The Nature Of The Firm

In a rambling post at the blog The Determined Statist (aka The Incidental Economist), Harold Pollack touches on several topics that ostensibly relate to the work of Ronald Coase, a Nobel Prize winning economist who died recently at the age of 102.

Pollack points out that Coase is widely remembered for two articles: “The Problem of Social Cost” and “The Nature of the Firm.” With respect to the second article, Pollack writes:

Here Coase noted another deceptively simple paradox of the modern market economy. We teach our Econ 101 students that the price mechanism allows a decentralized, miraculously efficient allocation of activities and resources. Under the proper conditions, anyway, the invisible hand is genuinely powerful with no need of further central planning.

Yet we somehow have these organizations called “firms,” whose internal processes more closely resemble command economies than they do the textbook price-driven competitive economy. Just today, Walmart’s publicity materials compare living-wage legislation to state socialism. Yet its managers operate an internal command economy to allocate hundreds of billions of dollars in capital while coordinating the efforts of more than two million employees.

Actually, firms organize themselves in a variety of ways. Some are very bureaucratic and hierarchical while others prefer flatter organizational structures. Yet liberals tend to ignore this variety and often characterize the internal working of a firm as a “command economy” or “central planning,” as we see here in Pollack’s post. Matthew Yglesias of Slate magazine is especially guilty of this practice.

It’s hard to understand this characterization of the firm as anything other than a tactic to generate support for more centralized control of the economy by the government. After all, if upon closer examination, central planning and command economy practices flourish in the private sector on the micro level, then why not by the government?

Of course, the historical evidence of the 20th century teaches us why not. Comparing the organization of individual firms to that of entire economies is like comparing apples to oranges. Yet that doesn’t stop liberals from taking this misleading approach as they strive to place as many people as possible under the control of the central authority.

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