What Is a Firm?
| Peter Klein |
Some of you have heard me suggest — at least half seriously — that we ban the word “entrepreneurship” from scientific discourse. The word has so many definitions that its use often obfuscates rather than clarifies. (If you mean self-employment, better to say say “self-employment”; if you mean opportunity discovery, say “opportunity discovery”; and so on.)
Harold Demsetz gave an interesting and entertaining presentation yesterday at ISNIE, in a session honoring Yoram Barzel on his 80th birthday. Demsetz’s remarks made me wonder if we should ban “firm” as well. Demsetz pointed out, quite rightly, that Coase (1937) defines the firm in terms of the employment relation. A one-person operation, in this definition, is not a firm, and vertical integration deals with the question of adding producers of intermediate products to the firm’s employment roll. Demsetz thinks independent contractors are firms, and hence it makes little sense to speak of “firm” and “market” as alternatives, as Coase does. (Oliver Williamson, during an earlier session, noted that Coase expressed more interest in intermediate product markets in his 1988 article than in “The Nature of the Firm.”)
For Knight, Williamson, Hart, and other notables, in contrast, the firm is defined not by the employment relationship, but by the ownership of alienable assets. In this approach, the question is who owns what, not who is employed by whom. (Dan Spulber offers yet another approach, defining the firm as nexus of transactions with objectives different from those of its owners.) Of course, even in the Knightian approach, to get from the one-person firm to the multi-person firm requires some theory about the relative transaction costs of employment versus independent contracting, a theory Nicolai and I try to provide in chapter 8 of our recent book, focusing on the conditions under which the entrepreneur to delegate judgment to subordinates.
So, what is a firm? Perhaps the better question is, What are the important research questions that can be answered when the firm is defined as X?
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