Sunday, 28 August 2016

My 5 open questions in economics

Recently Tyler Cowen asked Adam Ozimek about the five biggest open questions are in the current economic debate.
Ozimek's answer is here.

This got me thinking about what are my 5 biggest questions in current economics. Of course all such answers are idiosyncratic in that we all have our own interests and research areas in economics, but here are my 5 questions, which unsurprisingly have to do with the theory of the firm. Actually 3 of them are old questions.

1) why do firms exist?
2) what determines the boundaries of firms?
3) what determines the internal organisation of firms?

These are, of course, the 3 questions asked by Ronald Coase back in 1937 but I list them here because we still don't have really good answers to them. As Oliver Hart wrote back in 1989,
"An outsider to the field of economics would probably take it for granted that economists have a highly developed theory of the firm. After all, firms are the engines of growth of modern capitalistic economies, and so economists must surely have fairly sophisticated views of how they behave. In fact, little could be further from the truth. Most formal models of the firm are extremely rudimentary, capable only of portraying hypothetical firms that bear little relation to the complex organizations we see in the world. Furthermore, theories that attempt to incorporate real world features of corporations, partnerships and the like often lack precision and rigor, and have therefore failed, by and large, to be accepted by the theoretical mainstream.”
And while progress has been made since 1989 we still don't have a completely satisfactory theory of the firm.

But today we can add at least 2 more question to those above.

4) how and why are firms formed? This is a question about the role of the entrepreneur in the development of the firm and thus offers the opportunity for the theory of the firm to be integrated with the theory of the entrepreneur.
5) what role do firms play in the formation of markets? Market formation is another under appreciated area in economics but having a better understanding of firms will help us better understand the process of market creation.

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