Just for fun: Marx on the firm

That Marx didn't much like markets is obvious enough, but what of firms? On the positive side Marx preferred the deliberate order of the firm to the anarchy of the market. After all he wanted to run the entire economy like a firm. This view that the firm can be seen as an organisational alternative to the market anticipated Coase in this regard. But on the other hand he saw the firm as the key locus where labour exploitation ad alienation was perpetrated and he has "issues" with the detailed division of labour that capitalism introduced. His model of communism, to be realised after single-firm socialism, was meant to overcome the depressing human condition existing in the capitalist firm.

Besides being a political proposal, single-firm socialism was, according to Marx, a historical necessity imposed by the development of productive forces. The firm’s greater efficiency (relatively to markets) had already been evinced by the growth in firms’ size during capitalism, and productive forces exerted strong pressure for their further growth. By eliminating private property, socialism did nothing other than complete an inevitable process of concentration, whose onset was 'scientifically guaranteed' by historical materialism (Pagano 2012: 42).

For Marx single-firm socialism’ would supersede the dualism of capitalism, under which firms and markets coexisted, and enable the greater development of the productive forces. The limitations of the market sprang from what Marx saw as its nature as a decentralised coordination mechanism dealing with the, often inconsistent, decisions made by buyers and sellers. This negative view of the market lead Marx to argue for the extension of firm-type organisation to society as a whole.

The extension of the planned organization of production of the capitalist factory would complete a process already ongoing in the historical dynamics of capitalism whereby productive forces tended constantly to increase the size of firms. Socialism was the final outcome of this tendency of the productive forces to shift production relations within the firm. The scientific certainty of the advent of socialism was, for Marx, inherent in the tendency of the productive forces to influence production relations. The extension of the authoritarian world of the capitalist firm to the whole of society was necessary to reap the benefits of a planned coordination made more and more necessary by the increasing interdependence among the production sectors (Pagano 2012: 43).

Even if firms are better than markets, firms are not all good. For Marx capitalism produced a very detailed and hierarchical division of labour. This was one of his major criticisms of capitalism. The capitalist-owned firm is a structure that involved a massive deskilling of workers and made labour alienated and painfully homogeneous. But, in the short term at least, socialism could do little about this:

[ ... ] in the early stage of socialism, planning could be made on an objective basis because, according to Marx, capitalism had eliminated the possibility of subjective preferences among repetitive and simple tasks. These conditions suggested, for the first phase of a socialist society, a form of authoritarian planning based on the theory of labour value that ignored the subjective preferences for different kinds of work (Pagano 2012: 43).

Over the longer term, of course, all this would change and

[ ... ] work would entirely match the preferences and development of individuals [ ... ] (Pagano 2012: 43).

Such an idea was constantly present in Marx’s critique of capitalism but its implications were postponed to a distant future.

Interestingly Marx, unlike Coase, saw costs in using the market but assumed that the firm could be used at basically zero cost.

In some respects, Marx made a mistake mirroring orthodox economics when he assumed that, while the costs of market coordination were very high, the costs of firm-type coordination were negligible, with the consequence that all the economic transactions could be coordinated at zero costs by centralized planning (Pagano 2012: 44).

The standard neoclassical model assumes that transactions costs are zero and thus there is no need for firms while Marx assumed that management coasts are zero and thus there is no need for markets. Coase's argument is that both firms and markets come with costs and it is the comparison of these costs that determined the boundaries of the firm.

Ref.:

• Pagano. Ugo (2012). `Marx'. In Michael Dietrich and Jackie Krafft (eds.) Handbook on the Economics and Theory of the Firm (pp. 42-8), Cheltenham: Edward Elgar.