immaturity of the firm

Introduction
In Ronald H. Coase’s The Nature of the Firm, he explains the inadequacy of economic analysis in only terms of the Price Method and consequently expands the field of economics to include the role of the firm. However, by acknowledging the firm and the rules entailed requires acknowledgment of the imposed submissive nature of the firm. By looking at Immanuel Kant’s essay, What is Enlightenment?, we can begin to understand the submissive nature of the firm, how it affects the values of society, and reversely how society’s self-imposed immaturity of thought begs the need for the firm.


The Pricing Method and the Firm
Coase’s essay expands the tradition thought of the price method into an economic system that acknowledges the Firm and consequently the employer and the employee.
Coase begins his essay with a quote by Sir Arthur Salter saying “The normal economic system works itself. For its current operation it is under no central control, it needs no central survey… [But] by a process that is automatic, elastic, and responsive.” However, Coase proposes “the economic system ‘works itself.’ This does not mean that there is no planning by individuals.” This fundamental shift does not detract from the value of the price method, but recognizes the economy as more dynamic.

Coase attributes this to the idea that transaction costs of the price mechanism that the integrating force of the firm which determines the factors of production and sustainability of a firm. By limits of information imperfection, the “entrepreneur” has to limit the factors of production by fixing the cost of some, such as labor, so he is more capable of directing the others factors of production. Coase sums this up by saying “the operation of a market costs something and by forming an organization and allowing some authority (the “entrepreneur”) to direct the resources, certain marketing costs are saved.”

With the entrepreneur directing resources, the creation of the firm creates a separation between the employer and the employee, whereas individually there was no separation between the direction of work and the labor. This division creates what Immanuel Kant calls enlightenment and ignorance.

The Enlightened man vs. the Ignorant man
In Kant’s What is Enlightenment?, he describes enlightenment as “man’s emergence from his self-imposed immaturity. Immaturity is the inability to use one’s understanding without guidance from another. This immaturity is self-imposed when its cause lies not in the lack of understanding, but in lack of resolve and courage to use it without guidance from another. Sapere Aude! ‘Have courage to use your own understanding!’—that is the motto of enlightenment.”

The separation of man begins with the ignorant, immature man and the enlightened, aware man who serves as the guardian of the ignorant man. Kant attributes becoming, or staying, in a state of immaturity is simply because it is easy; “If I have a book to serve as my understanding, a pastor to serve as my conscience, a physician to determine my diet for me, and so on, I need not exert myself at all. I need not think, if only I can pay: others will readily undertake the irksome work for me.” Essentially, the guardian plays the role of the mind and the ignorant man plays the role of the machine.


The Price Method’s parallel attributes to Enlightenment
The reasonable man, or the man who is enlightened, is one who is capable of thinking for himself. His actions are determined by the most logical path of action. The reasonable man’s values and, essentially, personality determines the business in which he takes. The operation of his business is dependent on the choices he makes, regardless of them being good or bad. He determines the value of what should be done, what should be bought, or what should be sold. He is his own man; his fate determined by no one else but himself. The enlightened man is one that is that mirrors the theory of the true economic man. His values determine the price of the good he is willing to pay.

This attributes make him the entrepreneur that Coase speaks of. His perspectives decide the perspectives of the firm. The firm is the victim or beneficiary of his decisions. The course of a firm, although affected by the employees, is determined by this reasonable man. He is the boss that chooses the direction of the firm. The employee is not allowed to think outside the box that the entrepreneur defines. This separation between management and employee is the same separation of the enlightened man and the immature or ignorant man.

Despite being the enlightened man for the firm that he manages, he is still capable of being the immature man in all other aspects of life. His understanding could still be determined by a book, or his diet still determined by his physician.

The Firm’s parallel attributes to Ignorance
The ignorant or immature man is one whose values are determined by someone else. His actions are not determined by his own judgment but by the guidelines determined by the entrepreneur or manager. Kant gives an example, “it would be disastrous if an officer on duty who was given a command by his superior were to question the appropriateness or utility of the order. He must obey.” The enlightenment of the officer, in this situation, could result in heavy transaction costs of making his own decisions, which could lead to his death or the death of others. Therefore, not only is it encouraged to take the path of the immature man, but often it is required and expected.

Although it is not impossible for the ignorant man to take the path of enlightenment, immaturity is fairly entrenched in society. Kant explains that, “Rules and formulas, those mechanical aids to the rational use, or rather misuse, of his natural gifts, are the shackles of a permanent immaturity.” This is the process in which we are born. The formula for a successful man is one that values formal education. The man on the path of success is one that goes to high school, which is followed by higher education at a college or university. His ambitions are limited to those that have proven successful for others; to get good grades and to get a good job. It is this formula that entangles man with his first “shackles of permanent immaturity.” It is the fear of failure and insecurity that drives men down this path. It is proven, defined and relatively easy; creative thinking is reduced to a minimum.

The entrepreneur, in the modern sense, is typically one who does not follow such actions. This response to immaturity is often regarded with much respect and awe. It is often thought and stated by the members of modern society that they disregard risk. Kant describes this man as one who is able to choose uncertainty for the pursuit of his own ambitions. “Whoever threw [the shackles of a permanent immaturity] off would still make only an uncertain leap over the smallest ditch, since he is unaccustomed to this kind of free movement.” It is immaturity of thought, which is so entrenched in society, that helps lead to a high failure rate of startups.

Even for those entrepreneurs who are successful, immaturity of thought still runs rampant. The process for an entrepreneur has been fairly formalized, particularly of the advent of the internet boom at the turn of the millennia. The entrepreneur would create a product, engaged by venture capitalist, and lead the company to an acquisition. The startup ends up as a product of a large, dominate company. This exit strategy requires no creativity and these start ups end up only as a contractor to develop a new product for these companies. It is only those who do not resort to an exit strategy who are truly enlightened.

Society Creates the need for Immaturity of Thought
The firm is not the only cause for the immaturity of thought in society. There are reciprocal effects for the creation of the firm from society’s immaturity of thought. The firm is the result of the immaturity of thought of society. Economics has a vehicle for the enlightened man and that is the price method, which is a very stable and logical vehicle for the due process of business. Coase states that “the distinguishing mark of the firm is the supersession of the pricing method.” It is the immature man who validate and requires the firm to usurp the fundamentals of the pricing method. Coordination and enlightened thought are just too costly for every man to employ the pricing method.

The fundamental creation of the firm and the distinguishment of the enlightened man from the immature man are due to the reduction of transaction costs. Imperfect information and the costs associated with gaining the information to use the price method are affectively overbearing for the common man. Coase explains, “this cost may be reduced but it will not be eliminated by the emergence of specialists who will sell this information.” The separation between the operation and the coordination is a fundamental step to reduce transaction costs. When you have a physician determine your diet, the time spent understanding the requirements for a healthy diet are limited to those who specialize in that field. The reduction in transaction costs is increased cooperation which is the very fundamental qualities of the guardian of the immature man.


Conclusion
The firm is not the origination of the enlightened and immature separation. Immaturity was the reason for the creation of the firm, and the firm does reversely perpetuate the relationship between the two perspectives. It is because of these two dynamics that create the Kant ideal of the enlightened man and the shame of the immature man. However, the firm has required the need for the separation, which is an aspect of specialization. It can only be hoped that the enlightened man, who is the guardian for the immature man has the immature man’s interest in mind when he decides what they believe, do, and are.