The Nature of the Firm by Coase

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Ronald Harry Coase, a British economist, who was born December 29, 1910 in Willesden, England. He emigrated to the United States and started work at the University of Buffalo. Coase settled at the University of Chicago in 1964 and became the editor of the Journal of Law and Economics. He received the Nobel Prize in Economics in 1991. Coase is best known for two articles in particular: "The Nature of the Firm" (1937), which was written at his age of 27, lets even say his quite early economic age. This article, which was a brief but highly influential essay, Coase introduces the concept of transaction costs to explain the size of firms.

Introducing his analysis of ‘The nature of the firm’, Coase refers to D.H. Robertson who points out that we find “islands of conscious power in this ocean of unconscious co-operation like lumps of butter coagulating in a pail of buttermilk”(Coase,1937). Coase asks next: why is it so? His answer is built on the research of a balance between production cost and transaction cost giving rise to firm ‘coagulating transactions’. At the very begining, however Coase is touching a very delicat question which has been a reason of many economic disputations. Indeed he opens up a question if the economic assumtions are really managable and if it is so, do theese economic applications really correspond with the realistic world? Concerning this issue he finds a compromise. He is pointing out the statement of Mrs. Robinson who remarked the folowing resolution : „More often one set will be manageable and the other realistic“. Coase himself is trying out to give an explanation the economic assumtions are tractable though by „two of the most powerful instruments of economic analysis developed by Marshall, the idea of the margin and that of substitution, together giving the idea of substitution at the margin“. Consequently he is trying to „bridge what appears to be a gap“ in economic theory between two oppinoins The...
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