Towards a political theory of the firm

Towards a Political Theory of the Firm is a new NBER working paper by Luigi Zingales.

Abstract:

Neoclassical theory assumes that firms have no power of fiat any different from ordinary market contracting, thus a fortiori no power to influence the rules of the game. In the real world, firms have such power. I argue that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a "Medici vicious circle," where money is used to get political power and political power is used to make money.

I hope when I get the chance to read the paper that there is more to it than this abstract suggests. Many, most, organisations, be they firms, trade unions, churches, not-for-profits, universities, welfare groups, environmental groups etc, will try to get governments to do their bidding. It's just the nature of things and a really good reason for keeping firms etc as far away from government as possible. It is one reason why you want a limited role for government in the economy, the smaller the role, the less government can do to help firms and thus the less firms will try to influence governments. 'Positive non-interventionism' has a lot going for it.

In the neoclassical model its not that firms have no power to influence the rules of the game, its more that there are no firms, or government for that matter, to do the influencing or to be influenced. In a world of zero transaction costs there is no need for firms since consumers can carry out production themselves. "With perfect and costless contracting, it is hard to see room for anything resembling firms (even one-person firms), since consumers could contract directly with owners of factor services and wouldn't need the services of the intermediaries known as firms" (Foss 2000: xxiv).

If you want to see what letting governments and business get together results in check out the history of guilds, they provided money to governments and governments provided protection for them for 800 years! What suffered for this time was economic efficiency, the consumer (as usual) and the economy and society in general.

Ref.:

• Foss, Nicolai J. (2000). 'The Theory of the Firm: An Introduction to Themes and Contributions'. In Nicolai Foss (ed.), The Theory of the Firm: Critical Perspectives on Business and Management (xv-lxi), London: Routledge.