One of the central concerns of economics is the nature and functioning of both markets and non-market institutions like business firms or governments in allocating resources. In an important and influential article, the Nobel Laureate F. A. Hayek painted the virtues of the market as a mechanism of coordination in a vivid way. Writing in the context of a long-running debate about the efficacy of socialism, he argued that the market is superior to central economic planning because of the way it economizes on information and takes advantage of the localized knowledge of market participants. In an equally important article, another Nobel Laureate, Ronald Coase, considered a related question: in a market economy, why are there non-market institutions like business firms? Why aren't all aspects of production carried out through market exchanges among independent workers? This is far from an absurd idea. Consider the way in which rifles were made in Birmingham, England, in the early twentieth century.
The master gun-maker -- the entrepreneur -- seldom possessed a factory or workshop. ... Usually he owned merely a warehouse in the gun quarter, and his function was to acquire semifinished parts and to give those out to specialized craftsmen, who undertook the assembly and finishing of the gun. He purchased material from the barrel-makers, lock-makers, sight-stampers, trigger-makers, ramrod-forgers, gun-furniture makers, and, if he were engaged in the military branch, from bayonet-forgers. All of these were independent manufacturers executing the orders of several master gun-makers. ... Once the parts had been purchased from the "material-makers," as they were called, the next task was to hand them out to a long succession of "setters-up," each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who prepared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stockers, who let in the barrel and lock and shaped the stock; the barrel-strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browners, and finally the lock-freers, who adjusted the working parts. [G. C. Allen, The Industrial Development of Birmingham and the Black Country, 1906-1927. London, 1929, pp. 56-57.]
In constructing his argument, Coase asserts (a) that the firm consists in the supersession of the price mechanism by administrative control and (b) that such supersession is often efficient because "there is a cost to using the price system."
Your assignment is to consider the following question. Is there a conflict or contradiction between Hayek's argument and Coase's argument? If you think there is a contradiction, explain what it is. If you think there is no contradiction, explain how the two arguments can be reconciled.
Your readings are the two original articles, both available online.
- F. A. Hayek, "The Use of Knowledge in Society," American Economic Review 35(4): 519-530 (1945).
- Ronald Coase, "The Nature of the Firm," Economica (N.S.) 4: 386-405 (November 1937).
You are welcome to consult (and cite) other works. But don't get bogged down in research. Concentrate on the ideas and on how you will frame your argument.