Wednesday, November 17, 2021

Teaching economics as if nothing happened inside the firm?

For many decades, economics textbooks treated firms (and government agencies, and other organizations) as black boxes. It is strange that a person who studies economics in the university can be introduced in microeconomics, and in the discipline in general, without analyzing the relationship between employers and workers, which is, perhaps, the core relationship that defines our economic system. It is as if one wanted to keep youth protected from intellectual and political debates, and the ideologies that have shaken mankind in the last two hundred years. 

All they will see, if they use any of the so far dominant textbooks (until the publication of the CORE’s Project free e-book The Economy) is the same graph of supply and demand in a perfectly competitive market, typical of some consumer goods, applied to the supply and demand of labor. Apart from this graph, in the up to now dominant textbooks, nothing is said about what occurs within the firm between owners or managers, and the workers, nor on the implications that this relationship has for the structure of the whole society. 

However, as Coase and Simon stressed, many, perhaps most, of the relevant trasactions and decisions in an economy take place inside the firm and not in markets. Decisions about working conditions, job allocation, promotions, hiring, outsourcing, plant closing… take place inside the planned economy that is a capitalist firm. The incomplete nature of labor contracts introduces the role of power and authority, something that both Marx and Coase, from different perspectives, emphasized.

The allocation of talent, the internal organizational design and the allocation of effort to different tasks, which happen inside the firm and other organizations, determine not only the opportunities that different individuals have (and hence have distributional implications), but also the efficiency and productivity of the whole economy. 

This is why, if you use the e-book The Economy with your students (as I do), these will be exposed to what happens inside the firm, opening the black box, before they see a supply and demand graph.

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