There are numerous economic definitions for the firm. The institutionalist will refer to it as a mechanism where production is not co-ordinated by the market (i.e. a hierarchy that brings multiple stages in production and distribution under common ownership and management), making it distinct from the entrepreneur. Simple question: why does the firm exist?
I'm certain your digging for more, but isn't the simple answer; to avoid or reduce transactions costs associated with using the market.
Yep, just a little more detail. To what extent, for example, should we focus on principal-agent approaches? Should it be more focused on incomplete contracting?
I suppose I don't understand the need to choose. I suppose the former seems less important depending upon which relationship we're looking at. Specifically true for publicly held companies where the goals of ownership and management are misaligned. The latter seems to me (the laymen) to be more directly causal for the existence of the firm.
Basically we're referring to different forms of transaction costs and therefore potentially different knock-on effects. A principal-agent scenario, for example, is arguably more likely to generate inefficiencies (e.g. using economic rents originating from market power to 'pay' for the internal inefficiencies generated by hierarchy)
Here we go again. You ask a question, that you allude to knowing the answer to, but won't provide it. But, you will belittle anyone that doesn't kiss your ring.... Lets see how many fish take the bait. Or, maybe you will provide your answer, no you won't.
Technically you shouldn't be in the thread. The secondary sources that you're reliant on skew a political economic school of thought that hasn't got a coherent theory of the firm. Its a simple point. Orthodox economics struggled to explain why complex organisations, characterised by costly economic planning, exist. Neoclassical economics traditionally focused on economies of scale argument. However, given costless transactions, that doesn't actually make theoretical sense. It only demonstrates possible gains through entrepreneurial co-operation. We'd then be reliant on market power arguments (and a focus therefore on market failure). Shifting away from the naivety of costless transactions does provide a solution, as Anikdote noted. However, then we're in further difficult water as we understand the nature of those transaction costs (e.g. we get unlikely conclusions such as compatibility with the subsequently updated neoclassical approach and Marxist analysis)
I shouldn't be in this thread? You are too focused on the economic anaylsis, and miss the simple point that no one is good at all things. What is the "transaction cost" for someone that is excellent at what they do, but no ability to sell themselves. What is the cost to administer that same person? How many entrepreneurs grow their company into the fortune 500? Gee, wrong skill set. Like I said before, you need to get out more.
You don't know why the firm exists do you? Both of your responses have had zero content, so a simple "yep" will suffice
Like I mentioned previously, incomplete contracting seems to be more directly causal for the existence of the firm. That complete contracting is difficult and expensive is what makes certain market transaction so costly. I don't think we can completely dismiss the economies of scale argument entirely though, as mentioned, vertical integration reduces costs, reducing overhead and therefore efficiency and potentially output. Outsourcing is expensive for many of the reasons discussed, clearly more-so than whatever gains are made by the technical expertise they may have in their field.
Then how come we see so much evidence of principal-agent problems? (e.g. reductions in investment hurdles in order to inefficiently grow). Just a knock-on effect from contracting problems? Certainly can't be dismissed. But its a typically a secondary feature. Chandler, without an understanding of institutionalism, gleaned that by referring to his '3 prongs' of investment (where organisational investments essentially become more important than invention)
Do you mean within the firm our outside of it as a cause for integrating? I suppose I don't see it as an explanation for the existence of the firm because it doesn't really solve the problem, and often creates more now internal principal agent problems, if it fails to solve the problem it's awfully hard to view it as a solution. If it were just a secondary issue, then I'd think we'd see less vertical integration and instead of insourcing we'd see attempts at reducing the costs of contracting.
Do people ever take this clown seriously? I mean, I could understand if he had something worthwhile to say (which he decidedly does not). However, it has been proven in the thread titled Modern Economics, beyond reasonable doubt, that he has absolutely no knowledge of either modern economic theory or how it is applied in practice. His whole schtick consist of posting material from sources based on [outdated & debunked] Marxist analysis. It is bizarre how someone so uneducated can be so delusional about his lack of knowledge.
We know that principal-agent problems are a common problem. That you'd simply go for imperfect contracting then is an interesting choice. Essentially you'd be combing the two (i.e. the existence of the firm is an efficiency reaction to issues such as hold-up, but it then enables the managerial theories to necessarily dominate). Reminds me somewhat of Williamson's heuristic approach where he uses asset specificity to compare agency costs, influence costs and costs from hold-up
