The Nature of the Firm (Coase, 1937)

Ronald Coase begins this article with the concept of the economic system as being coordinated by the price mechanism and society becomes not an organisation but an organism.  As Sir Arthur Salter mentions, the economic system "works itself".  Nevertheless, Coase agrees with Robertson in that we find "islands of conscious power in this ocean of unconscious cooperation like lumps of butter coagulating in a pail of buttermilk". Then, Coase presents the following question: "If production is regulated by price movements, production could be carried on without any organisation at all, well might we ask, why is there any organisation?" Why is the price mechanism superseded?

Coase assumes the task of attempting to discover why a firm emerges at all in a specialised exchange economy and concludes that the main reason why it is profitable to establish a firm is that there is a cost of using the price mechanism (marketing cost).  This cost includes the costs of discovering the relevant prices, the costs of negotiating and concluding a separate contract for each exchange transaction, the desire to make long-term contracts under uncertainty.

Some of the questions that arise when reviewing the article are:

(1) What is the distinguishing mark of the firm?
(2) What forces determine the size of the firm? Why is not all production carried on by one big firm?
(3) Can the decreasing returns to the entrepreneur be avoided? Is Market-based-management one approach to accomplish this purpose?
(4) Why do we observe an increasing vertical integration in the Latin American countries?
(5) Is Coase's criticism of Knight theory valid?

Coase's article can be found in the following link:

http://www.sonoma.edu/users/e/eyler/426/coase1.pdf