# The Nature of the Firm (Coase 1937) ## 🎯 핵심 주장 "Owing to the difficulty of forecasting, the longer the period of the contract, the less possible it is to specify what the other party is required to do" → Firms exist to coordinate when writing complete contracts is impossible. ## 💡 Null Breaking **They Said**: Markets coordinate everything through price mechanism (invisible hand). **Coase Said**: No—there's a second coordination mechanism: the entrepreneur's **conscious power** within firms. Coordination by direction, not price. **Surprise**: Why does the price mechanism stop at firm boundaries? Because **transaction costs** make market coordination costly. ## 🔑 Keep / Retire ### Keep ✅ - **Incomplete contracts insight**: Contracts can't specify everything → need ongoing coordination - **Transaction costs concept**: Coordinating through markets has costs - **"Unprogrammed adaptations"**: Williamson's key takeaway ### Retire ❌ - **Firms vs Markets dichotomy**: Too binary, obscures hybrid forms (Gibbons 2025) - **"Islands of conscious power" metaphor**: Ignores bridges between firms (Richardson 1972) - **Entrepreneur as solo decision-maker**: Ignores coalitional nature (Barnard, Simon, March) ## 🧱 논증 블록 (논문 구조) ### Block 1: The Puzzle "Why is coordination sometimes by price mechanism, sometimes by entrepreneur?" ### Block 2: Incomplete Contracts When it's difficult to forecast and specify in advance → contracts become incomplete → need someone to decide later. ### Block 3: Transaction Costs Discovering relevant prices, negotiating/concluding contracts, monitoring performance → all costly. ### Block 4: The Boundary Firm expands until: (a) organizing mistakes cost = market transaction costs, or (b) diminishing returns to entrepreneurial function. ## 🔗 Connections ### Builds On - **Knight (1921)**: Risk, Uncertainty, and Profit - uncertainty requires judgment - **Robertson (1923)**: "Islands of conscious power in ocean of unconscious coordination" ### Built Upon By - **Williamson (1975)**: Transaction Cost Economics - formalized Coasean insights - **Grossman-Hart (1986)**: Property Rights Theory - first formal model - **Baker-Gibbons-Murphy (2002)**: Integration serves relational contracts ### Critiqued By - **Richardson (1972)**: "Firms are NOT islands" - directed coordination happens BETWEEN firms - **Gibbons (2025)**: Retire dichotomy, keep incomplete contracts; reframe as "If contracts perfect, need bosses?" ## 📊 Impact & Citations - **Google Scholar**: ~89,000 citations - **Nobel Prize**: Part of Williamson's (2009) and Hart's (2016) prize justifications - **Field Impact**: Launched organizational economics as distinct field ## 🎓 Teaching Notes ### Coase's 3 Key Moves 1. **Problem**: Why do firms exist? (vs. everything coordinated by markets) 2. **Answer**: Transaction costs + incomplete contracts → need conscious coordination 3. **Boundary**: Expand firm until cost of organizing = cost of market transaction ### What Coase Got Right (1937!) - Contracts are incomplete - Coordination has costs - There's more than just "the market" ### What Coase Missed - **Non-integration ≠ Market**: Alliances, networks, ecosystems - **Conscious power ≠ Solo command**: Management is coalitional (Barnard, Simon) - **Firms ≠ Islands**: Bridges everywhere (Richardson) ## 🔬 Research Implications ### Then (1937-2000) Research agenda: "When should we integrate?" (Make vs. Buy) ### Now (2000+) Research agenda: "How do visible hands coordinate?" (regardless of integration) - Module 4: Integration decision - Module 5: Non-integration governance - Module 6: Building equilibria ## 📝 Personal Notes ### Gibbons' Verdict > "Coase launched the field—celebrated for 88 years—but now it's time to retire the firm-market distinction **gracefully**, having honored its contribution." ### Modern Reframing | Coase (1937) | Gibbons (2025) | |--------------|----------------| | "If markets perfect, need firms?" | "If contracts perfect, need bosses?" | | Firm vs Market | Integration vs Non-integration | | Entrepreneur's power | Visible hands (coalitional) | | Price vs Direction | Invisible vs Visible hands | ### The One Sentence **Coase**: Firms exist because market transaction costs sometimes exceed organizing costs. **Incomplete**, because it ignores: - Organized non-integration (Richardson) - Coalitional management (Barnard, Simon) - Equilibrium-building (Kreps, Gibbons) --- *"The firm-market dichotomy was field-launching but is now field-limiting."* — Gibbons (2025)