The nature of the firm

The Suntory and Toyota International Centres for Economics and Related Disciplines

The Nature of the Firm Author(s): R. H. Coase Source: Economica, New Series, Vol. 4, No. 16 (Nov., 1937), pp. 386-405 Published by: Blackwell Publishing on behalf of The London School of Economics and Political Science and The Suntory and Toyota International Centres for Economics and Related Disciplines StableURL: http://www.jstor.org/stable/2626876 Accessed: 26/07/2009 09:40
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiplecopies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on thescreen or printed page of such transmission. JSTOR is a not-for-profit organization founded in 1995 to build trusted digital archives for scholarship. We work with the scholarly community to preserve their work and the materials they rely upon, and to build a common research platform that promotes the discovery and use of these resources. For more information about JSTOR, please contactsupport@jstor.org.

Blackwell Publishing, The London School of Economics and Political Science, The Suntory and Toyota International Centres for Economics and Related Disciplines are collaborating with JSTOR to digitize, preserve and extend access to Economica.

http://www.jstor.org

ENOVEMBER

The Nature of the Firm
By R. H. COASE
ECONOMIC theory has suffered in the past from a failure to stateclearly its assumptions. Economists in building up a theory have often omitted to examine the foundations on which it was erected. This examination is, however, essential not only to prevent the misunderstanding and needless controversy which arise from a lack of knowledge of the assumptions on which a theory is based, but also because of the extreme importance for economics of good judgment inchoosing between rival sets of assumptions. For instance, it is suggested that the use of the word " firm " in economics may be different from the use of the term by the "plain man."'' Since there is apparently a trend in economic theory towards starting analysis with the individual firm and not with the industry,2 it is all the more necessary not only that a clear definition of the word " firm " shouldbe given but that its difference from a firm in the " real world," if it exists, should be made clear. Mrs. Robinson has said that "the two questions to be asked of a set of assumptions in economics are: Are they tractable ? and: Do they correspondwith the real world ? "3 Though, as Mrs. Robinson points out, " more often one set will be manageable and, the other realistic," yet there may well bebranches of theory where assumptions may be both maniageableand realistic. It is hoped to show in the followingpaperthat a definitionof a firm may be obtained which is not only realistic in that it corresponds to what is meant by a firm in the real world, but is tractable by two of the most powerful instruments of economic analysis developed by Marshall, the idea of the margin and that ofsubstitution, together giving the idea of substitution at
1 Joan Robinson, Economics is a Serious Subject, p.
2 12.

See N. Kaldor, "The Equilibrium of the Firm," Economic _ournal, Mllarch, 1934. 8 Op. cit., p. 6. 386

1937]

THE

NATURE

OF

THE

FIRM

387

the margin., Our definition must, of course, "relate to formal relations which are capable of being conceived
exactly."2

It...