The Nature of the Firm (1937)
R. H. COASE
Economic theory has suffered in the past from a failure to state clearly its assumption.
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 needles 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. For instance, it
is suggested that the use of the word “firm” in economics may be different from the use of
the term by the “plain man.”' Since there is apparently a trend in economic theory towards
starting analysis with the individual firm and not with the industry,2 it is ail the more
necessary not only that a clear definition of the word "firm" should be given but that its
difference from a firm in the "real world," if it aists, should be made clear. Mrs. Robinson
has said that "the two questions to be asked of a set of assumptions in economics are: Are
they tractable? and: Do they correspond with the real world?"3 Though, as Mrs. Robinson
points out, "More often one set will be manageable and the other realistic," yet there may
well be branches of theory where assumptions may be both manageable and realistic. It is
hoped to show in the following paper that a definition of a firm may be obtained which is
not only realistic in that it corresponds to what is meant by a firm in the real world, but is
tractable by two of the most powerful instruments of economic analysis developed by
Marshall, the idea of the margin and that of substitution, together giving the idea of
substitution at the margin.4 Our definition must, of course, "relate to formal relations which
are capable of being conceived exactly."5
I
It is convenient if, in searching for a definition of a firm, we first consider the economic
system as it is normally treated by the economist. Let us consider the des cription of the
公司财务管理economic system given by Sir Arthur Salter6. “The normal economic system works itself.
For its current operation it is under no central control, it needs no central survey. Over the
whole range of human activity and human need, supply is adjusted to demand, and
production to consumption, by a process that is automatic, elastic and responsive.” An
economist thinks of the economic system as being co-ordinated by the price mechanism
and society becomes not an organization but an organism.7 The economic system “works
itself. This does not mean that there is no planning by individuals. These exercise foresight
and choose between alternatives. This is necessarily so if there is to be order in the system
But this theory assumes that the direction of resources is dependent directly on the price
The Nature of the Firm (1
937) R. H. COASE
2
mechanism. Indeed, it is often considered to be an objection to economic planning that it
merely tries to do what is already done by the price mechanism.8 Sir Arthur Salter's
des cription, however, gives a very incomplete picture of our economic system. Within a
firm, the des cription does not fit at all. For instance, in economic theory we find that the
allocation of factors of production between different uses is determined by the price
mechanism. The price of factor A becomes higher in X than in Y. As a result, A moves from
Y to X until the difference between the prices in X and Y, except if 50 far as it compensates
for other differential advantages, disappears. Yet in the real world, we find that there are
时光飞逝的短句唯美many areas where this does not apply. If a workman moves from department Y to
department X, he does not go because of a change in relative prices, but because he is
ordered to do 50. Those who object to economic planning on the grounds that the problem
is solved by price movements can be answered by pointing out that there is planning within
our economic system which is quite different from the individual planning mentioned above
and which is akin to what is normally called economic planning. The example given above
is typical of a large sphere in our modem economic system. 0f course, this fact has not been
ignored by economists. Marshall introduces organization as a fourth factor of production;
J.B. Clark gives the co-ordinating function to the entrepreneur; Professor Knight introduces
managers who co-ordinate. As D. H. Robertson points out, we find "islands of conscious
power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of
buttermilk.”9 But in view of the fact that it is usually argued that co-ordination will be done
by the price mechanism, why is such organization necessary? Why are there these "islands
of conscious power"? Outside the firm, price movements direct production, which is coordinated
through a series of exchange transactions on the market. Within a firm, these
markets transactions are eliminated and in place of the complicated market structure with
exchange transactions is substituted the entrepreneurco-ordinator, who directs production.10
It is clear that these are alternative methods of co-ordinating production. Yet, having
regard to the fact that if production is regulated by price movements, production could be
carried on without any organization at all, well might we ask, why is there any
organization?
0f course, the degree to which the price mechanism is superseded varies greatly. In a
department store, the allocation of the different sections to the various locations in the
building may be done by the controlling authority or it may be the result of competitive
price bidding for space. In the Lancashire cotton industry, a weaver can rent power and
shop-ro
om and can obtain looms and yarn on credit.11
碧生源减肥茶广告语This co-ordination of the various factors of production is, however, normally carried out
without the intervention of the price mechanism. As is evident, the amount of “vertical”
integration, involving as it does the supersession of the price mechanism, varies greatly
The Nature of the Firm (1937) R. H. COASE
3
from industry to industry and from firm to firm.
It can, I think, be assumed that the distinguishing mark of the firm is the supersession of the
price mechanism. It is, of course, as Professor Robbins points out, “related to an outside
network of relative prices and costs,”
12 but it is important to discover the exact nature of
this relationship. This distinction between the allocation of resources in a firm and the
allocation in the economic system has been very vividly described by Mr. Maurice Dobb
when discussing Adam Smith's conception of the capitalist: “It began to be seen that there
was something more important than the relations inside each factory or unit captained by
an undertaker; there were the relations of the undertaker with the rest of the economic
world outside his the undertaker busies himself with the division of
labour inside each firm and he plans and organises consciously,” but “he is related to the
much larger economic specialisation, of which he himself is merely one specialised unit.
Here, he plays his part as a single ceIl in a larger organism, mainly unconscious of the wider
rle he fills.”13
In view of the fact that while economists treat the price mechanism as a coordinating
instrument, the? also admit the co-ordinating function of the “entrepreneur,” it is surely
important to enquire why co-ordination is the work of the price mechanism in one case and
of the entrepreneur in another. The purpose of this paper is to bridge what appears to be a
gap in economic theory between the assumption (made for some purposes) that resources
are allocated by means of the price mechanism and the assumption (made for other
purposes) that this allocation is dependent on the entrepreneur-co-ordinator. We have to
explain the basis on which, in practice, this choice between alternatives is effected.14
II
Our task is to attempt to discover why a firm emerges at ah in a specialized exchange
economy. The price mechanism (considered purely from the side of the direction of
resources) might be superseded if the relationship which replaced it was desired for its own
sake. This would be the case, for example, if some people preferred to work under the
世界上牙齿最多的动物direction of some other person. Such individuals would accept less in order to work under
someone, and firms would arise naturally from this. But it would appear that this cannot be
a very important reason, for it would rather seem that the opposite tendency is operating if
one judges from the stress
normally laid on the advantage of “being one's own master;”15 0f
course, if the desire was not to be controlled but to control, to exercise power over others,
then people might be willing to give Up something in order to direct others; that is, they
would be willing to pay others more than they could get under the price mechanism in order
The Nature of the Firm (1937) R. H. COASE
4
记忆宫殿记忆法to be able to direct them. But this implies that those who direct pay in order to be able to do
this and are not paid to direct, which is clearly not true in the majority of cases.16 Firms
might also exist if purchasers preferred commodities which are produced by firms to those
not 50 produced; but even in spheres where one would expect such preferences (if they
exist) to be of negligible importance, firms are to be found in the real world.17 Therefore
there must be other elements involved.
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. The most obvious cost of “organizing” production through
the price mechanism is that of discovering what the relevant prices are.18 This cost may be
reduced but it will not be eliminated by the emergence of specialists who will sell this
information. The costs of negotiating and concluding a separate contract for each exchange
transaction which takes place on a market must also be taken into account.19 Again, in
certain markets, e.g., produce ex-changes, a technique is devised for minimizing these
contract costs; but they are not eliminated. It is true that contracts are not eliminated when
there is a firm but they are 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 co-operating
within the firm, as would be necessary, of course, if this co-operation were as a direct result
of the working of the price mechanism. For this series of contracts is substituted one. At
this stage, it is important to note the character of the contract into which a factor enters
that is employed within a firm. The contract is one whereby the factor, for a certain
remuneration (which may be fixed or fluctuating), agrees to obey the directions of an
entrepreneur within certain limits.20 The essence of the contract is that it should only state
the limits to the powers of the entrepreneur; Within these limits, he can therefore direct
the other factors of production.
There are, however, other disadvantages - or costs - of using the price mechanism. It may
be desired to make a long-term contract for the supply of some article or service. This may
be due to the fact that if one contract is made for a longer period, instead of several shorter
ones, then certain costs of making each contract will be avoided. Or, owing to the risk
attitude of the people concerned, they may prefer to make a long r
适合雨天的心情的句子ather than a short-term
contract. Now, owing to the difficulty of forecasting, the longer the period of the contract
is for the supply of the commodity or service, the less possible, and indeed, the less desirable
it is for the person purchasing to specify what the other contracting party is expected to
do. It may well be a matter of indifference to the person supplying the service or commodity
which of several courses of action is taken, but not to the purchaser of that service
or commodity. But the purchaser will not know which of these several courses he will want
the supplier to take. Therefore, the service which is being provided is expressed in general
terms, the exact details being left until a later date. All that is stated in the contract is the
The Nature of the Firm (1937) R. H. COASE
5
limits to what the persons supplying the commodity or service is expected to do. The
details of what the supplier is expected to do is not stated in the contract but is decided later
by the purchaser. When the direction of resources (within the limits of the contract)
becomes dependent on the buyer in this way, that relationship which I term a "firm" may be
obtained.21 A firm is likely therefore to emerge in those cases where a very short-term
contract would be unsatisfactory. It is obviously of more importance in the case of services
-labor-than it is in the case of the buying of commodities. In the case of commodities, the
main items can be stated in advance and the details which will be decided later will be of
minor significance.
We may sum Up this section of the argument by saying that the operation of a market
costs something and by forming an organization and allowing some authority (an
"entrepreneur") to direct the resources, certain marketing costs are saved. The entrepreneur
has to carry out his function at less cost, taking into account the fact that he may get
factors of production at a lower price than the market transactions which he supersedes,
because it is always possible to revert to the open market if he fails to do this.
The question of uncertainty is one which is often considered to be very relevant to the
study of the equilibrium of the firm. It seems improbable that a firm would emerge without
the existence of uncertainty. But those, for instance, Professor Knight, who make the
mode of payment the distinguishing mark of the firm - fixed incomes being guaranteed to
some of those engaged in production by a person who takes the residual, and fluctuating,
income-would appear to be introducing a point which is irrelevant to the problem we are
considering. One entrepreneur may sell his services to another for a certain sum of money,
while the payment to his employees may be mainly or wholly a share in profits.22 The
significant question would appear to be why the allocation of resources is not done directly
by the price mechanism.
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