Re: Re: Binary scheme of democracy and centralism

[Bill Lear <rael@xxxxxxxxxx>]

On Tuesday, April 16, 2002 at 14:37:41 (-0700) Sabri Oncu writes:
>.... [Williamson] is the founder of this "transaction costs
>economics" ...

Coase, not Williamson, is the founder of this theory.  Yanis
Varoufakis provides a nice summary of how Coase uses the Equi-marginal
Principle to explain why firms arise:

     Why do firms exist?

     Why does  a large  firm like Ford  have many  different factories
     which exchange  commodities (e.g. car parts) with  each other but
     without using the market?  For  example the Spanish branch of the
     company produces gearboxes which are  then added to a car made in
     Ford's German factory.   Yet the latter does not  buy the gearbox
     from the former.  In effect, the firm has substituted the market.
     But  if the  market works  so well,  why does  the firm  do this?
     Indeed, why  does the firm  exist at all?   Why do people  not do
     everything  through one  to  one trading  and,  instead, work  in
     groups called firms?

     The  answer given by  Ronald Coase  (who won  the Nobel  Prize in
     economics primarily for this thought) was that transacting at the
     market-place has its costs; e.g. the time it takes to haggle, the
     risk  that you  will purchase  a  good of  inferior quality,  the
     possibility that  when you wish to  buy some part it  will not be
     available  in sufficient  quantity at  the market  etc.   A firm,
     according to Coase,  will expand until the cost  of organising an
     extra transaction  within the firm  becomes equal to the  cost of
     carrying out the same transaction  by means of an exchange on the
     open  market.   It stops  growing  when  the  cost of  organising
     internally  the  next  activity  (e.g. building  a  new  gearbox)
     exceeds  the transaction  cost  of buying  it  from some  outside
     supplier (e.g.  an independent manufacturer).  Notice  how in the
     last sentence the size of the  firm was explained by means of the
     Equi-marginal Principle.

     --- Yanis  Varoufakis,  *Foundations  of  Economics*  (Routledge,
         1998), p. 121-122.

One striking omission in all of this discussion so far is that we are
using the polite word "hierarchy" rather than the more descriptive
"totalitarianism" when describing firms' organizational structure.
Hierarchy's are not necessarily totalitarian.  Every firm that I have
seen is essentially totalitarian in practice.


Bill