Ronald Coase (Part II: Firms vs. Socialism)

[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.

Ronald Coase and Business Understanding (Part I: Why Are There Firms?)

[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.…

The Ratepayer’s Prayer (Brother Clarkson, petitioner and parishioner)

The familiar complaint of market failure by critics of decentralized (nongovernmental) decision-making must be coupled with realistic discussion about any government “solution.” This is why market failure must be considered alongside two other failures:

• Analytic failure, which can range  anywhere from intellectual error to the fatal conceit to emotional bias, and
• Government failure, the gap between theory and practice, wishes and result.

Intellectuals, practitioners, regulators, and the public far too often resort to see-a-problem, pass-a-law rather than:

1. Making sure what is seen as a problem is really negative;
2. Making sure that the undesired situation did not result form prior government involvement in whole or part; and
3. Assessing whether the (coercive) solution is greater than the problem, which would leave civil society (media, foundations, public opinion) to right the wrongs.

Reasons to Sell Enron Wind (October 1998 memo to Ken Lay)

19th Century Frac Job: Oil Well Torpedoing (and a ‘grievous’ government monopoly)

Milton Friedman on the Energy Crisis (and ObamaCare to come)

Energy Tax Preferences: Rid Them All (Cato letter to House working group revisited)

Is the Carbon Tax Seance Over? (A reality check for a trumped-up ‘conservative’ cause)

Global Warming is Responsible for ….

Useful Learning, Real Money: A Glimpse Into the Hydrocarbon Educational Future