Wednesday, November 7, 2018

The Organization of Industry #2

A coordinating example Richardson doesn't give is a home-builder, HB for short. HB could contract with an architect to create detailed design and specs for building a new house. After the architect's work is done, HB contracts with an excavator, landscaper, concrete provider, carpenters, plumbers, electricians, painters, roofers, and so forth to build the house. When the home is at least partly built, HB could contract with a realtor to sell the property.

The quantitative mix between direction, co-operation and market transactions can vary due to other particulars such as the size and specialization of the firms. Richardson's paper addresses some of this relying in part on brick-making. "What is important, for our present purposes, is to note that impersonal co-ordination through market forces is relied upon where there is reason to expect aggregate demands to be more stable (and hence predictable) than their component elements. If co-ordination were to be sought through co-operation, then individual brick-makers would seek to match their investment and output plans ex ante with individual builders. Broadly speaking, this does not happen, although traditional links between buyers and sellers, such as are found in most markets, do introduce an element of this kind. Individual brick manufacturers rely, for the most part, on having enough customers to ensure some cancelling out of random fluctuations in their several demands. And where sales to final consumers are concerned, this reliance on the law of large numbers becomes all but universal. Thus we rely on markets when there is no attempt to match complementary activities ex ante by deliberately co-ordinating the corresponding plans; salvation is then sought, not through reciprocal undertakings, but on that stability with which aggregates, by the law of large numbers, are providentially endowed[.] "

Richardson's summary section begins as follows: "This article began by referring to a vision of the economy in which firms featured as islands of planned co-ordination in a sea of market relations. The deficiencies of this representation of things will by now be clear. Firms are not islands but are linked together in patterns of co-operation and affiliation. Planned co-ordination does not stop at the frontiers of the individual firm but can be effected through co-operation between firms. The dichotomy between firm and market, between directed and spontaneous coordination, is misleading; it ignores the institutional fact of inter-firm cooperation and assumes away the distinct method of co-ordination that this can provide."

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