[Editor note: The efficacy of decentralized markets relative to government planning is a staple of modern social-science thought. This two-part series (see yesterday) concludes by comparing and contrasting the ‘central planning’ of the firm with governmental planning in the economy.]
Firms have traditionally been thought of as socialism writ small. Ronald Coase in The Nature of the Firm (1937) quoted Dennis Robertson, who described firms as “islands of conscious power in [an] ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk.” [1]
At first blush, firms are hierarchical and centrally planned, terms commonly associated with the socialist economy. Frederick Taylor’s The Principles of Scientific Management (1911), the business bible of its day, saw greater industrial efficiency in tighter managerial control over employees:
…The work of every workman is fully planned out by the management at least one day in advance, and each man receives in most cases complete written instructions, describing in detail the task which he is to accomplish, as well as the means to be used in doing the work.
[Editor note: Ronald Coase died last week at age 102 (obits here and here). One of the most important economists of the last century, Coase substituted real-world economics for ‘blackboard economics’ to solve some fundamental questions–and to appreciate market processes in place of government intervention.]
“When economists find that they are unable to analyze what is happening in the real world, they invent an imaginary world which they are capable of handling. It was not a procedure I wanted to follow in the 1930s. It explains why I tried to find the reason for the existence of the firm in factories and offices rather than in the writings of economists, which I irreverently labeled as ‘bilge.’” (Ronald Coase)
MasterResource attempts to comprehend markets and government regulation of markets. Undesigned (market) order is compared and contrasted to imposed (government) disorder.…