 Hi, this is Professor Gerald Friedman, Department of Economics at the University of Massachusetts. And we're here today to talk about the firm, the capitalist firm. Now, first thing to note is in orthodox economics, which we call neoclassical economics, which goes back to classical economics with Adam Smith and Karl Marx and people, there are no firms. Adam Smith is all about the division of labor coordinated through the market. You produce something. You want something else. You sell what you produced to buy what you want. There's no firm. He never talks about a firm. He does talk about the social division of labor where I kill a beaver, trade it with Dan for a deer. He talks about the detailed division of labor where maybe I kill half the beaver and somebody else kills the other half and somebody else skins it. We all do a particular part of it, but there's no firm. There's nobody telling us what to do. Presumably, we coordinate our detailed division of labor. Adam Smith doesn't say this, but I suppose we would coordinate it by exchange. I'll pay him to help me kill the beaver. We'll together pay the other guy to help us skin it. Markets. Adam Smith and Orthodox economists are all about markets. Markets are the way to coordinate the activities of different people. The division of labor leads to productivity and it's coordinated through markets. There are no firms. What is a firm? A firm is an island of command. Within the firm, there are no markets. Technically, we have a firm called the Department of Economics at UMass Amherst. And this firm hired Dan to film me. We could say it hired me. It commanded me to make this video and teach this course. I'm not paying Dan. The department's not paying me. We all do this as a matter of command. Well, technically, the department is paying Dan because he's an outside contractor. So it's maybe not the best example. But when the person comes in to clean this room, the janitor comes in at about 6 o'clock. He does things because he's ordered to. He doesn't sit there and say, well, how much is this wastebasket worth to you? How much will you pay me to pick up that newspaper and recycle it to empty this recycling bin? The university and the department and General Motors and Chrysler and Apple and Google, all these companies are islands within which things are done as a matter of command by orders rather than by markets. Now, the orthodox do recognize the firm, though they don't like to talk about it. And the argument is that firms exist. And this goes back to Ronald Coase, a very interesting English economist. Ronald Coase wrote in 1937, in the theory of the firm, that firms exist because using markets can be expensive. They're transactions course. And the transactions course, the course of negotiation, the course of setting prices, all become expensive. So to avoid them, we just do things by command. And some things are harder to do by command, so there we bear the course of the transactions course. So we don't tell consumers what to buy, we let them choose, and then we negotiate prices. But within the firm, we have things by command. And the boundary between the firm and the market is set by the extent of transactions course. Higher transactions course, bigger firms. Lower transactions course, smaller firms. Now, this theory doesn't make a whole lot of sense. It sounds good, but there's real problem with it. Take, for example, Jonathan Papelbaum, pitcher for the Red Sox, throwing a ball to Jason Varatec, who was catcher for the Red Sox for many years and still is sort of. Papelbaum throws the ball, Varatec throws it back. This is a firm. It's done by command. What are the transactions course that would be involved? They'd have to negotiate how much is the ball worth. Well, how difficult would that be to do? You do it once, you settle on the price, and then you just have to keep counting the number of times Varatec throws the ball back to Papelbaum or vice versa. The transactions course aren't that great. There are a whole lot of activities done within firms that really don't involve a whole lot of negotiation. You could come up with a price, maybe, and then just go through with it. So why do we have firms? If the transactions course aren't that great, well, think about it. What would Varatec's position be if Papelbaum throws in the ball? It's not the transactions course. It's the hold up. At that point, Varatec holds the ball. The whole game, the whole team's waiting, and Varatec tors the ball up in the air, catches it, and says, hmm, what's it worth to you? Varatec is in a position of great power. Firms, it's not transactions course, it's power. Firms are about taking the power away from the workers and giving it to the bosses. When the workers are in a market situation within the firm, the workers standing there with his hand on the assembly line ready to turn it off. At that point, that work has a great deal of power. If you do things through the market, which is the way a lot of manufacturing businesses actually were done well into the 20th century, you keep things in the market. You negotiate with workers. They're in a great position to hold you hostage, just like Varatec would holding that ball, and just like those workers would be holding the lever on the assembly line. Firms take that power away from the workers and give it to the bosses. It's not that firms are an island removed from the market. It's that firms are an island of capitalist power over workers, and that's what the command system within Firms is all about. Okay, we'll pick up and talk some more about this next time. And have a nice day. Thank you. Bye-bye.