Coase ON THE Nature OF THE FIRM PDF

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COASE ON THE NATURE OF THE FIRM: Tutorial Exercises:   NB: Questions 1-6 are short questions. Each of these questions can be adequately addressed in a paragraph or two. You should write answers to each of these short questions and hand them in at the start of the tutorial. These sheets will not be returned to you but kept by me as a record of attendance and preparation, so it is vital that you keep your own copies of your answers for revision purposes. Question 7 is an example of an essay type question, which should be thought about, and you should be prepared to discuss it at the tutorial. However, there is no need to prepare a full written answer to this essay question at this stage. Short Questions:   1. Coase suggests that if we take conventional economics seriously then we would not expect to see firms emerge at all. Explain. New institutional economics (NIE): Tries to explain why certain kinds of transaction take place take place within certain kinds of institutional arrangements/governance structures.   NIE tries to explain the existence of different kinds of institution by reference to idea that people undertake transactions within institutional formats that minimise TCs of carrying out those transactions. The old institutionalists were concerned in the main with describing institutions rather than with analyzing them, that’s basically the difference. " " Economic theory has suffered in the past from a failure to state clearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected. This examination is, however, essential not only to prevent the misunderstanding and needless controversy which arise from a lack of knowledge of the assumptions on which a theory is based, but also because of the extreme importance for economics of good judgment in choosing between rival sets of assumptions. "   2.

What kinds of costs does Coase associate with market type coordination?

But if people specialise, need to coordinate their activities. The efforts of workers who carry out only a part of the production process will be wasted unless (i) each receives the right semi-finished products from workers earlier in the process, and (ii) workers later in the process take what they have produced and turn it into a finished product. Transactions costs: the costs incurred in carrying out a transaction.

A transaction: the transfer of a good or services from one individual to another across a technologically separable interface. Coase's observation:There   are costs to using the price mechanism for coordinating economic activity. "transaction costs" or "marketing costs"! !

Sources of transaction costs:! costs of learning prices! •

" Audio recording started: 12:16 Wednesday, 2 October 2019" " " cost of negotiating contracts! • cost of writing contracts, etc.! • ! The costs of using the price mechanism is to carry out transactions include:   search and information costs of finding a trading partner and of learning what market prices • actually are.   bargaining and decision cost arising from need to negotiate contracts, etc. •   policing and enforcement costs of monitoring and enforcing compliance with terms of a • contract. ! ! This is a transaction-based theory. If it is more efficient for a transaction to be conducted under alternative institutions, price mechanism will not be used. Coordination by fiat (a formal authorization).! This is an important insight that has been applied toward explaining many institutions other than firms. Institutions arise in order to economize on transaction cost (Williamson, etc.) For example, bank clearing houses, commodity markets, vertical integration, etc.! !   3.

How can the concept of transaction costs be used to account for the existence and size of the firm?

For Coase, key feature of the firm is its ‘supersession of the price mechanism’, i.e. fact that in firms resources are allocated by command rather than through operation of the price mechanism:   Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transmission is substituted the entrepreneur-coordinator, who directs production. (p. 388)   Firms are ‘islands of conscious power in an ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk’ (p. 388). Within a firm, market transactions coordinated by relative price signals are replaced by planned behaviour determined by the firms’ entrepreneurowner. For Coase, firms exist because it is costly to carry out transactions using the price mechanism:   The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism … It is true that contracts are not eliminated when there is a firm but

they have been greatly reduced. A factor of production (or the owner thereof) does not have to make a series of contracts with the factors with whom he is cooperating within the firm, as would be necessary, of course, if this cooperation were as a direct result of the working of the price mechanism. (Coase, pp. 390-91.)

  4.

What, according to Coase, are the essential characteristics of the firm?

! Observations:! Firms transform inputs into outputs...but so do individuals.! • Firms are characterized by employers and employees..but in a way so are market • transactions.! Firms are legal entities...but this is an uninteresting definition that we won't address.! • ! Firms exist to economize on the cost of coordinating economic activity.! Firms are characterized by the absence of the price mechanism.!   5.

Coase’s first book, published in 1950, was an extended critique of UK broadcasting policy and in particular of the role of the BBC. Given Coase’s arguments in his article ‘The Nature of the Firm’ why do you think he was so critical of the BBC and do you think he would still be critical of the BBC as it exists today?

Was agsint artifical imposition that doesn’t arise from competition BBC today: Coase = thinks that although its not a monopoly anymore, it is still problematic e.g TV license system - too high a cost for consumers Against Coase - sky is a much bigger player than the BBC - now - many internet avenues - difficult to compete It is necessary bc the criteria coase says about the judegement of the bBC is incorrect bc he is concerned with efficiency as his main concern, but the BBC is not about efficency, the purpose of the BBC is about giving impatial news Coase - what is public service? Not given consumers what they want but what the bbc wants to showcase A major attraction of this to Coase himself was the avoidance of authoritarian power even if the process of administrative allocation was robust. In 1950 Coase had written a scathing criticism of the BBC’s ‘unified’ broadcasting policy under Lord Reith. One can hardly suppose there has ever been a less corrupt public servant than Reith and his commitment to BBC content being of an improving nature was adamantine. A cogent defence of Reith, though it is not easily applied to the contemporary BBC, can be mounted. But ‘the main disadvantage’ of Reithian determination of policy, Coase told us, was that in order to defend it ‘it is necessary first to adopt a totalitarian philosophy or at any rate something verging on it’.[1]"" "# " [1] RH Coase, British Broadcasting (1950) 191. Keats - L1 - Reading C

in his study of the BBC monopoly Coase considers the view that the BBC monopoly was required in order to raise the standards of tastes:"" The really important argument has been that a monopoly was required in order that there should be a unified programme policy. This argument is powerful and on its assumptions it is no doubt logical. Its main disadvantage is that to accept its assumptions it is necessary first to adopt a totalitarian philosophy or at any rate something verging on it. (1950: 191)""

6.

Bbc = MONOPLY - profiting few "  "

7.

What limitations do you associate with Coase’s account of the nature of the firm?

Coase depends too much on rationality Failure to provide operational framework for prediction - massively problematic Milton freedman - realism of our assumptions are not important - as long as the outcomes are generated - this is built on an incorrect understanding of science Failure to differentiate between firms - tiny one man enterprises, MNCs etc As long as there is competition at the level of instiutions, then you will gravitate towards an optimal outcome - this is vague - and is a critisim for Williamson ! Under Coase's definition of the firm, do traveling salesmen who sell the products of only one • firm and get paid solely on commission count as employees? Or are they independent contractors working for themselves?! " " How about temps (secretaries and receptionists)? Do they work for a firm? Which one?! • Movie theater chains and distributors are often under the same firm name (under the legal • definition). However, when movies come out, they are offered to exhibitors on a nondiscriminatory basis. United Artists theaters must bid for the right to show motion pictures distributed by United Artists. By Coase, are they the same firm?! In the Soviet Union, capital was often allocated across firms by governmental direction. By • Coase, were the individual productive enterprises firms?! How about the different divisions of Bell which used transfer prices to allocate goods? Does • it matter if the price was a market price or set internally?! Essay Questions   8. Outline Coase’s account of the nature of the firm and evaluate the claim that its weaknesses relate to what he inherits from conventional economics     Essential Reading:  

1.

Coase, R. H , 1937, ‘The Nature of the Firm’, Economica. In Initial Readings Pack. Reprinted in Buckley, P, J and Michie, J, eds, Firms, Organisations and Contracts, Oxford University Press, Oxford. Also reprinted in Coase, R. H. 1988, The Firm, The Market and the Law, University of Chicago Press, Chicago. An abridged version reprinted in Putterman, L. and Kroszner, R, eds, 1996, The Economic Nature of the Firm: A Reader, Cambridge University Press, Cambridge. Available in Keats as Lecture1Reading A

    Further Reading:   2. Dunn, M. H, 1992, ‘Firms, markets and hierarchies: a critical appraisal of Ronald Coase’s contribution to the explanation of the ‘Nature of the Firm’, Ordo, Vol 43, pp 193-204. Available at: www.uni-potsdam.de/fileadmin/projects/wirtschaftspolitik/assests/ Publikationen_Malcolm/Firms_Markets_and_Hierarchies.pdf. 3. Pratten, S, 2016, ‘Coase on the Nature and Assessment of Social Institutions’ in C. Menard and E. Bertrand, The Elgar Companion to Ronald H Coase. Edward Elgar, Cheltenham. Available in Keats as Lecture1Reading C.

Sources: https://www.kellogg.northwestern.edu/faculty/hubbard/htm/research/ec174/ lectures/3coase.htm" " https://www.coase.org/coaseinterview.htm" " https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0335.1937.tb00002.x"...