Economic Theories of the Firm: Past, Present, and Future
Paul Milgrom and John Roberts
When economists today write about the firm, they most often proceed by comparing its characteristics with those of markets. The reason is not hard to understand: As economic historians have repeatedly argued ( Innis, 1938; North and Thomas 1973; Rosenberg and Birdzell, 1985); the emergence, expansion and eventual dominance of the market system in western economies since the Middle Ages crucially contributed to economic growth and the resulting accumulation of wealth and rising standards of living for much of the population. More recently, the spectacular successes of the market- oriented economies of the rapidly industrializing nations of Asia have shown that the strengths of the market as a basis for organizing economic activity are not limited to western societies. These considerable achievements of market economies have led some to suggest that other sorts of economic organizations basically arise only to compensate for failures of the market ( Arrow, 1974). Others, much taken with the past successes of market economies, challenge any proposed intervention with the question: Why not rely on a market solution?
There is another, quite opposite, view according to which markets are a primitive way of organizing activity--one that worked well enough in simpler times when agricultural products were traded for finished foreign goods or for the hand-made products of local craftsmen and that still works well enough for distributing consumer goods and for buying and selling standardized items (grains, financial assets), but one that has proved inferior as a way