Quote of the Day

"Our definition is, therefore, realistic. Is it manageable? This ought to be clear; When we are considering how large a firm will be the principle of marginalism works smoothly. The question always is, will it pay to bring an extra exchange transaction under the organizing authority? At the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be "organized" by the price mechanism. Business men will be constantly experimenting, controlling more or less, and in this way, equilibrium will be maintained. This gives the position of equilibrium for static analysis. But it is clear that the dynamic factors are also of considerable importance, and an investigation of the effect changes have on the cost of organizing within the firm and on marketing costs generally will enable one to explain why firms get larger and smaller; We thus have a theory of moving equilibrium. The above analysis would also appear to have clarified the relationship between initiative or enterprise and management. Initiative means forecasting and operates through the price mechanism by the making of new contracts. Management proper merely reacts to price changes, rearranging the factors of production under its control. That the business man normally combines both functions is an obvious result of the marketing costs which were discussed above. Finally, this analysis enables us to state more exactly what is meant by the "marginal product" of the entrepreneur. But an elaboration of this point would take us far from our comparatively simple task of definition and clarification."

- Ronald Coase, The Nature of the Firm (1937)

Via Stumbling and Mumbling

Related; The Contracting and Organizations Research Institute