This paper simulates Ronald Coase's transaction cost approach to firm organizing using agent-based modeling, and contextualizes and contrasts it with the earlier division-of-labor/specialization theory of the firm that Coase challenged and sought to replace. The simulation tests firm emergence by targeting the difference between the theories, especially Coase’s rejection of specialization as an explanation for integration in the firm. The results show little support for, and suggest a shortcoming to, Coase’s transaction cost theory. These findings indicate a potential relationship between the pre-Coasean theory and Williamson’s Transaction Cost Economics, which can help shed light on the latter’s significant influence in the theory of the firm. (Emphasis added).It is the idea in bold that confuses me. Consider the following from an interview with Coase:
Wang: Microeconomics is about demand and supply. Compared with classical economics, marginal analysis clearly offers a deeper understanding of consumer choice. But I don’t think it is equally powerful in explicating production, the supply side of the economy.Is this really a man challenging the division of labour?
Coase: To understand production, we have to go back to Adam Smith’s division of labor. It serves well as a starting point, even though the modern economy today has become far more complicated.
Wang: This must be Smith’s most undeserving failure. Modern economics is built on Smith’s framework of the “invisible hand”. But it leaves no room for the division of labor.
Coase: Modern economics shows little interest in production. I am not sure production function tells us anything about production in the economy.
Wang: Adam Smith used the pin factory as an example to develop his analysis of the division of labor. Today, to investigate the division of labor, we can no longer afford to confine our focus to a single firm. Instead, we have to study the organizational structure of production.
Coase: That’s right. The firm remains the cell of the economy, but the intricate relations and constant interactions among the cells determine economic dynamism.
Also consider this piece from Coase and Wang (2011):
Price theory is primarily concerned with resource allocation, with little to say about production and innovation. The study of the industrial structure of production offers a research program to bring the division of labor back to the center of economics, with direct implications for the study of innovation and entrepreneurship.Again, does this sound like a man trying to replace the division as an explanation for production, rather the opposite I would think. Coase seems to be saying we need to emphasise the division of labour.
- Coase, Ronald H. and Wang, Ning (2011) 'The Industrial Structure of Production: A Research Agenda for Innovation in an Entrepreneurial Economy', Entrepreneurship Research Journal, 1(2): Article 1.