Why Firms Exist? What Is A Firm?

At the end of the eighteenth century, with the rise of the enlightenment and the industrial revolution came the development of the capitalist economy. As mercantilism faded with the developments of the industrial revolution, capitalism, a new economic system developed. Capitalism is a system in which the means of production, distribution, and exchange of wealth are controlled chiefly by private property owners who are free to seek profits in competitive conditions. Capitalism can be broken down into five functional components; self-interest, private property, division of labor, competition, and the invisible hand. Each component is an integral aspect of capitalism both at its inception and in our contemporary global economy.

According to Scott (27), “Capitalism is an indirect system of governance for economic relationships”, this implied that in capitalism there are two different classes of people based on their economic role, the employee, who is considered as the capitalist class, and the employer, who is considered as the working class. Moreover, according to Crossman, the fundamental characteristic of capitalism is a set of three relationships among workers/employer, the means of production and those who

Horace Taylor puts his opinion into prospective with this political cartoon. Businesses became more powerful than the government itself, which was too afraid to interfere in the exploitation. One such exploitation was the creation of corporation. Corporations were designed to limit the liabilities of its shareholders and thusly minimize the loss of capital by criminalizing only the legal entity, rather than its underlying workers. Thusly, legal suits and such became nearly useless against the incorporated. Additionally, as corporations grew unchecked, they found other ways to control competition. The railroad industry, the first big business of America, used pools and rebates to maximize profit but decrease competition – a principal not part of capitalism. Progress was slowed by the lack of competition, but the pursuit of wealth helped maintain it or a time. The trust was similar to a pool, but trusts were far more hierarchal and were used by corporations rather than regions. Having all the power in the world, businesses could grow and do whatever they wanted without worrying about the government ceasing their progress.

He attacks Friedman selective choice of legal realities that help prove his stance and discarding of those that do otherwise as mere “legal fictions”. In that, Denning disputes that Friedman rests his arguments on legal realities such as the law of agency, and dismisses another legal reality – the corporation – for the sake of illustrating how the corporation’s money belongs to its stockholders, customers, and employees but not the real legal owner – the organisation itself. Instead of providing a balanced argument on the legal definitions of terms “corporations” and “agency”, Denning’s stance is mainly concerned with how Friedman conveniently chooses legal facts that only provide backing to his conclusions, instead of tackling these core terms to help support his own argument.

The concept of forming of corporations by registration and restricted liability of stake holders of corporations dates back to mid nineteenth century. The concept in its very basic sense means that a company is a separate legal entity, in other words, it is a juristic person.

Many privately owned companies exist in capitalist societies. The population is not vast enough to carry all of these companies.

As the Industrial Revolution begins, the idea of capitalism began to come up. It is economic and political system in which private owners control the country’s trade and industry for personal profit. The government intervenes the least as possible so that the best companies survive

Individual ownership evolved over time into a variety of models of collective enterprise. In Darwinian terms, the corporate model has prevailed as the legal structure of choice in modern commerce because

In “Wealth of Nations”, Adam Smith’s most famous piece, he argues that the root of capitalism’s success is consumerism. He believed that the most effective and profitable way to create commodities is by dividing labor or division of labor. Because workers were separated into specific skill sets, it saved time and allowed for the production process to flow smoothly, resulting in higher revenue. This system of productivity in turn influenced how Smith viewed market transactions. Smith stood by the validity of capitalism and promoted the idea that trade and labor

The divisions of labor must be controlled by a rational actor; such notions are arguably the mechanisms’ of “self love” acts as an actor which drives the capitalist machinery. The example of the pin maker illustrates this point. Lastly, Smith instills “a certain propensity in human nature; the propensity to truck, barter, and exchange one thing for another.” This, he suggests, may simply be an extension of reason. It is this final, and most specific, penchant of human nature that ensures a vague sense of self interest, coupled with reason and speech; produce a very particular kind of capitalist economic system, which he describes in the rest of the book. In speaking about labor, Smith characterizes it in a negative light. He observes the division of labor as positive to production and competition, but in the social sense sees it as a dummying of the masses. “The man whose whole life is spent in performing a few simple operations… has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally

“Even the former deputy British prime minister, Nick Clegg on his Januray2012 mansion house speech sought to set out his vision of how this should be done. Quoting John Stuart Mill, he set out to “end the feud between capital and labour” by promoting the virtues of employee share ownership and employee ownership as he termed it John Lewis economy” www.centreforum.org.

The Question of Imitability: do firms without a resource face a cost disadvantage in obtaining or developing it? [is what a firm is doing difficult to imitate?]

The concept of a company being a separate legal entity is the most striking illustration in separating the company from its owners. A paramount principle of corporate law is that no shareholder or member of a company is made liable for the obligations incurred by such incorporations A company is different from its members in the eyes of law. In continuations to this the opposite also holds true in the sense that neither can the company be held liable for the acts of its members. It is a fundamental distinction that a company is distinct from its members.

Chandler`s model of large-scale enterprises is a way from and shift away from the ‘invisible hand’ model given by Adam Smith. Chandler`s model is an attempt to explain the developments in the second phase of industrial revolution where he tends to reason behind the enhancement of capital. In this context, he gave the concept of modern industrial enterprise, which according to him grew in three phases. That is, there were investments in the production facilities, mostly the ones with technological potential to produce economies of scale and the economies of scope,

Proponents of the knowledge-based theory of the firm point out that this one sided concentration on incentive conflicts in the economics of organizational literature overlooks the production side of the firm. Langlois and Foss, for example, argue that the literature has unreflectively relied on a dichotomy between productive aspects and exchange aspects of the firm, that is, on a dichotomy between production costs and exchange costs. In analyzing exchange costs the literature recognizes that exchange itself is not costless, but involves transaction costs from imperfect knowledge and opportunism. But in analyzing production costs, there has been an embedded agreement that price theory tells us all we need to know about production. As Langlois and Foss point out, however, it is very likely that knowledge about how to produce is imperfect and that knowledge about how to link together one person’s (or organization’s) productive knowledge with that of another is imperfect. These twin issues of capabilities and coordination are discrete from the hazards of astringent that other traditional beliefs have focused on. Both knowledge resources and (imperfect) production costs can be said to vary depending on the attributes of a production process, in the same way that transaction costs differ depending on the asset attributes of investment projects. Thus, instead of holding technology constant across alternative modes of organization as a