Ronald Coase, the eminent British economist and University of Chicago professor emeritus, turned 100 on December 29. In 1937, Professor Coase published a seminal paper: The Nature of the Firm, which along with many other achievements earned him the 1991 Nobel Prize in economics.
The Economist marked Professor Coase’s 100th birthday with an article, Why Do Firms Exist?, that reviews his major accomplishments. I like its edgy first paragraph:
“For philosophers the great existential question is: ‘Why is there something rather than nothing?’ For management theorists the more mundane equivalent is: ‘Why do firms exist? Why isn’t everything done by the market?’”
Professor Coase’s work provides simple answers to to these questions. He explained that, in principle, a firm should be able to find the cheapest, most productive goods and services by contracting them out in an efficient, open marketplace. However, markets are not perfectly fluid. Transaction costs are incurred in obtaining goods and services outside the firm, such as searching for the right people, negotiating a contract, coordinating the work, managing intellectual property and so on. Thus, firms came into being to make it easier and less costly to get work done.