Coase, Theory of the Firm, Schumpeter, Kreps, Viner, Marshall Eric Rasmusen, [e-mail]

1
Coase, Theory of the Firm, Schumpeter, Kreps,
Viner, Marshall Eric Rasmusen,
erasmuse_at_Indiana.edu

G604, History of Thought, size of firms, march
23, 2006

2

• Classics Organization     R. H. Coase (1937)
  "The Nature of the Firm," Economica, New Series,
  4, 16 386-405 (November 1937)
•     Jacob Viner (1931) "Cost Curves and Supply
  Curves," Zeitschrift fur Nationalokonomie, 3
  23-46 (1931)
•     Kreps, David, A Course in Microeconomic
  Theory, pp. 274-279 (Princeton University Press,
  1990)
•     Joseph A. Schumpeter. "The Fundamental
  Problem of Economic Development," The Theory of
  Economic Development, tr. Redvers Opie, pp. 57-94
  (Oxford Oxford University Press, 1934, 1st
  edition in German, 1911).
•     Alfred Marshall, Principles of Economics,
  8th edition, 1920 (1st edition, 1890),
  "Industrial Organization, Continued. Business
  Management,"Book IV, Chapter 12.

3
Marshall (1890/1920)

• INDUSTRIAL ORGANIZATION, CONTINUED. BUSINESS
  MANAGEMENT

we have to inquire how it occurs that, though in
manufacturing at least nearly every individual
business, so long as it is well managed, tends to
become stronger the larger it has grown and
though primâ facie we might therefore expect to
see large firms driving their smaller rivals
completely out of many branches of industry, yet
they do not in fact do so.
4
Industrial Organization

• In remote villages in almost every county of
  England agents of large undertakers come round to
  give out to the cottagers partially prepared
  materials for goods of all sorts, but especially
  clothes such as shirts and collars and gloves
  and take back with them the finished goods.
  There is a continual contest between the factory
  and the domestic system, now one gaining ground
  and now the other

5
Managers and Entrepreneurs

• the manufacturer who makes goods not to meet
  special orders but for the general market, must,
  in his first rôle as merchant and organizer of
  production, have a thorough knowledge of things
  in his own trade. He must have the power of
  forecasting the broad movements of production and
  consumption, of seeing where there is an
  opportunity for supplying a new commodity that
  will meet a real want or improving the plan of
  producing an old commodity.
• But secondly in this rôle of employer he
  must be a natural leader of men. He must have a
  power of first choosing his assistants rightly
  and then trusting them fully of interesting them
  in the business and of getting them to trust him,
  so as to bring out whatever enterprise and power
  of origination there is in them while he himself
  exercises a general control over everything, and
  preserves order and unity in the main plan of the
  business.

6
The Education of Children

• He himself was probably brought up by parents
  of strong earnest character and was educated by
  their personal influence and by struggle with
  difficulties in early life. But his children, at
  all events if they were born after he became
  rich, and in any case his grandchildren, are
  perhaps left a good deal to the care of domestic
  servants who are not of the same strong fibre as
  the parents by whose influence he was educated.

7
Business Morality

• It is a strong proof of the marvellous growth in
  recent times of a spirit of honesty and
  uprightness in commercial matters, that the
  leading officers of great public companies yield
  as little as they do to the vast temptations to
  fraud which lie in their way.
• If they showed an eagerness to avail themselves
  of opportunities for wrong-doing at all
  approaching that of which we read in the
  commercial history of earlier civilization, their
  wrong uses of the trusts imposed in them would
  have been on so great a scale as to prevent the
  development of this democratic form of business.
• There is every reason to hope that the progress
  of trade morality will continue, aided in the
  future as it has been in the past, by a
  diminution of trade secrecy and by increased
  publicity in every form

8
Moral Hazard and Adverse Selection

• under the scheme of Profit-Sharing, a private
  firm while retaining the unfettered management of
  its business, pays its employees the full market
  rate of wages, whether by Time or Piece-work, and
  agrees in addition to divide among them a certain
  share of any profits that may be made above a
  fixed minimum
• it being hoped that the firm will find a
  material as well as a moral reward in the
  diminution of friction, in the increased
  willingness of its employees to go out of their
  way to do little things that may be of great
  benefit comparatively to the firm,
• and lastly in attracting to itself workers of
  more than average ability and industry

9
Schumpeter (1911) The Entrepreneur

• When he swims with the stream in the circular
  flow which is familiar to him, he swims against
  the stream if he wishes to change the channel.
  What was formerly a help becomes a hindrance.
  What was a familiar datum becomes an unknown.
  Where the boundaries of routine stop, many people
  can go no further, and the rest can only do so in
  a highly variable manner.
• ...every man would have to be a giant of wisdom
  and will, if he had in every case to create anew
  all the rules by which he guides his everyday
  conduct.
• In the breast of one who wishes to do something
  new, the forces of habit rise up and bear witness
  against the embryonic project.
• It is no part of his function to find or
  create new possibilities. They are always
  present, abundantly accumulated by all sorts of
  people. Often they are also generally known and
  being discussed by scientific or literary
  writers.
• For its success, keenness and vigor are not
  more essential than a certain narrowness which
  seizes the immediate chance and nothing else.

10
5 Types of Innovation

• 1. new goods (product innovation)
• 2. new methods of production (process innovation)
• 3. new markets
• 4. new sources of inputs
• 5. new organization

11
Coase (1937)
12
Transaction Costs
13
Using Marginalism
14
(No Transcript)
15

• A link to the course website
• http//www.rasmusen.org/g604/0.g604.htm