There are those who completely in denial of market existence and there are those who dismiss any non-market solution. Even the most ardent supporters of market sometimes slip: they think market is so powerful you don't need to do anything. On the other extreme, the market deniers think people are all too stupid, there is a call for government in virtually everything.
We are not in either group. (Despite the accusation that we are free market diehards).
Letting a problem in the hand of market has its own cost. If that cost is greater than the cost of managing it under a controlling command, you want an organization. Or, in business lexicon: firm. In a firm you have a manager who assign you and others, tasks. Think about a small firm with one manager and three workers. It is less likely that the manager knows all of you too well, she pays each of you wage exactly worth your contribution to the firm. Furthermore, it is less likely that he knows you perfectly, that he can assign you a work that really exploit all your potential to the limit (and pay you accordingly). Why not and not? Because the cost of getting the right information for those questions is too much.
Yet, firm exists. It should then be true that the cost of letting the market handle it (the matching of your pay and your do and your being) is even higher. Just imagine you go around telling everybody on the street that you can do this and that. And somebody else goes around asking people if one happens to match exactly what she needs to work for her. And imagine this is not just you and her. But everybody, all people. Why this is not happening? Because it's too expensive.
So it leaves us with firm or market. Or more accurately: a particular firm, other firms, and the market. If the particular firm happens to be able to manage things most efficiently (that is, with the least cost), then it will prevail. The others, gone.
You should now understand why some firms are big, some small. Or, why that thing called government still exists today.
Very important point you raised here.
ReplyDeleteReading Coase (1937), ‘The Nature of the Firm in Economica. The big question is why we have firm in the first place.
If all human are homo economicus (super-rational, forward looking, selfish, dynamically consistent etc) and transaction cost are zero as neo classical economics postulated then all firm should consist of one person subcontracting everything else to other one-person-firm.
Too bad still too few economist heed Coase's call in his 1988 article at Journal of Law, Economics, & Organization to study the world of positive transaction cost
well,
ReplyDeleteit is interesting.
ya-ya-ya...
The firm main goal is to find market (even it's a really small one) where he could monopolized it.
ReplyDeleteOliver Williamson developes Coase's work on transaction cost by arguing that there is a spectrum from hierarchy to market. Some also argue that network forms should be somewhere in between.
ReplyDeleteI think firm size is still an open research question i.e., no one really understand why some firms are big and others are small.
Speaking about market, yes I regard cafe salemba as one of market radicals/fundamentalists. I don't actually mind about this, however.
ReplyDeleteEspecially if you guys promote the market mechanism in one area in which market is proven to be better but it (almost) doesn't exist (or, using your term: failed) in Indonesia e.g., academic job market.
Indonesia should have a functioning academic job market and, I think, economists can lead a public campaign explaining why competition is good for universities (I am bothered by the observation that most faculties in a university are graduates of the same university, which I interpret as a lack of competition).
I guess you mean a market as a network of relationship. Bad rating or reputation means no relationship, then no job or business developed.
ReplyDeleteIf you're an excellent academician or scientist (small firm), you may shift to a better university (big firm). Once you found there's another university with a better rating. Meaning that you may start to build a relationship with that better-rating university.
Even a small has power to a big.
I remember when I studied at STEKPI (when still good in early 90s - not now), almost 80% of the lectures are from the UI. I guess the reason is a better takehomepay.
Absolutely right, Berly and Roby, Coase and Williamson provide excellent account on this.
ReplyDeleteTwo things, I'd like to elaborate. First on the 'market' itself, and second on Roby's and Anymatters's job market issue.
When we say 'market', we can refer to two concepts: institution and process (or, 'mechanism', as Roby put it in his comment). The post is actually concerned with market as an institution. What I was trying to say is in practice market actually competes with firms in handling things. Sometimes the market loses, sometimes it wins. As Berly said, in the world of positive transaction costs, market as an institution has to really work hard if it wants to beat a particular firm.
But market as a mechanism is different. It is the process. It is how things work. So, yes, Roby, we here are market fundamentalists. But what that means is that we always like to promote the use of market mechanism to select the most efficient entity. Even when selecting between market institution and firm.
One note on Roby's other point, academic job market. I agree, this market should be free. At UI, at least from what I know at Econ Dept, most faculties are FEUI own graduates. But FEUI's case is not extremely bad. Most of the faculties went to other universities for their higher degree, before coming back to FEUI. So, yes, most faculties are own graduates (but for their bachelor degree only, not their master's or doctorate). I also know that in its graduate programs, compared to other departments in UI, FEUI has more instructors from other universities, hired as adjunct professors.
And in fact, there's no rule saying that if you get your degree at UI and you want to teach, you should teach at UI. No, it's totally your choice (unless you were paid by UI for your higher degree completion, for example, so it's a payback). Why do most FEUI graduates come back teaching as faculties at FEUI (even if they are not funded when getting their master's or Ph.D's)? Because they find it better than others, probably. That is not to say that other universities cannot take them. Depends on what they are offered. Anymatters' example is a case in point.
But I also need to comment on Anymatters good example. I think you're right: it's about the takehome pay. But it is only part of the reason. There are many things you would want to consider when accepting an offer, takehome pay being one of them. Others include your expected future career, association with the universities, etc. Those UI lecturers who taught at STEKPI might value these other things lower than those who decided to stay full time.
academic hiring is one example of cumulative advantage processes (increasing return to scale): good universities attract good profs which in turn attract good grad students who will work at good universities.
ReplyDeletea paper just came to my inbox about how under certain conditions, market mechanism produces inefficient outcomes (the paper here)
But they (the UIs) need to give up their socialist view 100% because they teach in a completely different context.
ReplyDeleteWhat about if Dian Nitami, or someone like her, once had a dream to get on with one intelligent handsome young man from the UI? :)
In addition to Roby's, some rational Western unis also attract international / Asian lecturers to attract more international students paying triple fees.
Regarding market mechanism, rating system is helpful to the market. Eg, one insurance adviser (small firm) always recommeds A-rating insurance cos (big firms) to its clients. Once such insurance co is graded B, it shifts to develop business with other (new) A-rating ins cos.
Roby, you just answered your own question, at least when we relate that to FEUI's case, as I used in my illustration. That is, the grads (who happen to study at FEUI) come back teaching there because it is the best they think. Your 'lack of competition' here should then refer to other universities' inabilities to hijack those people (in any aspect possible, including requirement to give up ideology, if any, as Anymatters pointed out).
ReplyDeleteThanks for the paper. Will read it.
What about if Dian Nitami, or someone like her, once had a dream to get on with one intelligent handsome young man from the UI? :)
ReplyDeleteAnymatter, you can tell them to dream on... ^^;v