"Bloomberg Businessweek has a great piece about how an Ayn Rand-loving hedge fund guy is driving Sears into the ground...He mentions the Coase/Williamson argument. Of course the other argument is the Smithian one - the division of labor is limited by the extent of the market. As an undergraduate I was pretty interested in IO, and in fact my senior thesis contrasted the Coase/Williamson transaction cost theory of the firm with the Smithian division of labor ideas. It was an awful mess of a research paper... but I guess that's just a step along the path of learning to do research.
But back to the economics: Eddie Lampert’s big idea is that markets and competition rool, so he’s forcing the different parts of Sears to compete for resources just as if they were independent firms, with individual division profitability the only criterion for success. According to BB, it’s not going well; but they don’t get much into the broader issues.
The first issue that should pop into anyone’s head here is, if the different divisions of Sears have no common interests, if the best model is competition red in tooth and claw, why should Sears exist at all? Why not just break it up into units that have no reason not to compete?
For that matter, why should any large firm exist? Why not just have small firms, or maybe just individuals, who make deals for whatever they need?
Of course, that’s not how we do things. We may live in a market sea, but that sea is dotted with many islands that we call firms, some of them quite large, within which decisions are made not via markets but via hierarchy — even, you might say, via central planning. Clearly, there are some things you don’t want to leave up to the market — the market itself is telling us that, by creating those islands of planning and hierarchy.
Now, why exactly that’s true — why some things are better done through market mechanisms, while others are better done through at least a bit of command-and-control — is a deep issue. Oliver Williamson (pdf) got a Nobel for helping elucidate some aspects of that issue (although that may not mean much to you, considering some of the people who’ve gotten Nobels)."
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