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This is indeed an important question, best addressed in Ronald Coase's 1937 article "The Nature of the Firm". It is such an influential article that has its own

This is indeed an important question, best addressed in Ronald Coase's 1937 article "The Nature of the Firm". It is such an influential article that has its own wiki page, which is quite good: https://en.wikipedia.org/wiki/The_Nature_of_the_Firm https://en.wikipedia.org/wiki/The_Nature_of_the_Firm The short answer as to why firms exist (and why it is not markets all the way down such that every microtask is contracted out to the free market) is "transaction costs". For the long answer, I suggest you start at the wiki article, and if interested, read this Economist blog summary: http://www.economist.com/node/17730360 http://www.economist.com/node/17730360, and if still interested, read the original article (you can find it by just googling for it).

anigbrowl 12y ago
I strongly recommend the original article. It meanders for a few hundred words before hitting its stride (Coase was English and born over a century ago) but it's a real masterpiece. Many of Coase's ideas were so simple as to seem a bit trite in summary, but develops them in interesting counter-intuitive ways, and from first principles rather than relying on mathematical truisms. also, many of his talks are on Youtube; I regret not having had the opportunity to hear him speak in person before he died recently. Great thinker.
mhartl 12y ago
Thanks for pointing this out. There are many strong opinions on this subject guided by little more than naïve intuition. Having an opinion on the nature of the firm without reading Coase is like having an opinion on externalities without reading Coase [1]. [1]: http://www.jstor.org/discover/10.2307/724810?uid=3739560&uid=2&uid=4&uid=3739256&sid=21104521002823 http://www.jstor.org/discover/10.2307/724810?uid=3739560&uid...
justincormack 12y ago
Indeed but we have computers now. Transaction costs are vastly different. The firm has changed remarkably little. Coase is not very predictive in these circumstances.
- icebraining 12y ago
  Has it really? What about the rapidly rising number of freelancers? Or the decreasing size of firms year-after-year since 2000?
- pjc50 12y ago
  Transaction costs are psychological and informational rather than administrative. You can send messages instantly around the world, but that does not help you know what message to send. It's certainly got easier to hire people for work fragments (mturk etc), but that only works if you can specify the work and verify its quality. This is the problem of "outsourcing" on a small scale.
001sky 12y ago
Yanis Varoufakis is paraphrasing coase (1937).
snake_plissken 12y ago
Heh I thought of posting the same thing after I read the article. It's good read although I remember it being written in that classic style of dense 1930s economic literature, where you have to re-read some paragraphs and sections 3 or 4 time.

anigbrowl 12y ago

I strongly recommend the original article. It meanders for a few hundred words before hitting its stride (Coase was English and born over a century ago) but it's a real masterpiece. Many of Coase's ideas were so simple as to seem a bit trite in summary, but develops them in interesting counter-intuitive ways, and from first principles rather than relying on mathematical truisms. also, many of his talks are on Youtube; I regret not having had the opportunity to hear him speak in person before he died recently. Great thinker.

mhartl 12y ago

Thanks for pointing this out. There are many strong opinions on this subject guided by little more than naïve intuition. Having an opinion on the nature of the firm without reading Coase is like having an opinion on externalities without reading Coase [1]. [1]: http://www.jstor.org/discover/10.2307/724810?uid=3739560&uid=2&uid=4&uid=3739256&sid=21104521002823 http://www.jstor.org/discover/10.2307/724810?uid=3739560&uid...

justincormack 12y ago

Indeed but we have computers now. Transaction costs are vastly different. The firm has changed remarkably little. Coase is not very predictive in these circumstances.

icebraining 12y ago
Has it really? What about the rapidly rising number of freelancers? Or the decreasing size of firms year-after-year since 2000?
pjc50 12y ago
Transaction costs are psychological and informational rather than administrative. You can send messages instantly around the world, but that does not help you know what message to send. It's certainly got easier to hire people for work fragments (mturk etc), but that only works if you can specify the work and verify its quality. This is the problem of "outsourcing" on a small scale.

001sky 12y ago

Yanis Varoufakis is paraphrasing coase (1937).

snake_plissken 12y ago

Heh I thought of posting the same thing after I read the article. It's good read although I remember it being written in that classic style of dense 1930s economic literature, where you have to re-read some paragraphs and sections 3 or 4 time.