Causal-Realist Answers to the Coasean Question

Abstract

Coase (1937) famously asked: if the price mechanism is efficient, why are there firms? His answer, following his identification of firms as “islands of conscious power,” was that using the price mechanism is costly and due to transaction costs it is efficient to integrate production processes under the direction of a manager. Attempts to formulate a specifically Austrian theory of the firm tend to adopt the Coasean view.

None of these attempts, however, seem to directly address the Coasean question. Instead, they tend to focus on explaining what firms are and their structure, and expect to thereby, by implication, explain firm existence. In so doing, these theories unsuccessfully address how and why firms emerge in the market process and therefore fail to relate firm creation with the overall market structure.

This paper reviews and critiques existing Austrian approaches to Coase’s question and outlines a new way forward, which emphasizes the firm as a market phenomenon. Here the firm is a vehicle for imaginative entrepreneurs (P. G. Klein 2008b) to create artificial density (Durkheim 1933), thereby increasing the extent of the market and providing a basis for further specialized factors of production - beyond the general level of division of labor in the market. From this perspective, the firm becomes a product of, and prospective catalyst for progressing, the overall division of labor. The firm emerges as an entrepreneur-generated tool toward increased efficiency and more roundabout production, and, consequently, potentially plays a crucial role in the development of civilization.

Keywords: theory of the firm, organization, entrepreneurship, division of labor, specialization, Austrian Economics

JEL Classification: D21, L10, L22, L23, L26