A marvel of economics…

Is how little understanding there is of the existence of the firm. The fact that there are at least four rival theories in economics explaining its existence is symptomatic of the darkness prevailing in this area.

When the average person thinks of "the economy," perhaps the first thing they think of is "businesses." But economics cannot yet explain the existence of these businesses.


  1. Name the four theories please :)

    1. Transaction cost
      Principal agent

      This list is from Axtell, "The emergence of firms in a population of agents"

  2. Gene, I've never taken an economics course in my life, so I'm somewhat mystified by the idea that the existence of businesses is a mystery to economist. So could you briefly describe what the mystery is? Which of these things is mysterious?

    1. The existence of people who produce and sell goods

    2. The existence of people who pay others to help them produce and sell goods

    3. The existence of government-recognized organizations which people create in order to pay others to help them produce and sell goods

    To a layperson like me, none of these sound like especially mysterious phenomena.

    1. http://www3.nccu.edu.tw/~jsfeng/CPEC11.pdf

      Why isn't everyone an independent contractor? Why does anyone get paid in annual salary instead of being paid per job on a contractual basis?

  3. Gene: does Grossman/Hart get lumped under the transactions cost category?

    1. Kevin, I drew my list from Axtell. I am no expert on how many models of the firm there are, or which ones fit into which category! So I don't know the answer to your question. I was assuming since Axtell is a solid scholar, and he noted four different approaches to the firm, that there are certainly at least four!


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