Why do firms exist and should they have a social conscience?

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Why do firms exist and should they have a social conscience?

Many economists, especially those of a liberal disposition, believe entirely in the market. They state that the free market is the best way to allocate resources to those who need it most and that if it was left to individuals, we’d all be much worse off. Yet in the real world, no-one ever questions whether or not we should get rid of firms, many have become household names throughout the world. So if the market is perfect, why do we also have firms? How do they fit together? Since firms are widely accepted to be part of the community, they provide jobs and supply us with all the products we need, should they have a social conscience? This is often an issue as we here of large companies such as Nike and Apple exploiting workforces and oil producers like BP polluting our environment and there is normally an outcry against them. Whilst the public opinion suggests that they should have a conscience, in pure economic terms, I don’t think they should.

Ronal Coase argued that the reason firms existed was to reduce transaction costs. A transaction cost is a cost incurred in making an economic exchange, such as enforcing contracts, negotiating prices and hiring workers. With a firm put in place, the hassle and time used up with the transaction can be dramatically reduced in several ways. Firstly, if a firm is in place, then it provides a much easier structure to simply repeat a process, for example, a car company buys 10,000 tonnes of steel each month and they can have this as almost a prescription, there is no need to renegotiate every time and try to work out the logistics. Secondly, firms allow a greater degree of a specialisation. Within a firm, there can be several different departments such as marketing, transport and logistics and this means people can specialise in what they’re best at, reducing training costs (as you don’t have to train people for every role) and vastly increasing efficiency- when someone specialises in one job, they become experienced and tend to become better at that task.

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Some liberal thinkers would argue that we could do this merely with a partnership such as we see with the John Lewis Partnership. Surely people would be rational enough to see that it makes sense to work together and specialise in that sense. However, the issue with this is that it’s likely some workers will be able to just be able to produce more or work harder, thus being more efficient and this is where the difficulty comes. Do they receive more money for producing more output or do they earn the same as everyone else? If the answer was ...

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