“Coase and Simon Got It Right, Alchian and Demsetz Got It Wrong”
| Peter Klein |
A reader asks: “In a response to a prominent economist who asked ‘what have we learned about . . . organizations,’ you provided a list that began with ‘Organizations can have market-like features, but are inherently different from markets. I.e., authority is real — Coase and Simon got it right, Alchian and Demsetz got it wrong.’ What are the major papers that led to this conclusion?”
I have in mind the Alchian-Demsetz notion that the firm is a legal fiction, a convenient label for a nexus of contracts. (Recall the famous passage in their 1972 paper about “firing the grocer.”) Classic formulations of the opposite view — that the firm does, in fact, have some power of fiat — come from the two Olivers, Williamson and Hart.
Williamson invokes the notion of “forbearance,” the idea that the law treats the firm itself as the arbiter of intra-firm disputes, while the courts are more likely to intervene in disputes between firms. (See the discussion in his 1991 article “Comparative Economic Organization: The Analysis of Discrete Structural Alternatives,” especially pp. 98-100 of the version that appears in The Mechanisms of Governance). Hart’s views are expressed in his 1986 JPE paper with Sanford Grossman and his 1995 book Firms, Contracts, and Financial Structure. If contracts are incomplete, Hart argues, than ownership of alienable assets conveys residual rights of control, which conveys a form of authority.