In essence, this is quite a simple matter. Here's Theory of the Firm 101 for you: In the real world, pure free market economies are inefficient. (If you think

In essence, this is quite a simple matter. Here's Theory of the Firm 101 for you: In the real world, pure free market economies are inefficient. (If you think otherwise, you've never tried to co-ordinate a complex project with multiple independent contractors.) In the real world, pure bureaucracies are inefficient. (Think North Korea, or the old Soviet Union.) But they are inefficient in different ways. It turns out that we can improve efficiency if we have islands of bureaucracy (firms) in a sea of free market competition. And, since these firms get to keep some of that efficiency gain for themselves, that's what happens: one way or another, people organize themselves into firms, and reap the benefits.