Saturday, July 20, 2013

Corporations and "central planning"

Paul Krugman makes a basic point about how corporations and other large firms operate in the real world, a reality often obscured by zombie economic dogma in John Galt and the Theory of the Firm 07/16/2013:

For that matter, why should any large firm exist? Why not just have small firms, or maybe just individuals, who make deals for whatever they need?

Of course, that's not how we do things. We may live in a market sea, but that sea is dotted with many islands that we call firms, some of them quite large, within which decisions are made not via markets but via hierarchy — even, you might say, via central planning. Clearly, there are some things you don’t want to leave up to the market — the market itself is telling us that, by creating those islands of planning and hierarchy. ...

The thing is, however, that for a free-market true believer the recognition that some things are best not left up to markets should be a disturbing notion. If the limitations of markets in providing certain kinds of shared services are important enough to justify the creation of command-and-control entities with hundreds of thousands or even millions of workers, might there not even be some goods and services (*cough* health care *cough*) best provided by non-market means even at the level of the economy as a whole?
He also links to the paper by Oliver Williamson Transaction, Cost Economics: The Natural Progrssion 12/08/2009.


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