Happy 100th Birthday Ronald Coase

Here are some questions to ponder: Why are there are companies? Why doesn’t everyone work for themselves as independent contractors? Why is it necessary for people to congregate into companies, some small and some very large?

In 1937, Ronald Coase had an answer:

His central insight was that firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. A firm is essentially a device for creating long-term contracts when short-term contracts are too bothersome. But if markets are so inefficient, why don’t firms go on getting bigger for ever? Mr Coase also pointed out that these little planned societies impose transaction costs of their own, which tend to rise as they grow bigger. The proper balance between hierarchies and markets is constantly recalibrated by the forces of competition: entrepreneurs may choose to lower transaction costs by forming firms but giant firms eventually become sluggish and uncompetitive.

Dr. Coase turns 100 tomorrow. He’s also said that he’s been working on his next book.

Here’s a lecture he gave at the University of Chicago Law School in 2003:

Posted by on December 28th, 2010 at 10:11 am


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