But Mr Coase's narrow focus on transaction costs nevertheless provides only a partial explanation of the power of firms.The rise of the neo-Coasian school of economists has led to a fierce backlash among management theorists who champion the “resource-based theory” of the firm.Firms routinely employ thousands of workers and move billions of dollars-worth of goods and services within their borders. Classical economics had little to say about this question.Why have these “islands of conscious power” survived in the surrounding “ocean of unconscious co-operation”, to borrow a phrase from D. Adam Smith opened “The Wealth of Nations” with a wonderful description of the division of labour in a pin factory, but he said nothing about the bosses who hired the pin-makers or the managers who organised them.The proper balance between hierarchies and markets is constantly recalibrated by the forces of competition: entrepreneurs may choose to lower transaction costs by forming firms but giant firms eventually become sluggish and uncompetitive.How much light does “The Nature of the Firm” throw on today's corporate landscape?Mr Coase's theory continues to explain some of the most puzzling problems in modern business.
They stick with the same employer for years, rather than regularly returning to the jobs market.
Eventually, Mr Coase acquired an army of followers, such as Oliver Williamson, who fleshed out his ideas. Far from resting on his laurels, Mr Coase will publish a new book in 2011, with Ning Wang of Arizona State University, on “How China Became Capitalist”.
His central insight was that firms exist because going to the market all the time can impose heavy transaction costs.
Where trust in established institutions is scarce, it makes sense for companies to stretch their brands over many industries.
And where capital and labour markets are inefficient, it makes equal sense for companies to allocate their own capital and train their own loyalists.