Markets VS Firms

[digitalmcq]

I have a question for the free market types: if the free market is the most efficient allocator of resources then why do firms exist?

 

[michaellee]

Are you implying that "firms" are not part of the free market, or have I not understood your question?

 

[Cain]

I think you need to revise your question. Are you specifically asking about unincorporated firms? You seem to assume that we have a free-market.

 

[fishbob]

Free Market does not mean you don't have to pay for your vegetables. Although that would allocate the heck out of the vegetables for a short while, soon there would be no more vegetables.

 

[shanek]

I have a question for the free market types: if the free market is the most efficient allocator of resources then why do firms exist?

Duh, because firms are part of the free market? This question makes no sense. It's like asking if milk is so delicious, then why does ice cream exist?

 

[digitalmcq]

Let me clarify my question.

Firms serve to bring large numbers of people together under the authority of a centralized bureaucracy. The purpose of this is to organize these individuals and focus them on accomplishing the goals of the firm. The most common of these goals is to generate profit by producing some product and then selling said product.

However, free marketers tend to claim that the most efficient way to organize individuals to produce and sell products is an open market. A firm represents an attempt to bring a market under a centralized bureaucracy to manage that market. Firms house many departments (accounting, production, marketing, etc) that perform services that could easily be obtained from the market but often are not. The question is why? If the free market is the most efficient way to organize society then why do these centralized bureaucracies exist?

Neo-classical economics really has no explanation (that I am aware of) of why firms exist. I'm curious as to what some of the more ardent supporters of this line of reasoning have to say about this topic.

 

[digitalmcq]

Re: Re: Markets VS Firms

Duh, because firms are part of the free market? This question makes no sense. It's like asking if milk is so delicious, then why does ice cream exist?

Actually, firms represent ways to control the market. Let me give you an example: A firm wants to obtain a certain input (raw material or whatever) but doesn't want to pay market prices so it buys out its supplier. This type of vertical integration protects the firm from the vagaries of the market (and potentially denies competitors of a source of the required input). This benefits the firm at the expense of the market.

 

[NightG1]

Let me clarify my question.

Firms serve to bring large numbers of people together under the authority of a centralized bureaucracy. The purpose of this is to organize these individuals and focus them on accomplishing the goals of the firm. The most common of these goals is to generate profit by producing some product and then selling said product.

However, free marketers tend to claim that the most efficient way to organize individuals to produce and sell products is an open market. A firm represents an attempt to bring a market under a centralized bureaucracy to manage that market. Firms house many departments (accounting, production, marketing, etc) that perform services that could easily be obtained from the market but often are not. The question is why? If the free market is the most efficient way to organize society then why do these centralized bureaucracies exist?

Neo-classical economics really has no explanation (that I am aware of) of why firms exist. I'm curious as to what some of the more ardent supporters of this line of reasoning have to say about this topic.

A free market can be a market of "firms" or corporations and it also depends on the type of market you mean. It's all about scale. Individuals can not compete with large firms on cost because firms have the advantage of being able to produce large quantitiies of product which lowers the per unit fixed cost or the fixed cost applied to the service. You could form a cooperative like some farms do but those are tenuous and prone to disorder because of the "too many Hitlers in the same bunker" syndrome. Corporations are run by one person (usually) with the sanction of a directors board.

I am not necessarily a "supporter" of this reasoning. I just work in an industry were the competitors are all "firms" and I am exposed to the dynamics on a daily basis.

 

[NightG1]

Re: Re: Re: Markets VS Firms

Actually, firms represent ways to control the market. Let me give you an example: A firm wants to obtain a certain input (raw material or whatever) but doesn't want to pay market prices so it buys out its supplier. This type of vertical integration protects the firm from the vagaries of the market (and potentially denies competitors of a source of the required input). This benefits the firm at the expense of the market.

But what if the supplier is in a market that is a real loser at the moment or the plant is 100 years old or is about to loose their air permit or whatever. The buy-em-out strategy rarely - and I mean rarely - works. Actually your supplier is in a better position to buy you out in many cases.

 

[shanek]

Firms serve to bring large numbers of people together under the authority of a centralized bureaucracy.

Not necessarily. My business is a firm, and it doesn't even remotely resemble that. It consists of three partners, and no one else.

However, free marketers tend to claim that the most efficient way to organize individuals to produce and sell products is an open market. A firm represents an attempt to bring a market under a centralized bureaucracy to manage that market.

I'd love to see you support this.

Firms house many departments (accounting, production, marketing, etc) that perform services that could easily be obtained from the market but often are not. The question is why?

Sometimes, things are more efficient when you do them in-house. Other times, it's more efficient to contract an outside firm to do it for you. Exactly what these areas are and to what extent they are efficient depends heavily on the individual firm, its size, make-up, and the abilities of its members.

Neo-classical economics really has no explanation (that I am aware of) of why firms exist.

You're apparently using some definition of "firm" that is at odds with how I've heard it used by every economist I've ever spoken to.

 

[shanek]

Re: Re: Re: Markets VS Firms

Actually, firms represent ways to control the market. Let me give you an example: A firm wants to obtain a certain input (raw material or whatever) but doesn't want to pay market prices so it buys out its supplier. This type of vertical integration protects the firm from the vagaries of the market (and potentially denies competitors of a source of the required input). This benefits the firm at the expense of the market.

Well, apparently you have no idea how the free market works. I suggest a perusal through the Macroeconomics thread.

"Market prices" are simply what the market will bear, and it's determined by how difficult it is to produce the item demanded and the worth of that item by those who demand it. Buying out the supplier and doing it in-house doesn't really take away that market force. It simply means that it is taking on both the expenses and the profits of the company it has purchased. If you look at really large corporations (Time Warner is a perfect example), you'll see that all of its subsidiaries act pretty much as independent entities and even compete with each other. It also doesn't deny anyone else a source of that item, unless of course the firm successfully receives government sponsorship as a monopoly.

 

[Ed]

Whoever is suggesting that outsourcing those functions is viable in any general way ought to look at the real world. Legal and accounting can be viewed (with justification) as propriatory assets. Whoever first thought up that "short term leaseback" scheme deserves a head pat.

I mean really. Is Economics any more useful in the real world than Philosopy or Dowsing?

 

[The idea]

Firms serve to bring large numbers of people together under the authority of a centralized bureaucracy.

Yes, some firms have bureaucracies and lots of employees.

However, free marketers tend to claim that the most efficient way to organize individuals to produce and sell products is an open market. A firm represents an attempt to bring a market under a centralized bureaucracy to manage that market.

The "market" consists of what? The firm's employees? If you take out the part about the market being under a centralized bureaucracy, then you are left with the statement that a firm may have a bureaucracy. In other words, there are too many desks in business offices. Free market types should disapprove of that kind of thing. No, that doesn't make sense. Maybe your concern is that, to continue to receive wages, employees have to follow their employers' instructions?

 

[The idea]

Neo-classical economics really has no explanation (that I am aware of) of why firms exist. I'm curious as to what some of the more ardent supporters of this line of reasoning have to say about this topic.

Adam Smith wrote about how division of labor improves productivity. How could you have division of labor without firms? Suppose someone performs some specialized assembly operation on automobile engines. Is there going to be a big open field where the laborer goes to work, buys a partially assembled engine, does some work on it, and then hopes to quickly sell the result to someone else who will perform more work on it?

Some problems: exposure to the weather, cost of transporting the partially assembled product in the marketplace, security against theft, financing the purchase, need for someone to engineer the whole product that includes the engine, time required to negotiate each sale transaction, uncertainty that it will be possible to sell the partially assembled component. Shall I continue?