The firm as a social institution: the failure of the contractarian viewpoint.

Main question: how can we describe the internal organization of the firm: by marginalist or by hierarchical approach?

Main goal: to persuade us, that contractarian approach (market approach) is wrong, and authoritarian approach reflects the reality.

Intro: overwhelming majority of modern theories treats the firm as one single maximizing or satisfying individual;

 modern theories neglect the internal structure of the firm;

 there is a tendency in the economic theory to consider a firm as hierarchical structure.

  1. Alchian and Demsetz's point of view.

    2. Market exchange = organization of production within the firm.

    Power and authority do not exist in wage contract.

    The classical capitalist firm is a contractual structure with: 1) joint input production; 2) several input owners; 3) one party who is common to all the contracts of the joint inputs; 4) who has rights to renegotiate any input's contract independently of contracts with other input owners; 5) who holds the residual claim; and 6) who has the right to sell his central contractual residual status.

  2. The employment contract

    3. --Alchian and Demsetz--: Presumed power to manage and assign workers to various tasks = one little consumer power to manage and assign his grocer to various tasks;

    There is only difference between these two cases: a team use of inputs and a centralized position of some party in the contractual arrangement;

    -- Nutzinger --: This approach is closer to earlier putting-out system;

     Labor-power ≠ labor-capacity:

    Labor-power — specific product that is defined

    Labor-capacity — the concrete use of the capacity is not defined;

    In wage contract there is a special agreement to obey the directions of the Boss.

  3. Institutional consideration

    4. Wage contract cannot be completely specified in advance;

    Market exchange ≠ x apples equal y dollars;

    Even freelance independent workers are highly dependent in fact;

    Þ All contracts imply secondary obligations and need for loyalty and trust (institutional aspect) Þ hierarchical structure of enterprise.

  4. Leaving the firm

Objection to the authoritarian view — possibility of leaving a firm

BUT leaving the firm Þ transaction cost arises: 1) the need for finding a new occupation in another enterprise leads to search and information costs, not only in terms of money; 2) the costs of leaving imply the loss of informal relations with fellow workers; 3) the claims and respect acquired during the occupation and 3) the need for building-up new social relations at the next workplace. Very often, also other areas are involved: 4) new housing, 5) new schooling, 6) new neighborhood relationships, and so on.
  2. Ways of withstanding the power of boss (Are they effective?)

    3. Bargaining power of skilled workers (not common in fact)

    Possibility to leave (not powerful enough because 1) it is too costly and 2) he can use the threat of leaving and not properly the leaving because he would lose any influence on the organization after quitting it.

    Moral suasion

    Courts appeal.

     Admonition

     Denial of promotion

     Demotion to another job or department

     Provision or refusal of certain amenities

     Granting further training and education (or not!)

     Threat of firing, up to the dismissal itself.

  3. Conclusion

Without any doubt, one can look formally at the firm from a purely contractarian viewpoint. But, as we have attempted to show, this way of looking at the firm is seriously misleading in many respects.

 

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