How Coase's theory of the firm helps explain the organisation of firms within the industry.

Essay by northrirCollege, UndergraduateB, May 2003

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Coase believed that it was important to enquire "why co-ordination is the work of the price mechanism in one case and the entrepreneur in the other." How did Coase ultimately explain the choice between the alternatives? Using an industry of your choice illustrate how Coase's theory of the firm helps explain the organisation of firms within the industry.

In the purely theoretical study of economics the market mechanism is the core of the economic system and everything that occurs in that system is directed by the fluctuations that manipulate the market mechanism in terms of demand and supply. As Coase wrote: "an economist thinks of the economic system as being coordinated by the price mechanism and society becomes not an organisation but an organism." Here the individual's participation in an economic system as limited merely to choosing between alternatives provided by, and priced by, the market mechanism. However it is impossible to escape the fact that in reality there are entrepreneurs, and their associated firms, co-ordinating a good degree of economic activity.

In reality consumers and producers alike are not controlled solely by the market but by managers in some sort of "economic planning". Some economists like Marshall even went so far as to say it was the fourth factor of production: along with land, labour and capital. Thus I think it would not be a gross misjudgement to substitute "enterprise" for "economic planning" and those who think partake in this direction of resources as "entrepreneurs". D. H Robertson referred to these as "Islands of conscious power in this ocean of unconscious co-operation, like lumps of butter coagulating in a pail of buttermilk". The general acknowledgement of the existence of these "lumps" must lead the curious mind to enquire why they have coagulated in such magnitude and what, if...