<p>A classic reference that is somewhat related is Ronald Coase's "<a href="https://www.jstor.org/stable/2626876?seq=1#page_scan_tab_contents" rel="nofollow">The Nature of the Firm</a>". Coase set out to address the following puzzle: since markets are efficient, why do we need to organize into firms? Couldn't we just have each individual acting alone and rely on the market to put the pieces together into complete products? Coases answer to why this wouldn't work well was transaction costs. If there is a (small) cost to engaging in market transactions then the aggregate cost of the many transactions needed to assemble complicated products will be prohibitive. The solution, argues Coase, is to form an organization (a firm) within which all of these transactions can take place without recourse to the market.</p>

<p>Coase's reasoning has been expanded in the 80 years since its publication. Notably, Oliver Williamson did important work to dig into the details of the conditions that make organizing work within a firm especially attractive. He argued that firms should be most likely to form when work is relationship-specific and when there are significant difficulties in writing and enforcing contracts. A great summary of Williamson's work can be found <a href="http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2009/advanced.html" rel="nofollow">here</a>.</p>

<p>Both Coase and Williamson received the Nobel prize for this work.</p>

CC BY-SA 3.0
2016-08-18T08:12:03.460Z
2016-08-18T08:12:03.460Z
Ubiquitous
<p>Corporations are essential and they do provide benefits to the overall economy.</p>

<p>Corporations are essential in the sense than individuals, when given the freedom to choose, do choose to invest their capital in corporations. And these corporations, in turn, use this capital to produce products and services which other people voluntarily purchase.</p>

<p>Corporations are a net benefit to the economies in which they operate because they produce products which customers voluntarily purchase for prices which allow the corporations to return a profit to their shareholders.</p>

<p>To the extent there are exceptions to this vis-a-vis crony corporations and government subsidies, the previous paragraph is notwithstanding.</p>

CC BY-SA 3.0
2016-08-18T09:43:50.747Z
"Corporations are essential in the sense than individuals, when given the freedom to choose, do choose to invest their capital in corporations." This is a very strange meaning of the word essential. Is buying junk food also essential?
Giskard
CC BY-SA 3.0
2016-08-18T10:51:58.797Z
Are you implying that if there were no corporations then less capital would be deployed? I am not sure I buy that because even without equity capital, companies can still utilize capital in the form of debt. Also, there is the argument that without corporations there might be more companies.
Lassie Fair
CC BY-SA 4.0
2020-03-02T14:33:20.073Z
Read Ubiquitous's answer. Then read yours. What does Ubiquitous's answer have that yours doesn't?
Criticize SE actions means ban
CC BY-SA 3.0
2016-07-19T05:46:10.497Z
2016-07-19T05:46:10.497Z
FreeMarketUnicorn
<p>There seems to exist a rarely-stated assumption that somehow corporations are an essential element of a free-market economy, and that they benefit a nation's economy. However, I wonder if this is really true.</p>

<p>Here, I am speaking of the US form of a corporation which allows a small number of people to control capital contributed by a large number and also allows those same people to disavow responsibility for the debts and liabilities of the corporation.</p>

<p>In the Wealth of Nations, Adam Smith deprecated any kind of joint stock companies, writing that a man would be much more careless with other people's money than his own. By this logic one might see corporate law as a way for elites to exploit society parasitically and corporate law as a damage to the economy instead of a benefit.</p>

<p>Is there any theoretical validity to this kind of view?</p>

CC BY-SA 3.0
2016-08-18T08:43:33.643Z
Am I correct in thinking that you're asking specifically about **joint-stock** companies, rather than companies in general? If so, you may need to clarify the question, as both answers you've received are about companies generally.
410 gone
<macroeconomics><corporate-governance><classical-economics>
Are corporations essential components of a free market economy?
Lassie Fair
# Are corporations essential components of a free market economy?

(Asked by: username_0 on 2016-07-18)

There seems to exist a rarely-stated assumption that somehow corporations are an essential element of a free-market economy, and that they benefit a nation's economy. However, I wonder if this is really true.

Here, I am speaking of the US form of a corporation which allows a small number of people to control capital contributed by a large number and also allows those same people to disavow responsibility for the debts and liabilities of the corporation.

In the Wealth of Nations, Adam Smith deprecated any kind of joint stock companies, writing that a man would be much more careless with other people's money than his own. By this logic one might see corporate law as a way for elites to exploit society parasitically and corporate law as a damage to the economy instead of a benefit.

Is there any theoretical validity to this kind of view?

**Tags:** macroeconomics, corporate-governance, classical-economics

> **Comments:**
> **username_1**: Am I correct in thinking that you're asking specifically about **joint-stock** companies, rather than companies in general? If so, you may need to clarify the question, as both answers you've received are about companies generally.  

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## 2 answers

### Answer by username_2 on 2016-08-18. Score: 4

A classic reference that is somewhat related is Ronald Coase's "[The Nature of the Firm](https://www.jstor.org/stable/2626876?seq=1#page_scan_tab_contents)". Coase set out to address the following puzzle: since markets are efficient, why do we need to organize into firms? Couldn't we just have each individual acting alone and rely on the market to put the pieces together into complete products? Coases answer to why this wouldn't work well was transaction costs. If there is a (small) cost to engaging in market transactions then the aggregate cost of the many transactions needed to assemble complicated products will be prohibitive. The solution, argues Coase, is to form an organization (a firm) within which all of these transactions can take place without recourse to the market.

Coase's reasoning has been expanded in the 80 years since its publication. Notably, Oliver Williamson did important work to dig into the details of the conditions that make organizing work within a firm especially attractive. He argued that firms should be most likely to form when work is relationship-specific and when there are significant difficulties in writing and enforcing contracts. A great summary of Williamson's work can be found [here](http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2009/advanced.html).

Both Coase and Williamson received the Nobel prize for this work.


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### Answer by username_3 on 2016-07-19. Score: 0

Corporations are essential and they do provide benefits to the overall economy.

Corporations are essential in the sense than individuals, when given the freedom to choose, do choose to invest their capital in corporations. And these corporations, in turn, use this capital to produce products and services which other people voluntarily purchase.

Corporations are a net benefit to the economies in which they operate because they produce products which customers voluntarily purchase for prices which allow the corporations to return a profit to their shareholders.

To the extent there are exceptions to this vis-a-vis crony corporations and government subsidies, the previous paragraph is notwithstanding.

> **Comments:**
> **username_4**: "Corporations are essential in the sense than individuals, when given the freedom to choose, do choose to invest their capital in corporations." This is a very strange meaning of the word essential. Is buying junk food also essential?  
> **username_0**: Are you implying that if there were no corporations then less capital would be deployed? I am not sure I buy that because even without equity capital, companies can still utilize capital in the form of debt. Also, there is the argument that without corporations there might be more companies.  
> **username_5**: Read username_2's answer. Then read yours. What does username_2's answer have that yours doesn't?  

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