Walking in a firmless land

A classic in the field of economics which attempts to answer the question:  what function do firms serve is Ronald Coase's 1937 The Nature of the firm.  Just as barter served for Adam Smith a pre-monetary assumption of how the world works, so for Coase there exists a world where no firm exists, and all products are made through direct purchases with participants in pre-existing direct markets. This kind of 'creation mythology' is probably not wrong in itself, but I must pause at the outset to look at how unrealistic it is.  Coase in that paper opens up by making a claim that the creation myth of the firm he's about to espouse is not only tractable to a marginal analysis, but is realistic.

There are two points I'd like to make.  The first is an anthropological one.  Coase specifically doesn't talk about the other pre-firm possibility - where goods and services get produced by friends, family members, slaves.  This must be surely how the thousand year old Japanese company did it.  Just what is it when a family decides to run a family hotel for over a thousand years?  Well, there must be many parts to that particular story - the value placed in the business, the family tradition inculcated in all the descendants which encouraged some family members to continue, the lack or abundance of alternatives available to offspring, the number of offspring being produced, both to serve as workers and as mouths to feed, the desirability of the service offered (the hotel was by a hot spring which clearly must have had some value to people in the neighbourhood).  

Given what we now know about economics as a subject (post-Kahnemann and Tversky, post-Becker, post-Lucas) it must be clear now in a way it wasn't to Coase that a marginal analysis could be possible even to the non-markets, familial, slaves and friends firm.  This would be even more realistic than Coase's pre-firm landscape.

Second, how realistic anyway is this Coasian pre-firm landscape?  Not very.  Putting well functioning markets prior to the emergence of a firm seems to me rather fraught with too much difficulty.  So-called free markets are clearly the product of a particular policy environment which implies a well developed cultural landscape.  Rules over property, enforcement, resolution dispute, probably a monetary environment, tools for discovering the best and most correct market, and so on.  That particular constellation of desirables, whilst not specifically demanding a large governmental infrastructure, certainly needs a supporting framework of institutions.  Jumping to the end of his paper, we're going to find that the marginal value of adding the firm into this mix is 'worth it'.  This positive value is the value, in general, of the firm.  But if the pre-firm world is a figment, or at least unrealistic, then the 'value' of the firm is in question.  Underlying this pre-firm fantasy world is the implicit mechanics of a well functioning and pervasive set of elastic supply and demand curves in a fairly institution-free context. 

What economics needs at this point is a new creation myth, one which doesn't assume the existence of a barter and creditless economy pre the invention of money, nor the existence of a well evolved set of free markets pre the invention of the firm.  Why not have an anthropologically informed creation myth, which resonates more strongly with the way our economic systems did in fact emerge.

Keeping my own company

I thought it might be fun to come at economics from my own point of view, with a focus on the company.  I shall hopefully touch on real economics and finance writings, but specifically with this emphasis.  I want to have a top down approach and a bottom up approach.  The top down approach will look at the domain of companies in general, where they fit in from a macro-economic point of view.  And the bottom up approach is like the perspective of an equity analyst or management consultant - looking at the innards of companies, what specifically they can do and create, both as a primary output and also with respect to their funding.  With each of these two directions, I can approach the subject more theoretically and also more pragmatically or empirically.

I know my natural disposition is to approach this subject from a syntagmatic or evolutionary point of view - both with respect to the shape of the company generally, and with respect to the shape of the finance group of organisations (i.e. how they fund).  This contrasts a little bit with the so-called equilibrium approach to economics which tries to give priority to steady state models, where change applies as perturbations (differential equations with shocks, mathematically).  At this point I'd just like to point out that the evolutionary approach is just as amenable to algorithms and mathematics so I am free to reject the recent criticisms of the overly mathematical approach to this common steady-state approach.  

For me, the evolutionary perspective is more anthropologically real, allows me to see connections with the history of humanity over the last 70,000 years, gives me a very broad perspective.  At all points I will be trying in my head to find a way of model things, which of course means to simplify them.  That's totally acceptable and I see no significant downside.  That part is maybe somewhat controversial, since often you hear thinkers suggesting that models can be too simple.  Not for me.  Not for developing an understanding.  Start simple.  Work up.  

The picture above is said to be the oldest company in the world.  It is nearly 1,300 years old and is a hotel which is said to have been run by several dozen generations of the same family.