Saturday, January 26, 2008

Undercover Economist

It is fun to write essays on economics.

It is even more fun to read someone else's comments on your essays, when it is clear (as here) that the reader understands it even better than I did.

In fact, let me reproduce Tim's last paragraph, because it is better than anything I said:

There's a balancing act: too little outsourcing and a firm becomes a socialist state, denied incentives or price signals; too much and the problem of coordinating all the contracts becomes impossible.
It's worth thinking about how changing technology may alter this balancing act. The answer is not obvious. Some outsourcing decisions are made much easier to coordinate thanks to the internet and all the rest. At the same time, inter-firm communications also improve. And if the world is full of firms making more complex, intangible products, that may favour more implicit contracts and therefore larger firms. I simply don't know the answer and I'm not sure anyone else does either.

Yep, yep, yepper. No one knows, no way to know. But firms that figure it out make money, and get bigger.

Governments could never solve this problem, because (1) no price info, at any level, to make judgments ex ante, and (2) no profit feedback, to let you know if got it right, ex post.

Is optimal firm size increasing, decreasing, or staying about the same? I'll be able to tell the answer for about 2010!

UPDATE: A reader notes I had botched the second link above. Fixed, now. Thanks!


Anonymous said...

2nd link should point here:

Robert S. Porter said...

Don't tell Bainbridge about this.

Fundman said...

Do non-profits face the same insurmountable challenges as government with regards to size and oursourcing? I know Alchian wrote a bit about this, but mostly in the context of universities which I think differ pretty significantly.

On the one hand we lack profit motive, but there are institutional goals and donor intent to try to measure. Can they replicate the price signal?

I'm open to answers about this from readers, lurkers, and/or the Jefes here.

imaginarypolitics said...

How does one estimate how much nationalized health-care systems cost, when they don't operate with a price system? Isn't that puzzling?