<story><title>Firm Inefficiency</title><url>http://www.overcomingbias.com/2014/07/firm-inefficiency.html</url></story><parent_chain><item><author>tikhonj</author><text>This really reminds me of how Yanis Varoufakis, Valve&amp;#x27;s economist, describes most firms:&lt;p&gt;&amp;gt; &lt;i&gt;Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!&lt;p&gt;The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism.&lt;/i&gt;&lt;p&gt;The image of a firm as an island of control within a greater see of capitalism really stuck with me. I think it&amp;#x27;s a pretty good image to support Valve&amp;#x27;s style of organization. (Of course, I&amp;#x27;m also a bit biased: I prefer that philosophy for reasons of my own besides just increasing efficiency.)&lt;p&gt;The whole article (&amp;quot;Why Valve? Or, what do we needcorporations for and how does Valve’s management structure fit into today’s corporate world?&amp;quot;[1]) is well worth a read. I think it&amp;#x27;s a very constructive look at the issue that this post is talking about.&lt;p&gt;[1]: &lt;a href=&quot;http://blogs.valvesoftware.com/economics/why-valve-or-what-do-we-need-corporations-for-and-how-does-valves-management-structure-fit-into-todays-corporate-world/&quot; rel=&quot;nofollow&quot;&gt;http:&amp;#x2F;&amp;#x2F;blogs.valvesoftware.com&amp;#x2F;economics&amp;#x2F;why-valve-or-what-d...&lt;/a&gt;</text></item></parent_chain><comment><author>arjunnarayan</author><text>This is indeed an important question, best addressed in Ronald Coase&amp;#x27;s 1937 article &amp;quot;The Nature of the Firm&amp;quot;. It is such an influential article that has its own wiki page, which is quite good: &lt;a href=&quot;https://en.wikipedia.org/wiki/The_Nature_of_the_Firm&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;en.wikipedia.org&amp;#x2F;wiki&amp;#x2F;The_Nature_of_the_Firm&lt;/a&gt;&lt;p&gt;The short answer as to why firms exist (and why it is not markets all the way down such that every microtask is contracted out to the free market) is &amp;quot;transaction costs&amp;quot;. For the long answer, I suggest you start at the wiki article, and if interested, read this Economist blog summary: &lt;a href=&quot;http://www.economist.com/node/17730360&quot; rel=&quot;nofollow&quot;&gt;http:&amp;#x2F;&amp;#x2F;www.economist.com&amp;#x2F;node&amp;#x2F;17730360&lt;/a&gt;, and if still interested, read the original article (you can find it by just googling for it).</text></comment>
<story><title>Firm Inefficiency</title><url>http://www.overcomingbias.com/2014/07/firm-inefficiency.html</url></story><parent_chain><item><author>tikhonj</author><text>This really reminds me of how Yanis Varoufakis, Valve&amp;#x27;s economist, describes most firms:&lt;p&gt;&amp;gt; &lt;i&gt;Interestingly, however, there is one last bastion of economic activity that proved remarkably resistant to the triumph of the market: firms, companies and, later, corporations. Think about it: market-societies, or capitalism, are synonymous with firms, companies, corporations. And yet, quite paradoxically, firms can be thought of as market-free zones. Within their realm, firms (like societies) allocate scarce resources (between different productive activities and processes). Nevertheless they do so by means of some non-price, more often than not hierarchical, mechanism!&lt;p&gt;The firm, in this view, operates outside the market; as an island within the market archipelago. Effectively, firms can be seen as oases of planning and command within the vast expanse of the market. In another sense, they are the last remaining vestiges of pre-capitalist organisation within… capitalism.&lt;/i&gt;&lt;p&gt;The image of a firm as an island of control within a greater see of capitalism really stuck with me. I think it&amp;#x27;s a pretty good image to support Valve&amp;#x27;s style of organization. (Of course, I&amp;#x27;m also a bit biased: I prefer that philosophy for reasons of my own besides just increasing efficiency.)&lt;p&gt;The whole article (&amp;quot;Why Valve? Or, what do we needcorporations for and how does Valve’s management structure fit into today’s corporate world?&amp;quot;[1]) is well worth a read. I think it&amp;#x27;s a very constructive look at the issue that this post is talking about.&lt;p&gt;[1]: &lt;a href=&quot;http://blogs.valvesoftware.com/economics/why-valve-or-what-do-we-need-corporations-for-and-how-does-valves-management-structure-fit-into-todays-corporate-world/&quot; rel=&quot;nofollow&quot;&gt;http:&amp;#x2F;&amp;#x2F;blogs.valvesoftware.com&amp;#x2F;economics&amp;#x2F;why-valve-or-what-d...&lt;/a&gt;</text></item></parent_chain><comment><author>jerf</author><text>I actually think that&amp;#x27;s an important aspect of capitalism&amp;#x27;s success. It only (metaphorically) claims to be a good global organization scheme. Within that framework, experimentation and variation is permitted. Do you want a hippie commune? Sure. Coop? Sure. Conventional corporation? Yup. One dude in a garage? Sure. National-scale non-profit? Go for it. And they&amp;#x27;re all different organizations that can freely live and die as the situation warrants. It may not be perfect, but it can evolve without breaking.&lt;p&gt;Contrast that with a State-Uber-Alles philosophy like Communism, and you get a situation where you&amp;#x27;ve got what is putatively the same organization trying to organize the strategy for keeping the borders secure with nuclear weapons also trying to manage the local school bake sale. It&amp;#x27;s a fragile setup if it isn&amp;#x27;t perfect, and of course it isn&amp;#x27;t perfect. And lo, Communist governments that fall tend to fall hard and shatter their whole society, economy, country, and all in the process. All the eggs, you might say.&lt;p&gt;And let me highlight the issue of &lt;i&gt;resiliency&lt;/i&gt; and &lt;i&gt;fragility&lt;/i&gt; as being my main point, rather than any particular local issue of efficiency on this point or that. Capitalist societies hardly blink if a 100-person organizations proves unable to make a profit. It might be locally annoying, even devastating to some people, but globally it tends to work out for the best. (And those 100 people tend to be able to move on to something else too.) By contrast a centralized command-and-control system may keep this net-negative organization going for a long time for any number of reasons, but all of them, in the end, meaning that a net-negative organization lives on, draining the society it lives in. (Bear in mind the meaning of &amp;quot;net negative&amp;quot;... the entire point is that whatever benefits it may have, it is still &lt;i&gt;net&lt;/i&gt; negative in my discussion here.) The summation of such decisions is incredibly destructive.</text></comment>