Academic journal article Journal of Markets & Morality

The Nature of the Religious Firm

Academic journal article Journal of Markets & Morality

The Nature of the Religious Firm

Article excerpt

Within and Beyond the Coasean Firm

This article examines the nature of the religious firm. The aim is to connect to a literature about the structure of the firm that originated with Ronald Coase's 1937 article, "The Nature of the Firm," (1) which reoriented the way in which economists and lawyers look at the formation and structure of business organizations. In one sense this is an odd endeavor, given that Coase was concerned with the operation of profit-making entities, and not with the wide range of religious, social, charitable, or government institutions. How, it is fair to ask, can the insights in the one arena be transferred to the other?

I think that this transference is indeed possible. The answer requires making certain adjustments to the Coasean theory--which applies in principle to both commercial and noncommercial organizations alike, albeit in different ways (2)--to take into account these factors: the role of transaction costs, the binding external constraints under which the organization labors, the aims of the organization (whether financial or not), and the competence of the various actors who participate in the venture. As Coase conceived of his own inquiry, the sole question was why various actors use discrete transactions (often, contracts) in some cases and diffuse relationships (firms) in others. He did not follow up that insight, however, by asking the further questions of how it is that firms choose their particular internal governance structure, or how it is that they decide to expand, divide, or liquidate, even though these are some of the many stages in the life of the firm.

As I shall develop further, this set of questions cannot be answered by looking solely at the transaction costs that are involved in firm organization. It is also necessary to take into account two additional ingredients that are sometimes brushed aside in dealing with the standard account of the rational economic actor. The first is the simple observation that individuals bring different levels of competence to their various activities, which in turn influence the roles that they assume within a particular firm. The second is that financial ends comprise only part of the objectives of the firm and its various constituents. The objective of profit maximization is a convenient heuristic for dealing with many firms, and it has great power in analyzing economic relationships. But firms may deviate from profit-maximizing behavior because of their commitments to their long-term social cohesion and to other ends. This is especially true for those firms whose management has strong religious or conscientious commitments, such as to the environment, fair trade, or various notions of social justice. The same is doubly true of religious, social, and charitable organizations. It was just those religious constraints, for example, that led Hobby Lobby to challenge (successfully, in fact) the contraceptive mandate imposed by the Obama Administration under the Affordable Care Act. (3) The simple insight is that the interaction of these three concerns--transaction costs, individual competence, and organizational objectives--play out in different ways across business, governmental, religious, social, and other charitable organizations. The point here is not that all organizations work in the same fashion. It is, instead, that the same general theory helps to explain the differences in observed behaviors across different organizational types.

Subject to these essential caveats, it is useful to ask Coase's initial pointed question before seeking to generalize the inquiry to nonbusiness firms: Why is it that certain forms of business relationships take place through discrete transactions, including by way of example sales, leases, loans, and insurance, while other activities take place within a firm, where the day-to-day duties that arise between business partners tend to be defined in terms of areas of primary responsibility rather than by specific direction given to lower-level employees? …

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