MT1 - Capitalism and Corporations

Question 1

Chandler (1977)

Answer 1

Management allocates economic resources within the enterprise - coordinator of the flow of goods
Administrative coordination can be more efficient than market coordination
Modern enterprise: multidivisional model, several distinct operating units, units are independent
Hierarchy of paid executives, divisions in several countries, several different products
Multiunit: greater productivity, lower costs, higher profits
Technical and professional salaried management is essential
Separate management and ownership
Lower transaction costs between units
e.g. Coca-Cola: managers of logistics, divisions etc.

Question 2

Coase (1937)

Answer 2

There are costs to exchanging on the market and using the price mechanism
These do no exist within a firm, the price mechanism is avoided: higher authoity minimises uncertainties
Firms exist to minimise transaction costs
When it is cheaper to exchange on the market, firms should outsource the activites

Question 3

Williamson (1981)

Answer 3

Builds on Coase: Transaction Cost Economics (TCE)
Transaction costs arise from 3 properties:
-uncertainty (assymetric info)
- frequency of transactions
- asset specificity
Markets are not perfect: information asymmetry, opportunistic behaviour, bounded rationality
1. search and information costs (finding and processing information)
2. bargaining and negotiations costs (over terms, conditions, prices)
3. enforcement costs (enforcement and delaying with breaches)
authority reduces uncertainty, facilitates coordination
taxes encourage the formation of firms
too large firms: inefficiencies and bureaucracy
high specificity - high transaction costs
e.g. General Motors outsourcing to Fisher Body, then merger due to high transaction costs and specificity (1919-26)

Question 4

Smith (1776)

Answer 4

Division of labour increases productivity
A marketplace enables people to specialise
e.g. pin factory
Workers focus only on once skill which they can master
The role of government should be limited because free markets maximise economic growth

Question 5

North (1991)

Answer 5

Institutions consist of informal constraints (sancions, traditions) and formal rules (laws, rights)
Institutions create order and reduce uncertainty
Institutions and the effectiveness of enforcement determine the cost of transacting
Key institutions: state, financial institutions, legal institutions, norms and practices

Question 6

Marx (1848)

Answer 6

Class struggles - exploitations of class differences is the driving force behind all historical developments

Question 7

Goshal and Moran (1996)

Answer 7

Organisations are not just a substitution for when markets fail - they possess unique advantages, e.g. governing certain activities
Hiearachical control does not necessarily curb opportunism, rational controls and sanctions can backfire - internalising is not a solution
Market is often more efficient due to opportunistic behaviour