This morning the HoD sent me a link to an interesting new paper to do with the theory of the firm. I have started reading it this afternoon and there is one point about which I'm not sure I agree with the author. The paper is "From fictions and aggregates to real entities in the theory of the firm" by David Gindis, Journal of Institutional Economics, 5(1) 2009: 25–46.
On page 30 Gindis writes
What, then, is the link between the owner (e.g., employer) and the other agents necessary for production (e.g., employees)? The existence of such a link is important for a theory of the firm, and Hart (1995: 57) rightly stresses that ‘without something to hold the firm together, the firm is just a phantom’. Hart(1995: 57–59) says:To me Gindis misses the point Hart is trying to make here. My take on what Hart is saying is that while property rights hold the nonhuman assets in place, it is the nonhuman assets that keep the human assets in place. That is, the employees stay at the firm because the firm has control-property rights-over the nonhuman assets. These nonhuman assets make the employees more productive and thus the workers wish to remain with the firm to remain productive.A firm’s nonhuman assets . . . simply represent the glue that keeps the firm together . . . If such assets do not exist, then it is not clear what keeps the firm together . . . One would expect firms without at least some significant nonhuman assets to be flimsy and unstable entities, constantly subject to the possibility of break-up or dissolution.Clearly, Hart provides a wrong answer to a good question. Hart makes a logical mistake by stating that a collection holds itself together. Far from being the sort of thing that could bind anything together, a collection is itself in need of being bound together if it is to form a whole. Without some sort of ‘glue’, a collection is no different from a heap of sand easily blown away on a windy day. Arguably, Hart also makes a theoretical mistake by excluding human assets or people from his definition of the firm. Given that property rights hold nonhuman assets together, the glue question makes sense only if it is about what holds human beings together.
I shall have to ponder longer.