The Economics of Internal Organization: An Introduction

1. Preface * The economics of internal organization is, in some respects a new name for an old subject, the theory of the firm. The new name is, in part, an attempt to avoid some of the connotations of the earlier literature. Much of the latter focused on the question, "What do firms really maximize?" The list of answers encompassed most imaginable candidates, including "nothing." The question was not an unreasonable one and the answers were interesting, but like the question, "What does the government or the Congress maximize?" it turned out not to have a compelling answer. 1 The failure to find an objective function is symptomatic of the diversity and complexity of the environment within which firms operate and of the decisions that they make. Those who read the papers in the present issue, and the papers that follow in the next,2 will discover an enormous range of subject matter, and perhaps the absence of a single underlying theme. While I think there is a theme, in retrospect, the apparent diversity is not surprising. A modern corporation is, after all, an economy in miniature. It has a set of capital markets and a collection of labor markets (perhaps it would be best to replace "markets" with "allocation mechanisms" in order not to prejudge the issue). It has unemployment problems, is subject to cyclic fluctuations, and is concerned about the supply of money. It has its planners, forecasters, and stabilizers. It has to provide public goods and it has its problems with externalities. Becoming a specialist in the economics of the firm is clearly a formidable task. My assignment, as I understand it, is to introduce five papers and to present a view of the subject itself, albeit a personal one. I shall approach this in the reverse order by trying to characterize some of the issues and methodology of the economics of internal organization. I shall then give a brief account of each