The Nature Of The Firm

[NOVEMBER

The Nature of the Firm
By R. H. COASE

ECONOMIC theory has suffered in the ancient from a failure to state clearly its assumptions. Economists in make up a theory have often omitted to judge the foundations on which it was erected. This examination is, however, essential not only to counteract the misunderstanding and needless controversy which arise from a neediness of knowledge of the assumptions on which a theory is based, but besides because of the extreme importance for economics of good judgment in choosing between rival rears of assumptions. For instance, it is suggested that the use of the rule book firm in economics may be different from the use of the status by the plain man.l Since there is apparently a trend in economic theory towards starting summary with the individual firm and not with the industry,2 it is all the more indispensable not only that a clear definition of the word firm should be given but that its difference from a firm in the real human, if it exists, should be made clear. Mrs. Robinson has tell that t h e two questions to be asked of a set of assumptions in economics a r e : Are they tractable ? and : Do they correspond with the real world ? 3 Though, as Mrs.



Robinson points out, more often one set will be manageable and the other realistic, yet there may well be branches of theory where assumptions may be both manageable and realistic. It is hoped to show in the following subject that a definition of a firm may be obtained which is not only realistic in that it corresponds to what is meant by a firm in the real world, but is tractable by two of the most powerful instruments of economic analysis authentic by Marshall, the thinking of the margin and that of substitution, together giving the idea of substitution a t
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Joan Robinson, I~corro~rrzcs a Serious Subjecr, p. 12. as See N. Kaldor, T h e Equilibriuin of the Finn, h c o m m z c J o u r m l , March, 1934 Op. cit., p. 6.

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