Your browser does not support the PubReader view.
Go to this page to see a list of supporting browsers.
Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 15, No. 2, pp.277-294
ISSN: 1225-0279 (Print)
Print publication date 31 May 2002
Received 29 Aug 2002 Revised 05 Mar 2003

Why Firms and Markets in Economics?

Sung-Hee Jwa
President, Korea Economic Research Institute, FKI Building. 12 Fl. 28-1, Yoido-dong, Yeongdungpo-ku, Seoul 150-756, Korea, Tel: +82-2-3771-0004, Fax: +82-2-785-0270/1

JEL Classification: D21, D23, D40

Abstract

In this paper, by carefully reflecting on the modern transaction costs approach to the Theory of the Firm, we try and understand better the economic nature of firms vis-a-vis markets to derive important corporate policy implications. By following the idea of Coase that firms come to existence to economize on transaction costs, we specifically put it that the firm does so by internalizing factor market rather than product market activities. We also establish that the firm is essentially characterized by its vertical structure where the coordination function is realized through ‘command and control,' while markets are horizontal, democratic and spontaneous. This paper goes further to redefine the firm as a collection of non- transparent economics activities. Although the term ‘transparency' has been commonly used in the media and in policy debates, its precise economic interpretation has been so far unsatisfactory in the economics literature. This paper attempts to provide an economic meaning of transparency, which is placed in the context of firms and markets. Various corporate issues including its governance, policy, and transparency, as well as the role of market disciplinary mechanisms are clarified through theoretical extensions and discussions regarding the theory of the firm.

Keywords:

Theory of the firm, Nature of firms and markets, Transaction costs, Factor and product markets, Corporate governance, Corporate transparency

Acknowledgments

The views and opinions of the author expressed herein do not necessarily state or reflect those of the Korea Economic Research Institute.

References

  • Alchian, Armen A., and Demsetz, Harold. “Production, Information Costs and Economic Organization.” American Economic Review 62 (December 1972): 777-95.
  • Alchian, Armen A., and Woodward, Susan. “Reflections on the Theory of the Firm.” Journal of Institutional and Theoretical Economics 143 (1987): 110-36.
  • Arrow, Kenneth J. “The Organization of Economic Activity: Issues Pertinent to the Choice of Market Versus Nonmarket Allocation.” In The Analysis and Evaluation of Public Expenditure: The PPB System, 1. U.S. Joint Economic Committee, 91st Congress, 1st Session, U.S. Government Printing Office, pp. 59-73, 1969.
  • Caves, Richard E. “International Differences in Industrial Organization.” In Richard Schmalensee, and Robert D. Willig (eds.), Handbook of Industrial Organization II. Elsevier Science Publishers B.V., pp. 1225-50, 1989.
  • Coase, Ronald. “The Nature of the Firm.” Economica 4 (1937): 386-405. [https://doi.org/10.1111/j.1468-0335.1937.tb00002.x]
  • Coase, Ronald. “The Problem of Social Cost.” Journal of Law and Economics 3 (October 1960): 1-44. [https://doi.org/10.1086/466560]
  • Coase, Ronald. “Why Economics Will Change.” ISNIE Newsletter 4 (No. 1 2002): 1-7.
  • Greenspan, Alan. Regulation, Innovation, and Wealth Creation. Remarks before the Society of Business Economists, London, 25 September, 2002.
  • Grossman, Sanford, and Hart, Oliver. “The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration.” Journal of Political Economy 94 (1986): 671-719. [https://doi.org/10.1086/261404]
  • Hart, Oliver D., and Moore, John. “Property Rights and the Nature of the Firm.” Journal of Political Economy 98 (1990): 1119-58. [https://doi.org/10.1086/261729]
  • Hayek, von Friedrich. “Competition as a Discovery Process.” In Nishiyama Chiaki, and Kurt R Leube (eds.), The Essence of Hayek. Stanford, California: Hoover Institute Press, 1984.
  • Holmstrom, Bengt, and Kaplan, Steven N. “Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s.” Journal of Economic Perspectives 15 (No. 2 2001): 121-44. [https://doi.org/10.1257/jep.15.2.121]
  • Holmstrom, Bengt, and Tirole, Jean. “The Theory of the Firm.” In Richard Schmalensee, and Robert D. Willig (eds.), Handbook of Industrial Organization I. Elsevier Science Publishers B.V., pp. 61-133, 1989. [https://doi.org/10.1016/S1573-448X(89)01005-8]
  • Jensen, Michael C., and Meckling, William H. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics 3 (1976): 305-60. [https://doi.org/10.1016/0304-405X(76)90026-X]
  • Jwa, Sung-Hee. “A New-Institutional Economics Perspective of Corporate Governance Reform in East Asia.” Seoul Journal of Economics 13 (No. 3 2000): 215-23.
  • Jwa, Sung-Hee. A New Paradigm for Korea's Economic Development: From Government Control to Market Economy. London: Palgrave, 2001. [https://doi.org/10.1057/9781403920201]
  • Jwa, Sung-Hee. The Evolution of Large Corporations in Korea: A New Institutional Economics Perspective of the Chaebol. London: Edward Elgar Publishers, 2002. [https://doi.org/10.4337/9781781950470]
  • Klein, Benjamin, Robert G. Crawford, and Alchian, Armen A. “Vertical Integration, Appropriable Rents, and the Competitive Contracting Process.” Journal of Law and Economics 21 (1978): 297-326. [https://doi.org/10.1086/466922]
  • Nelson, Richard R., and Winter, Sidney G. Evolution Theory of Economic Change. Cambridge: Harvard University Press, 1982.
  • North, Douglass C. Institutions, Institutional Change and Economic Performance. Cambridge University Press, 1990. [https://doi.org/10.1017/CBO9780511808678]
  • North, Douglass C. Transaction Costs, Institutions, and Economic Performance. An International Center for Economic Growth Publication, San Francisco, California, 1992.
  • Penrose, Edith T. The Theory of the Growth of the Firm. New York: John Wiley and Sons Inc., 1958.
  • Rosen, Sherwin. “Transaction Costs and Internal Labor Markets.” In Oliver E. Williamson, and Sidney G. Winter (eds.), The Nature of the Firm: Origins, Evolution, and Development. Oxford: Oxford University Press, pp. 75-89, 1991.
  • Shleifer, Andrei, and Vishny, Robert W. “A Survey of Corporate Governance.” The Journal of Finance 52 (No. 2 1997): 737-83. [https://doi.org/10.1111/j.1540-6261.1997.tb04820.x]
  • Stiglitz, Joseph E. “Incentives and Risk-Sharing in Sharecropping.” Review of Economic Studies 41 (April 1974): 219-55 [https://doi.org/10.2307/2296714]
  • Vives, Xavier. “Corporate Governance: Does It Matter?” In Xavier Vives (ed.), Corporate Governance: Theoretical and Empirical Perspectives. Cambridge: Cambridge University Press, 2000. [https://doi.org/10.1017/CBO9781139175333]
  • Williamson, Oliver E. Markets and Hierarchies: Analysis and Antitrust Implications. New York: NY, Free Press, 1975.
  • Williamson, Oliver E. “The Modern Corporation: Origins, Evolution, Attributes.” Journal of Economic Literature 19 (December 1981): 1537-68.
  • Williamson, Oliver E. The Economic Institutions of Capitalism. New York: NY, Free Press, 1985.
  • Williamson, Oliver E. “Introduction.” In Oliver E. Williamson and Sidney G. Winter (eds.), The Nature of the Firm: Origins, Evolution, and Development. Oxford: Oxford University Press, pp. 3-17, 1997.
  • Zingales, Luigi, Rajan, Raghuram G., and Kumar, Krishna B. What Determines Firm Size? Mimeograph, University of Chicago, 1999.