390 ECONOMICA NOVEMBER If Our task is to attempt to discover why a firm emerges at all in a specialised exchange economy.The price mechanism (considered purely from the side of the direction of resources)might be superseded if the relationship which replaced it was desired for its own sake.This would be the case,for example,if some people preferred to work under the direction of some other person.Such individuals would accept less in order to work under someone,and firms would arise naturally from this.But it would appear that this cannot be a very important reason,for it would rather seem that the opposite tendency is operating if one judges from the stress normally laid on the advantage of "being one's own master."1 Of course,if the desire was not to be controlled but to control,to exercise power over others,then people might be willing to give up something in order to direct others;that is,they would be willing to pay others more than they could get under the price mechanism in erder to be able to direct them.But this implies that those who direct pay in order to be able to do this and are not paid to direct,which is clearly not true in the majority of cases.?Firms might also exist if purchasers preferred commodities which are produced by firms to those not so produced;but even in spheres where one would expect such preferences(if they exist)to be of negligibie importance,firms are to be found in the real world. Therefore there must be other elements involved. The main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.The most obvious cost of "organising" production through the price mechanism is that of discovering what the relevant prices are.4 This cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information.The costs of negotiating and CL Harry Dawes,"Labour Mobility in the Steel Industry,Ecomowic feacrmal Marck hthe trkinad inrceo by the better paid of skilled unen due to the desire foften the main aim in lite of a vorker)ta he independent" (.85} None the less,this is not altogether fauciful.Some small shopkeepe are said to carn Jess than their assistanta. C.F.Shove,"The Imperfection of the Market:Further Note"Ecoauic March,93,p.1,note t,points out chat such preferences may exiat,altbaugh the exampl he gives is almost the reverse of che instance given in the text. According to N.Kaldor,"A Clasifctoty Nate of the Determinatenes of Equilibrium," Revie 4f Econaic Sedies,Februaty 1934,it is one of the assumptions o static tbeary thatAll the relevant prices are known to all individuats"But thi is cleady mot te aft小he real world
937] THE NATURE OF THE FIRM 39r concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account.Again,in certain markets,e.g.,produce exchanges, a technique is devised for minimising these contract costs but they are not eliminated.It is true that contracts are not eliminated when there is a firm but they are greatly reduced.A factor of production (or the owner thereof) does not have to make a series of contracts with the factors with whom he is co-operating within the firm,as would be necessary,of course,if this co-operation were as a direct result of the working of the price mechanism.For this series of contracts is substituted one.At this stage,it is important to note the character of the contract into which a factor enters that is employed within a firm.The contract is one whereby the factor,for a certain remuneration (which may be fixed or fluctuating),agrees to obey the directions of an entrepreneur within cerlain limits.:The essence of the contract is that it should only state the limits to the powers of the entrepreneur.Within these limits,he can therefore direct the other factors of production. There are,however,other disadvantages-or costs- of using the price mechanism.It may be desired to make a long-term contract for the supply of some article or service. This may be due to the fact that if one contract is made for a longer period,instead of several shorter ones,then certain costs of making each contract will be avoided. Or,owing to the risk attitude of the people concerned, they may prefer to make a.long rather than a short-term contract. Now,owing to the difficulty of forecasting,the longer the period of the contract is for the supply of the commodity or service,the less possible,and indeed,the less desirable it is for the person purchasing to specify what the other contracting party is expected to do.It may well be a matter of indifference to the person supplying the service or commodity which of several courses of action is taken,but not to the purchaser of that service or com- modity.But the purchaser will not know which of these several courses he will want the supplier to take.Therefore, 1 This induenee was noted by Professor Usher when diecusing the development of capitalism. He "The tucceive buying and elling of partly finished produets werc sheer waste of cuetgy."(Introdetion to tbe Industrial History of EnglandB )But he does nat develop the idea nor consider why it is that buying and selling aperations still exist. Ie would be posible or n limits tothe power of the entrepreneur tobe fixed.This wauld be voluntary slavery.According to Profeisor Batt,The Lote of Mdasrer awd Soruant p.t such a contract would be void and unepforceable