What is a firm?

This seems an obvious question which many people would assume would have an obvious answer. And yet it doesn't.

No one can agree on a definition. For neoclassical theory, a firm is little more than a production function or production possibilities set. For Demsetz a firm is an organisation in which production is carried out exclusively for sale to those formally outside the organisation. For Coase the firm is defined as an employment relationship. X is a firm because the owner of X employs A and B to work for him. For Williamson and Hart a firm is defined in terms of the ownership of alienable assets. The question for them is who owns what rather than who employs who. Spulber sees a firm as a transaction institution whose objectives differ from those of its owners. For Foss and Klein a firm is made up of an entrepreneur and the assets owned by them. All of these ideas have some merit. Its much like a group of blind men trying to describe an elephant, each man can tell you about the part he can feel while remaining unaware of the rest of the animal.

At first, it may seem odd that economists can not agree on what a firm is. But is it really that strange? When you think about it, coming up with a definition that covers every organisation from a sole proprietorship to a partnership to a limited liability company to a multinational is asking a lot, maybe too much. Foss, Klein and Linder (2015: 275)  suggest that a "[...] better question than "what is a firm" is "what are the important research questions that can be answered when the firm is defined in a particular way?" ".

That idea does seem to have merit.  At least then you can use a definition which is useful for the question under consideration rather than trying to come up with an all-embracing definition. A lot of otherwise wasted time and energy could be saved by not having to come up with the perfect one size fits all definition.

Ref.:

• Foss, Nicolai J., Peter G. Klein and Stefan Linder (2015). 'Organizations and Markets'. In Peter J. Boettke and Christopher Coyne (eds.), The Oxford Handbook of Austrian Economics (pp. 272-95), Oxford: Oxford University Press.