Thursday, September 01, 2016


Austin Middleton, posts a reply to question on QUORA HERE
to the question: “Why do firms exist according to Ronald Coase? To what extent does Coase’s idea of the existence of firms contradict Adam Smith’s invisible hand?
Coase is all about transactions cost.”
“Firms form because it’s less costly to coordinate specific tasks within a hierarchy than it is to contract and exchange money for each and every service. But fims don’t continue to grow because there’s a diminishing returns on ever-expanding hierarchies: at some point the weight of the bureaucracy necessary to coordinate that many people overcomes any savings in doing the work in-house.
Wikipedia has a good blurb on it: Theory of the firm.
With the exception of this:
Such a situation runs counter to neo-classical economic theory. The neo-classical market is instantaneous, forbidding the development of extended agent-principal (employee-manager) relationships, of planning, and of trust.”
Yes, for simplicity’s sake, many neoclassical models are instantaneous markets. But it is not counter to neoclassical theory, or any theory, really, to add in complexity to the simple model for relevance sake.
I cannot think of a single reason why people incorporating their labor to lower costs would contradict any of the several takeaways from Smith’s Invisible Hand. And while I won’t say that such a contradiction is impossible, I will say I’d be astonished if other people who provided answers as to how they contradict also had a firm grasp on what Coase said, or what Smith’s Invisible Hand is about.”
Which “several takeaways from Smith’s invisible hand’? There are none! Its a rhetorical metaphor. 
Austin Middleton’s tale-ender is worse: “I’d be astonished if other people who provided answers … had a firm grasp … of what Smith’s Invisible Hand is about.”
Clearly Austin Middleton knows not much about Adam Smith’s use of the IH metaphor in Wealth of Nations. Neo-classical economists, like most modern economists, have created a theory about market economies being guided by ‘an invisible hand’ that has nothing to do with Adam Smith. 
There is no “invisible hand” of the market; its a misreading of Smith’s explanation in Wealth of Nations (WN IV.ii.9:pp. 455-6) and his teaching on the role of metaphors in his Lectures on Rhetoric and Belles Lettres, p. 299.


Blogger Paul Walker said...

As Mark Blaug noted the classical economists had no theory of the firm but it has also to be said that the neoclassicals had no such theory either. What they did have is an theory of industry level production - the production function. But the production function has no institutional organisation behind it. Such an organisation could be the whole economy, an industry, a firm or even a factory within a firm. From the production function alone we can't tell which it is. I could suggest a reading of chapter 2 of the "greatest book ever written" for quick summary of the development of the theory of production/the firm from about 1776 to around 1970 (see Here (see I argue that Smith had a couple of building blocks that could have led him to a (partial?) theory of the firm, but he didn't go in that direction. There is no need to invoke hands of level of transparency in the discussion of the development of the theory of the firm.

3:48 pm  

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