RELATION BETWEEN CONSUMERS AND PRODUCERS

Relation between consumers and producers

Relation between consumers and producers

In the purely theoretical study of economics the market mechanism is the core of the economic system and everything that occurs in that system is directed by the fluctuations that manipulate the market mechanism in terms of demand and supply. As Coase wrote: "an economist thinks of the economic system as being coordinated by the price mechanism and society becomes not an organisation but an organism." Here the individual's participation in an economic system as limited merely to choosing between alternatives provided by, and priced by, the market mechanism. However it is impossible to escape the fact that in reality there are entrepreneurs, and their associated firms, co-ordinating a good degree of economic activity. In reality consumers and producers alike are not controlled solely by the market but by managers in some sort of "economic planning". Some economists like Marshall even went so far as to say it was the fourth factor of production: along with land, labour and capital. Thus I think it would not be a gross misjudgement to substitute "enterprise" for "economic planning" and those who think partake in this direction of resources as "entrepreneurs". D. H Robertson referred to these as "Islands of conscious power in this ocean of unconscious co-operation, like lumps of butter coagulating in a pail of buttermilk". The general acknowledgement of the existence of these "lumps" must lead the curious mind to enquire why they have coagulated in such magnitude and what, if any, superior function do they serve to that offered by the price mechanism. It is with this intention that Coase begins his article on "The Nature of the Firm(Martin, 2005,, 6).

Co-ordination inside the Firm.

The degree to which co-ordination is determined by price mechanisms or entrepreneurs varies greatly from industry to industry and from firm to firm. A comparative investigation into these different types of industries could perhaps yield a number of answers about the underlying reasons for a firm's co-ordination of resources in the economic system. Coase perhaps used this, and more conceptual methods, to arrive at his conclusions for the "firm's super session of the price mechanism".

In the article "The Nature of the Firm" Coase outlines a number of cases in which co-ordination is due to the entrepreneur. He uses psychological reasoning to offer an explanation for the firm's existence when he writes that some individuals are naturally subservient and actively seek directions from some authority or individual. I would be wary of his reasoning for this, as, due to its psychological nature, it would be difficult to find any quantifiable evidence supporting this. Many readers may find it even more difficult to find this reasoning credible as he goes on to write that individuals actually pay for the privilege of being directed. Coase does add caution to this argument as he acknowledges "the stress normally laid in the advantage of being one's own master". It is with this idea in mind that Coase goes ...