Coase’s theory of the firm
If markets are so good at directing resources, why do companies exist? The first in our series on big economic ideas
ONE morning, an economist went to buy a shirt. The one he chose was a marvel of global production. It was made in Malaysia using German machines. The cloth was woven from Indian cotton grown from seeds developed in America. The collar lining came from Brazil; the artificial fibre from Portugal. Millions of shirts of every size and colour are sold every day, writes Paul Seabright, the shirt-buying economist, in his 2004 book, “The Company of Strangers”. No authority is in charge. The firms that make up the many links in the chain that supplied his shirt had merely obeyed market prices.
This article appeared in the Schools brief section of the print edition under the headline “Coase call”
From the July 29th 2017 edition
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