Monday, 7 June 2010

Trade and firms

In a footnote in some of my current work on the theory of the firm I write,
The first existence of a firm becomes even more problematic if we consider a farm as a firm. Farming is an ancient human activity. At what historical point did the farm first become a firm? Ofek (2001: chapter 13) argues that agriculture developed with a symbiotic relationship to exchange/trade and thus farms can seen (at least partially) as firms from a very early stage.
I have now come across an article in the Wall Street Journal by Matt Ridley in which he says,
Agriculture was invented where people were already living in dense trading societies. The oldest farming settlements of all in what is now Syria and Jordan are situated at oases where trade routes crossed, as proved by finds of obsidian (volcanic glass) tools from Cappadocia. When farmers first colonized Greek islands 9,000 years ago they relied on imported tools and exported produce from the very start. Trade came before—and stimulated—farming.
So again we see the argument that trade and farming (and thus firms) are closely related. The question is why? One possibility follows from the fact that we specialise in production but diversify in consumption. Thus if we set up a farm and start producing, say, meat but want to also consume, say, grains in some form, we need to obtain those grains. How? We swap meat for grain, in other words we trade. It is arguable that one necessary factor is making sure that farming survived was the ability to trade, in that trade meant we were able to specialise in production but were also still able to diversify our consumption.

Ridley also notes,
Once human beings started swapping things and thoughts, they stumbled upon divisions of labor, in which specialization led to mutually beneficial collective knowledge. Specialization is the means by which exchange encourages innovation: In getting better at making your product or delivering your service, you come up with new tools. The story of the human race has been a gradual spread of specialization and exchange ever since: Prosperity consists of getting more and more narrow in what you make and more and more diverse in what you buy. Self-sufficiency—subsistence—is poverty.
A specialised, trading unit of production, like a farm, is basically a firm. Thus firms are a very old human institution. Just not as old as trade.
  • Ofek, Haim (2001). Second Nature: Economic Origins of Human Evolution, Cambridge: Cambridge University Press.

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