Chapter 11: The employment relation and Coase’s theory of the firm
The place of the employment relation in the theory of the firm has been a subject of considerable debate. As is well known, in ‘The Nature of the Firm,’ Coase made this relationship central to his analysis. The firm directs employees via authority, and this entails a ‘supersession of the price mechanism’ that constitutes ‘the distinguishing mark of the firm’ (1937: 389). The ability to exercise authority, in turn, is rooted directly in the legal definition of employment. Some half a century later, however, Coase (1988b: 37) conceded that his focus on the employment relation constituted ‘one of the main weaknesses’ of his account. One issue was that this emphasis gave an incomplete picture of the firm by understating the role of property rights. Yet this, Coase (1988b: 38) insisted, was a mere ‘blemish’ that posed no ‘serious harm’ to his argument. The bigger problem was that his depiction misdirected attention, leading later analysts to focus on the firm’s choice of contractual arrangements in procuring factors of production. It thereby obscured the ‘key idea’ of examining the comparative costs of coordinating activities in firms and markets (Coase 1988b: 38).
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