The Accounts of the Nature and Emergence of the Firm Provided by Coase and Marx - Assignment Example

Compare and contrast the accounts of the nature and emergence of the firm provided by Coase and Marx Introduction Economic exchange is such a complex activity, but the bottom line is to be able to generate profit. It is in this reason that Coase was very interested to study the existence of the firm, which was already started by Marx, though not in a specific but in a general manner. Marx observed that the price of labour is low compared to the price of produced goods, creating a ‘surplus value’ which he identified as the source of capitalist’s profit. Marx was very interested in analysing the organisation of production which integrates the concept of labour as a commodity, but he was not more into the economic analysis as what Coase would want to identify. Marx observed the division of labour but was focused on claiming that the alienation of labour power is particularly the defining attribute of capitalism. However, Coase was trying to understand why there are highly organised production hierarchies within a firm while others remain harmonised through the system of interdependence between supply of a good or service and associated price. Coase coined transaction cost as the cost associated with market participation of a firm, organisation or individual. Coase was indeed interested to dig deeper into the economic analysis unlike Marx. For instance, Coase was able to integrate into his idea the concept of price mechanism which specifically points out the system of interdependence between supply of a good or service and its associated price. Thus, Coase’s idea was near to the point of unveiling the point that division of labour should increase productivity, as integral component of economic analysis of the existence of the firm. The above are the general ideas that this paper tries to expound in great detail in order to successfully compare and contrast the accounts of the nature and emergence of the firm provided by Coase and Marx. Included in the analysis are the concepts of market and non-market environment, transaction cost and price mechanism. Market versus non-market environment From the time of Marx, labour became a basic commodity, as peasants became free to sell their own labour. This happened because some people no longer possessed their lands or tools they must need to produce. As a result, they ended up obliged to sell their own labour. These people who sold their labour power were called “proletarians” and those who owned land, technology and were able to buy labour were called “capitalists.” Marx found that the capitalists were making substantial profits through the associated labour, as there was consistent generation of surplus value especially in a flourishing industry. Marx noticed that in almost all flourishing industries, the price for labour was significantly lower than the price associated with the price of the manufactured good (Meikle, 1996). Considering the point that labour has become a basic commodity especially among the capitalists, then the existence of the labour market coordinated with the market-price mechanism was the most essential thing to happen. For this reason, when there would be higher demand for labour force, the peasants would have the opportunity to increase the associated price for their labour. To maximise the opportunity for the capitalistic influence, Coase found that capitalists formulated firms as a course of action to separate the labour market from the actual price mechanism. For this reason, Marx argued that firms are means where capitalists could exploit workers (Collier, 2004; Meikle, 1996). However, Coase thought that when one has to find for efficient institutions for responding to uncertainty, firms are most likely to qualify for that purpose (Coase, 1937). It is therefore evident that firms or organisations tried to stay off from the labour market because of the associated cost especially if the demand and supply conditions would relatively change. For this reason, Coase was trying to emphasise the point that companies would want to engage in a long-term contract with workers in order to ensure minimisation of cost. This therefore leads to the birth of firms where the capitalists could try to maximise creation of profit. Coase idea was therefore a specific proof to what Marx would want to emphasise that the capitalists are looking forward to establish optimum creation of profit, at the expense of the labour force. For this reason, it could be implied that the capitalists were evolving in making ways to guarantee of the achievement of their ultimate capitalistic goal. They shifted from labour market to non-market labour environment by establishing firms where they could implement legalities and other related options to ensure minimisation of labour cost (costs associated with hiring and firing) by initiating labour contracts for instance. This is indeed the very point of the Marxian critique of new institutional economics (Ankarloo and Palermo, 2004). Coase, Marx and transaction cost What was interesting about the observation of Marx was the idea that in an industry that was doing well during his time, capitalists were able to produce good using lower price for labour. Transaction costs were not coined that time, but Marx was definitely pointing to the fact the associated cost incurred in making certain product or service offerings. The observation of Coase was also remarkable and it could not be different from Marx’s except for the fact that the former coined the concept of transaction costs. Coase noted that some productions were organised in hierarchies and even including those transactions within or between firms. However, Coarse found the answer to his important queries and it boils down to the point that there is a need to minimise associated cost in the production of goods in order to make sure cheaper transaction costs which in return could be advantageous compared to relying solely on the costs linked with price mechanism (Coase, 1937; Hodgson, 1997). At this point, it is clear that Coase and Marx could not be different in their potential views on transaction costs especially that the bottom line of this argument is the actual capacity of the capitalist to optimise generation of profit. However, there is a potential difference on the actual method used in order to prove their point. Marx was relying on his actual observation without using any concept for economic analysis. In the first place, it was not his actual point to dig deeper into the economic analysis. Coase on the other hand was trying to coin important concept such as the transaction cost in order to identify the nature and creation of a firm. For this reason, there is an actual consideration of the kind of empirical inquiry used by these two economists in order to come up with the idea linked up with the market economy. Coase, Marx and price mechanism On the concept of price mechanism, Coase and Marx’s perspective may significantly vary. Based on the stated information above, it is clear that Marx was focusing on the actual reliance of capitalists in the labour market. However, Coase was trying to emphasise the firm should be a means to control labour price, as it could be the best place outside of the labour market that the transaction costs could be minimised, and the costs of price mechanism could be potentially eliminated (Coase, 1937). At this point, Marx must not have pointed out the most detailed explanation of his observation of the capitalist movement because this could be probably due to the initial revolutionary progress of capitalism. However, Coase substantially unraveled the highly revolutionised approach of capitalists by establishing firms that the bottom line would be to eradicate the costs associated with price mechanisms. What Marx’s might have been missing in understanding capitalists’ movement was the point that there was a highly sophisticated advancement of ensuring profitability at the expense of the labour force. This is due to the fact that Coase was trying to establish detailed explanations by emphasising the need to understand the actual role of price mechanism in the real market economy, and giving us the associated information about the capitalists who have substantial ideas on the probable implications of this in profit making. By understanding the actual idea of Marx and the significant findings of Coase, we can then try to formulate the thought about the revolutionary capitalist movement, which in reality was able to start from the basic and then later had come into sophistication just for the capitalists to remain making sure of the achievement of potential productivity and eventually profit. Thus, the similarity of Marx and Coase’s findings could boil down to the fact that they were working on the same quest and that is to understand the actual nature of capitalism applied in the actual context of market economy. Analysis At this point, we already have explored the works of Coase and Marx. By knowing their actual findings, we understand that the two economists were both working on the same quest and that was to unravel the actual role of capitalists in the market economy. In detail, they may not have the same findings, but when one would try to integrate them, it would lead to the point of understanding capitalism as a revolutionary output of the capitalist movement. There were significant difference between the works of Coase and Marx. Coase was solely trying to make an economic analysis by understanding the emergence of the firms, but Marx was tapping on the general characteristic of the capitalist movement. Coarse on the other hand was dealing on the modern capitalist approach while Marx was at the level of defining the classical idea associated with capitalism. For this reason, Coarse was employing modern and sophisticated concepts in supplementing his actual ideas, while Marx was relying on the classical economic concept with supplements from his actual observation in the prevailing economic market. The difference between Coase and Marx’s ideas is clear. The two have substantially pointed out the concept of capitalism, but at different time, creating a significant gap in their respective concepts. However, when their ideas are to be combined, they will result to a clear illustration of the evolutionary role of capitalism in the market economy. This substantially shows that capitalism is therefore a dynamic force (Nee. 2007). Conclusion In this paper, the proponent tries to establish the ideas associated with comparing and contrasting the accounts of the nature and emergence of the firm provided by Coase and Marx. It was found that the idea of Marx on capitalism and Coase’s famous transaction costs are significantly related, especially in understanding the role of capitalists in the labour market. For this reason, when combining the ideas of Coase and Marx, there would be significant basis on the actual evolutionary path of the capitalist movement. References Ankarloo, D., and Palermo, G. (2004) Anti-Williamson: A Marxian critique of New Institutional Economics. Cambridge Journal of Economics. 28(3): 413-429. Coase, R. H. (1937) The nature of the firm. Economica. 4(16): 386-405. Collier, A. (2004) Marx: A beginner’s guide. Toronto: National Book Network. Hodgson, G. M. (1997) Competence and contract in the theory of the firm. Journal of Economic Behavior & Organization. 35 (1998): 179-201. Meikle, S. (1996) Marx and Stalinist History Textbook, Critique Vol 27 Nee, V. G. (2007) On capitalism. Stanford, CA: Standford University Press. Read More