Motors, General Electric, universities and other businesses and industry. Despite negative economist statements on the Russian economy Coase deduced that big firms in the US were run well so why not in Russia? He developed a theory that economic integration is the result of the limitations of small-scale production and is the joining up of small-scale producers in different industries to reap the advantages of larger-scale production. He conceived the article The Nature of the Firm providing fundamental insight into why firms exist. Citied 169 in academic journals between 1966 - 1980 it contributed towards his Nobel Prize in Economics in 1991.

All true but gets no rewards here. I would normally search google to see if it is a direct quote and if it was, stop reading immediately. It looks like a quote from his article on his 1937 article?

He actually offered a bridge within the existing language of economics: the "reason why it is profitable to establish a firm would seem to be that there is a cost in using the price mechanism" to avoid which "the factor for a certain remuneration (which may be fixed or fluctuating) agrees to obey the directions of an entrepreneur within certain limits" This he gives as the rationale for the existence of the firm, and it is within existing open market theory

Note that he dealt with the factor labour: but what he said could be extended to the other factors as well. And note that he might have said "there is a cost in finding the cost of the factor" - when he used the word price he was referring to the price charged by the factor. I mention this because he does not then look at the potential for reducing the price of the good created by the entrepreneur co-ordinator using the factor.

This is important when we come to Porter: it is easy to think that the low cost firm is also the low price firm: but Porter is looking to the potential to create rents from a position in the industry - and what better than lowest cost at a given price? Or even better lowest cost allowing the firm to charge a high price so as to keep the smaller players alive? That is the rent creating position. Remember this when we come to look at Sultan

What did he find out?

The purpose of Coase's investigation was to disprove that if there was if there was atomistic competition (where every transaction involving the use of another's labour, material or money was the subject of a market transaction) then there would be no need for an organisation. Coase presents structural analysis based on the principals of marginal analysis as to why a populated economy of business firms emerge instead of self-employed independents captialising on contracting their services to one another. He addresses the rationale in the costs of conducting market transactions, the rationale behind price mechanisms, market conditions and factors of production.

In his self-directed research and investigation into the problem of integration (vertical and horizontal), operational integration, transaction costs, cost curves and resource allocation; Coarse discovered many specialist firms operating within what was thought of as a 'single industry'.

He identified

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