Co-ordination and Spontaneity in Non-Hierarchical Business Organizations
- New Thinking in Political Economy series
Chapter 3: The Knowledge Problem in Firms
3. The knowledge problem in ﬁrms In a free market . . . any advantages that may be derived from ‘central planning’ . . . are purchased at the price of an enhanced knowledge problem. We may expect ﬁrms spontaneously to tend to expand to the point where additional advantages of ‘central’ planning are just oﬀset by the incremental knowledge diﬃculties that stem from dispersed information. On a small scale the latter diﬃculties may be insigniﬁcant enough to be worth absorbing in order to take advantage of explicitly coordinated organization. Knowledge problem dispersed over a small geographical organizational area may mean a Hayekian knowledge problem that, unlike that relevant to large, complex entities, is solvable through deliberate search. Beyond some point, however, the knowledge diﬃculties will tend to reduce the proﬁtability of ﬁrms that are too large. Competition between ﬁrms of diﬀerent sizes and scope will tend, therefore, to reveal the optimal extent of such ‘central planning’. (Kirzner 1992, p. 162) Coase and Williamson have had a great inﬂuence on modern economists, and it is mostly due to them that today we usually think of ﬁrms as designed, centrally planned institutions. But a diﬀerent perspective on the theory of the ﬁrm has emerged over the last decade, one explicitly anchored on an Austrian, or more speciﬁcally Hayekian, epistemological basis rather than on transaction costs. The fundamental insight of this new Austrian theory of the ﬁrm is that much of the economically important knowledge is subjective (that...
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