Notes

Outline

Crafts production.

Crafts production. Artisans work at their own pace. Differences in absolute and comparative skill across tasks. Ease of “systemic” change in product. Uniqueness of crafts-made goods. Need for “wide” human capital. Skilled artisan must master many different tasks.

Factory production.

Factory production. Shift from parallel to series. Time phasing of inputs. Workers work at pace of team. Workers complements not substitutes. Product standardized. Difficulty of systemic change. Ease of “autonomous” change and learning by doing.

Factory production. Physical capital saving. Need only one set of tools. Economizes on work-in-process (buffer) inventories. Human capital saving. “Deskilling.” Workers sorted by comparative advantage. Human capital “deepening” instead of widening.

The division of labor. Improvement in “skill and dexterity.” Learning by doing. Spread fixed set-up costs. Less “sauntering” between tasks. Increased innovation. Operative focused on and benefits from “abridging labour.” Specializing in invention. Assign operatives according to comparative advantage.

The division of labor. Adam Smith (1776): ten men could make 48,000 pins a day, or almost 5,000 per person per day. Karl Marx (1867): one woman or girl could supervise four machines, each making 145,000 pins per day, for almost 600,000 per person per day. Pratten (1980):  one person could supervise 24 machines, each making 500 pins a minute, or about 6 million pins per person per day.

The problem of organization. But the division of labor by itself doesn’t say anything about the boundaries of the firm. Are the stages of production each a separate firm, or are some stages within a single firm? Vertical integration.

The problem of organization. The theory of the firm we’ve learned so far doesn’t help much. The firm as a black box. Boundaries of the firm assumed.

Why are there firms?

Why are there firms? “The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.” Cost of discovering the relevant prices. Not completely eliminated by intermediaries. Costs of negotiating and concluding a separate contract for each exchange. Employment contract vs. spot contract. Costs of coordinating when tasks are uncertain.

The parable of the secretary. Why not pay for office services by the piece? $1 per letter typed, etc. Manager unlikely to know in advance which services needed. Manager pays for the secretary’s time, and decides tasks later. Contract for “job description.”

The size of the firm. The size of the firm not its output (Q) but the number of transactions or activities within its boundaries.

The size of the firm. Why doesn’t the firm expand forever? V. I. Lenin: “The whole of society will have become one office and one factory.” But: diminishing returns to internal coordination. Management as a fixed factor.

The size of the firm.

The size of the firm.

The size of the firm.

The nature of the firm. But is a firm something different from a market? “Telling an employee to type this letter rather than to file that document is like my telling a grocer to sell me this brand of tuna rather than that brand of bread.” (Alchian and Demsetz 1972, p. 777.) The firm as a nexus of contracts.

Transaction costs. The “costs of using the price system” came to be called transaction costs. Ex ante transaction costs. The costs of finding trading partners, negotiating, coordinating. Ex post transaction costs. The costs of opportunism after the deal is made. “Self-interest seeking with guile.” Asset specificity versus moral hazard.