Coase is right

There was a very insightful post up on Harvard Business Review from the hands of Ronald Coase. ((Coase wrote a seminal paper in 1937 called “The Theory of The Firm“. He argues that the existence of firms is not because of their value proposition or their unique offerings. No, the real reason is that the transaction cost of coordinating production within a firm is lower than organizing the same through the market. Or in other words, the reals business of a firm is getting people organized.)) Basically, what he suggests that economics has gone a long way to become a theoretical approach of economization. Econometrics is a good example of this. One should not forget economics is not a hard science, and is largely influenced by society, politics, history and culture. This is so obvious to me. What is really matters today is transition and inclusivity. Anyway, so instead, economics should orient itself more on real-world issues and appeal to a broad audience. It should go back to its roots: the study of man and its wealth in order not to lose its face. ((There seems to be a general trend towards the loss of confidence in science. See this Dutch article in Belgian newspaper De Standaard for instance; it discusses how a scientist’ success directly correlates with the number of “controversial” academic papers. This leads to a loss of quality and fraud practices.)) Couldn’t agree more! Here a few thoughts.

Especially in times of an economic meltdown, or financial crisis, we are looking for answers. The newspapers are not lying. Just read the headlines. So why is it that more and more companies  are outsourcing their business processes to near- and offshore locations? How come an automotive company like Ford moves it manufacturing plants from one European country to another? Why do top-managers receive such exaggerated bonuses while its them who are responsible for a loss of jobs? The numbers don’t lie and Standard & Poor, Moody’s and Fitch keep on downgrading our credit ratings. It seems we’re inches away from misery. What I try to convey is this: it is important that we understand why things are happening and what we can do about them. hat’s why so many people today value philosophy books again, cause they lost confidence in the economy all together. But one should still keep in mind that there are still both bearish and bullish markets. Just look at the stock exchange: it shouldn’t stop us from investing. That’s one thing. Secondly, like Coase argues, governments are increasingly taking over and the situation is out of balance. I am just not convinced Keynesianism is going to settle our debts either, nor do I say a planned economy will. Entrepreneurs and business leaders are losing it too and it seems to them economics to offer very little practical insight for managers and entrepreneurs. That is why they fall back on their own business intuition, personal judgment and heuristics for making decisions. The fall of Greece was mainly due to mismanagement. Another example is the one-minute manager hype. Management by perception is just not right. You need to look at the numbers and rely on data to make decisions and solve problems. It shouldn’t be so hard to calculate the Net Present Value (NPV) in order to assess investments. A cost-benefit analysis will help you structure your thoughts. The Capital Asset Pricing Model calculates if a given rate of return of a certain asset in a portfolio is reasonable or not. These are just a few clear techniques that entrepreneurs and managers alike can directly use. Economics is not rocket science.

Today, the only constant seems to be change. We are much more interconnected, diverse but in order to deal with contemporary issues we need to keep empirically study both the past and present. Too much of government intervention can never be good and we should look for a new normal. What is broken can’t be fixed, right?  And frankly speaking: innovation and employment shouldn’t be left up to the government alone. My 2 cents!

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