June 16, 2004The Theory of the Firm (lecture 13 of 32)

These notes are from the lecture The Theory of the Firm, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Klein.

Limits to Neoclassical Approach

Little insight into what firms are, what they do, why they're important. Little insight into practical managerial and policy issues:

How firms should be: Organized. Structured. Financed. Governed.Effect of regulation

Aspects of the "Theory of the Firm

Theory of production:

Production structure. Factor pricing. Entrepreneurs' costs.

Theory of firm proper:

Existence. Boundaries. Organization

Production and Cost

Complexity of Production:

Entrepreneurship. Economic calculation.

Austrian Imputation Theory:

Classical view: costs determine prices. Austrian view: prices determine costs. Marginalist productivity theory: factor prices tend to be equal to their discounted marginal revenue (value) products.

Nature of the Firm

Neoclassical view: firm as aproduction function ("black box").

Nexus-of-contracts view: firm as a legal fiction.

Knowledge-based ("capabilities") view: firm as a stock of knowledge.

Coasian view: firm as ownership of assets.

Problems:

Neoclassical -- only considers manager, very limited. Nexus-of-contracts -- sense in which that's true, and relationship between employers and employees. Response to Marxist constual of the firm as a power relationship. However, the relationship and contracts differ from other contracts: Less specific. Entering into relationship where, within defined limits, you do at your boss says. Contracts qualitatively different from normal contracts.Knowledge-based view -- it is true, but tautological; doesn't say uch about how the firm's total knowledge is utilized. Coasian -- firm is entrepreneur plus alienable assets he uses. ther individuals employed by the firm are not really a part of the firm, but imply individually contracting with the firm.

Coasian Framework

Firm and market as alternative resource-allocation mechanism.

External and internal transacion costs.

Optimal boundary of the firm -- determined by cost of market transaction.

Further development:

Asset specificity, and the holdup problem. Markets, hierarchies, and hybrids. Authority and delegation.

Compatable with Austrian Economics?

Wthin the firm, the price-mechanism is suppressed. It is not necessary to have a market within the firm. So-long as there is still a market outside of the firm. Internalize transactions until marginal cost of internalization equals the marginal cost of externalization. Austrian theory is very concerned with property and who owns what.

Rothbard on Limits of the Firm

Conventional explanation.

Incremental limits: nature of decision-making (ownership).

[incomplete, help wanted]

Austrian Objections to Coasian Framework

Ignores competition.

Says price-mechanism is suppressed (bad phraseology).

Insufficienty "dynamic".

[incomplete, help wanted]

Summary

Coasian framework: ownership and authority, which is essential to Misean calculation.

Entrepreneurship & economic calculation:

Factor-pricing. Firm boundaries and internal organization.

Policy implications: Need for free-market prices. "Freedom to fail".

Posted by Heinrich at June 16, 2004 11:59 PM

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Comments

The theory of the firm seems to be similar, even identical, to panarchist theory. Any one familiar with this comparison or with panarchism itself?