Edited by Daniel Hjorth
Chapter 11: The entrepreneurial firm
Is the entrepreneurial firm an artefact resulting from markets, or are both firms and markets artefacts resulting from entrepreneurs seeking to create economic organizations? Classical and neoclassical economic theory assumes the centrality and preexistence of markets. In other words, the world of economics here consists almost entirely of transactions between two or more parties seeking to exchange goods and services through the price mechanism of the market (Simon, 1991). In such a world, the existence of firms becomes an anomaly to be explained. Coase’s (1937) thesis off ered an explanation based on the cost to use the market – namely transaction costs. As Langlois (1995: 71) summarizes, The firm exists, Coase argued, because there is a cost to using the price system. And ‘a firm will tend to expand until the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction by means of an exchange in the open market or the costs of organizing in another firm’ (Coase, 1937, p. 395). Inspired by Coase, a school of transactioncost economics sprung up in which peculiarities in the process of exchange – that is to say, the costs of contracting – explain the firm. Costs of production figure in very little, and the process of production even less. (Winter, 1988) Yet in the world as we know it empirically, organizations are ubiquitous – not an anomaly to be explained (Simon, 1991). And markets do not always preexist firm formation (Sarasvathy and Dew, 2005b).
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