Michael Munger on the Nature of the Firm

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4.7 • 4.3K Ratings

🗓️ 14 January 2008

⏱️ 62 minutes

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Summary

Mike Munger, of Duke University, talks about why firms exist. If prices and markets work so well (and they do) in steering economic resources, then why does so much economic activity take place within organizations that use command-and-control, top-down, centralized structures called firms? Within a firm, most of the goods and services that the workers use are given away rather than allocated by prices--computer services, legal services and almost everything else is not handed out by competition but by fiat, decided by a boss. A firm, the lynchpin of capitalism, is run like something akin to a centrally planned economy. Munger's answer, drawing on work of Ronald Coase, is a fascinating look at the often unseen costs of making various types of economic decisions. The result is a set of fascinating insights into why firms exist and why they do what they do.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	other information related to today's conversation. Our email address is mail at econtalk.org. We'd
0:33.6	love to hear from you. My guest today is Michael Munger of Duke University,
0:39.5	economist extraordinaire, chair of the political science department at Duke University, and a frequent
0:45.5	contributor to the Library of Economics and Liberty. Mike, welcome back to Econ Talk.
0:49.8	Great to be back. Mike, our subject today is your recent essay at the Library of Economics and
0:55.0	Liberty. The title of which is, bosses don't wear bunny slippers. If markets are so great, why are
1:03.7	their firms? I'm going to read the title again because some of our listeners may be, it's early
1:09.7	morning you're commuting, and that title may have just kind of... I always didn't cause any
1:13.5	wrecks. Well, I hope not also, but I think it may have caught some people unaware. Bosses don't
1:18.6	wear bunny slippers. If markets are so great, why are their firms? And as always, if you go to
1:24.4	econtalk.org, you'll find a link to my article and other issues that come up during the podcast.
1:30.3	So if markets are so great, why are their firms? Is the question that you ask after the bunny
1:36.4	slipper intro? One answer would be simply bewilderment, I think. Well, firms exist because they
1:43.3	compete and they create markets. Let's all go home. But there's a deep insight in your essay,
1:49.1	and that is that firms are almost anti-market, explain the paradox.
1:54.1	The difficult thing, and this is something that you and I have talked around about in some of
1:57.6	other podcasts, and so I'm glad we get in a chance to go into it a little bit more deeply.
2:02.6	There's one of the things that markets do is organize people's activities. And prices are a way
2:10.4	of organizing the activities of many different people who don't talk to each other, who have no
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